Why do auto Insurers experience so much rate manipulation at point of sale?

The auto insurance industry has a large problem with customer rate manipulation at the point of sale. Industry studies and our own work with carriers indicate that this type of fraud constitutes upwards of 10% of net premiums. Yet by and large carriers don't focus much resource on fighting up-front fraud. I think it's in part because historically they have been too pessimistic about achieving results. Specifically in the past they've assumed:

"There's not enough time" - The modern auto insurance quotation and purchase process is designed to be completed in a matter of minutes, therefore there is no time for the carrier to examine the customer's data and investigate questionable details. If they try, the customer will go someplace else.

"There's no ROI" - The dollar value of each instance of point of sale fraud is small, running from £50 ($85 Canadian) to about £1,500 ($2,500 C) per policy. It costs more in underwriter investigation time than the potential savings.

"There's too much uncertainty"  - Carriers use third party data to test the validity of various key rating factors like territory, drivers, vehicles and so on but this data is only 80-90% accurate. Carriers don't want to reject good business based upon bad data so they're reluctant to 'pull the trigger' even when the data tells them they should.

But these assumptions are rapidly becoming obsolete and are leading carriers to ignore a significant profit and pricing opportunity.

"There's not enough time" is no longer true because new tools are available that automate the identification and measurement of fraud risks within a quote session's short duration. 

"There's no ROI" is becoming obsolete because these same tools are increasingly able tyo automate the process of challenging data claims and collecting documentary proof at POS, eliminating almost all of the burden historically borne by Underwriting.

Finally,  "There's too much uncertainty" is only true because carriers mistakenly focus on the data rather than the customer. The data is simply a 'tip and lead' that indicates that there might be a problem. Only the customer can tell the carrier whether the tip is true. And they usually do because once a manipulator thinks a carrier has found him out, he typically abandons the quote and goes elsewhere. Customers who aren't trying to manipulate - the 'false positives' - won't run away just because the carrier asks them a question. This means carriers don't need perfect data - the combination of "good enough" data and new rapid customer interaction tools provide far more insight.

The bottom line is that if carriers update their assumptions about the feasibility of fighting POS fraud they'll find a large and very accessible profit and pricing opportunity. How do I know? Because we're already doing it for their competitors.

VeracityID stops fraud before it starts. Our solutions detect, deter and defeat the most frequent and costly auto insurance frauds, during quote, billing, endorsement and at claim.   www.veracityid.com

Things every insurer needs to know about auto insurance fraud

The auto insurance market suffers from a shockingly high level of fraudulent activity, yet we find many people in the industry don't realize just how significant the problem is. This is a brief guide to auto insurance fraud. The framework we used is adapted from Daniel Ariely's consumer fraud framework to reflect the unique nature of auto insurance fraud. We highly recommend his book: The (Honest) Truth About Dishonesty. It's a great primer on how to think in a structured way about customers and fraud.

Things every insurer needs to know about auto insurance fraud:

Industry analysts estimate that auto insurance fraud constitutes a staggering 15 to 20 percent of total automotive net premiums written each year. We believe it's even higher for on line policies sold directly.

There are four basic kinds of fraudsters:

1. Fibbers: People who manipulate their rating data  up front to get a lower premium.
2. Freeloaders: Customers who stop paying premiums as soon as their get an insurance card.
3. Fabricators are customers who file claims for preexisting damage or pad claims with extra damage or faked health issues.
4. Fraudsters are professionals who organize complex, high dollar frauds typically involving multiple people around a 'staged' accident.
5. Retreads are simply any of the four kinds of fraudsters who having discovered how easy it is to cheat a given carrier do so over and over again.

Fraud happens when something changes. There are four key events that customers can exploit to commit fraud. It is essential to closely monitor and control these events to screen out frauds.

• During quote and application 
• At an endorsement when the policy details change
• At a billing event
• At a claim event

Underwriting fraud costs carriers as much as claims fraud. This is because while the average cost per event is much lower, there are far more events, making it much more difficult to target.

If given the chance, a large proportion of 'normal' customers will commit fraud but only a 'little' fraud - costing between a few hundred and a few thousand dollars - and only once in a while.  Fraud experts hypothesize that doing only a 'little' fraud allows them to think of themselves as still 'honest' people while capturing the fruits of dishonesty.

All things being equal, customers will commit more fraud if they believe no one is watching them. Thus they will commit more fraud on line than through a call center, they will commit more fraud in a call center than when working through an agent. The more specific, focused interaction the carrier can have with the customer, the less that customer will attempt to cheat.

Customers will commit more fraud if the dishonesty is about something other than money. This is why so many customers are comfortable manipulating underwriting data. It's playing with 'data', not 'stealing money' even though the result is the same.

Customers will commit more fraud if they can justify it as an "acceptable norm".  Customers will commit more fraud if their peer group does it or if the behavior is considered acceptable in similar product contexts. For example in health insurance carriers are required to honor claims arising from 'preexisting' conditions while in auto this is not the norm. This difference makes it easier for customers to justify cheating because the industry is being 'unfair'.

The huge number of 'normal' customers committing small frauds are very difficult to manage, leading carriers to focus their efforts on fighting the big professional types of Fraud. Carriers view these smaller ticket opportunistic frauds as simply a 'cost of doing business, to be factored into their rates. But as digital transformation of the industry proceeds, carriers are realizing that there is a major opportunity to gain a significant pricing and profitability edge in the market by targeting this fraud.

VeracityID stops fraud before it starts. Our solutions detect, deter and defeat the most frequent and costly auto insurance frauds, during quote, billing, endorsement and at claim.   www.veracityid.com.