How will insurance regulators evaluate AI/Black Box underwriting decisions?

There is quite a bit of auto insurance industry discussion about using AI machine learning models to identify bad risks during the underwriting process. The idea is that AI tools can tease out subtle variations in customer status and behavior that make a significant financial difference. But there's a catch.

The Legal and Regulatory Risks of AI Machine Learning
Given that insurance rates are tightly regulated, using AI machine learning to evaluate customer risk means AI models will be used to deny coverage to customers that do not 'measure up'. Which is a problem. Because customers expect carriers to have a rational reason for why they are being rejected. And regulators and courts become concerned when certain groups, for example minority customers, are rejected at higher rates than others. Unfortunately AI machine learning models cannot explain why they make a particular decision because they are 'black box' solutions. Their creators literally cannot explain how the machine arrives at its decisions, they can only judge the results.
This means relying on AI models to sort the 'good' customers from the 'bad' ones carries large potential regulatory and legal risks should its decisions result or even just be suspected of resulting in disparate impact for a disadvantaged class.

How VeracityID Uses AI
We use AI models to help carriers sort between good and bad customers too. But we only use them as a 'Tip and Lead', as an indicator that a given customer may pose a greater than normal fraud risk. We then use our other tools such as graph analytics, business rules, mobile documentation apps and automated interaction with the customer to identify and resolve specific real risks. When a carrier using VeracityID tools declines to cover a customer they can give a specific reason that makes sense to both customers and regulators:

• "they told us address A was their home but we discovered address B was"
• "they claimed their truck was a personal vehicle but these specific images of it show commercial gear and signage"
• "they quoted a policy with their 17 year old son and then without him and then refused to either add him to, or exclude him from the policy"

Doing so both eliminates legal and regulatory risk and improves customer satisfaction because instead of simply rejecting a customer with no explanation, VeracityID allows carriers to engage in an automated interaction that gives the customer the opportunity to modify their application and still receive coverage. This means that customers who made a mistake or for whom the purchased, 3rd party data is wrong, have the opportunity to correct the record and get back on the path to coverage.

Our motto is 'stop fraud before it starts' but it's also "stop legal problems before they start". 

www.veracityid.com  Twitter: @veracityid.com 

Are Mandated Auto Premium Reductions Justified?

Policymakers in many states - notably including California, Michigan and Louisiana in recent weeks - are considering aggressive steps to drive down auto insurance premiums in the wake of the Covid-19 pandemic and changes in driving behavior.  Even as they contemplate this, many leading carriers have already taken temporary action to reduce rates during the pandemic – both because it was the right thing to do and to forestall damaging policy changes.

On the surface, those initial reductions make some sense.  According to the US Energy Information Administration, gas sales were down 20% in March 2020 over March 2019 – and we all saw the roads were pretty empty.  Gas sales were very likely even lower in April during the height of the shutdown.  With reduced gas sales and empty roads came fewer claims.  And lower claims should drive down premiums in normal circumstances.

But will this still be true as the economy is re-opened in the weeks and months ahead?  Maybe not.

Early data from refineries and distributors suggest gas sales are quickly returning to ‘normal’.  Instead of continued relief from traffic, some experts predict that gridlock is coming to our cities as people choose to return to work by car instead of mass transit.  One forecaster suggests a 30% increase in commute traffic is coming this fall – and that our highways will soon be congested even more than before the virus hit (https://abc7news.com/bay-area-commute-covid-19-coronavirus-traffic/6248486/).  But other forecasters suggest that 25-30% of office employees will continue to work from home at least several days a week – and thereby skip the commute altogether (https://globalworkplaceanalytics.com/work-at-home-after-covid-19-our-forecast).  

At the same time, leading travel analysts observe that 30% of travelers have already switched from flying to driving for work and vacation.  And of course, there is the fear that a second wave could trigger renewed shutdowns.

So, what should we make of this?  How will the shift from bus to car and commute to vacation travel play out in terms of insurance economics?  Will these changes be transitory or permanent? Should policymakers act now – or wait for this settle out before making any dramatic moves?

At VeracityID, we think:

• The pressure to offer mileage-based insurance will increase – at least until there is clarity about driving patterns in the post-Covid economy.  But this may accelerate an adverse selection problem – with low mileage drivers switching from conventional to mileage-based coverage, and high mileage drivers sticking to conventional coverage with unreasonably low estimated miles.  Carriers need to monitor vehicle use in both cases – or will get burned.
• Policymakers should tread lightly for a few more months, at least.  If mileage increases significantly, a forced premium reduction could induce market failures.  If mileage falls, competition will soon drive down rates or risk intervention.  But if traffic gridlock happens, we will likely see a drop in claims severity in the near-term and an acceleration toward alternative work and commute patterns in the mid-term.  But none of this is clear today.
• Carriers should use this period to look for ways to increase customer retention by focusing on improving the customer experience across channels and striving to reduce rates by eliminating fraud, manual work and transaction costs.

Eliminating Underwriting Fraud Can Save Consumers and Carriers Up to 20% of NPW.  

Website: veracityid.com   Twitter: @VeracityID

Coming to an agent near you: direct online auto insurance losses

It is common knowledge that auto insurance distributed via the direct, online channel is much less profitable than agent business. But why is that? And is it likely to persist?

Carriers that distribute through agents have historically earned their profits through "seasoning", first year business is unprofitable but profitability improves as carriers run off bad customers and renew  the rest. This contrasts with the direct channel where customers tend to shop their insurance frequently because carriers have made shopping online so easy. And since it's easy to shop, direct customers find it easy to use multiple online quotes to figure out just which combination of less than honest data can generate the lowest premium for them.

So good news for agent-centric carriers right? Not really. We know that more and more agent customers are using online quote sites to shop for their insurance. Once they find the policy they want, they buy it from an agent. But this means that they are both learning how easy it is to shop at every renewal and how easy it is to manipulate their rate.

If you want to see where all of this is going, look at the United Kingdom: there, virtually all shopping happens on line either using carrier quote systems or more often, aggregator sites with both frequent shopping and rate manipulation being common. But most customers still buy their policies from agents. The result is a terrible, unprofitable auto insurance market with average loss ratios much higher than in the US..

And this "British disease" is now becoming a problem for US carrier. With older baby boomer customers being replaced by their younger, much more internet savvy offspring, the level of rate manipulation and churning will inevitably rise. Indeed in our work with carriers we've found that direct channels have 20 to 30 points of preventable fraud baked in at the point of sale.

Therefore even Agent-centric carriers must aggressively fight point of sale insurance fraud. If they don't, they'll discover that more and more of their business is 'first year' business.

We're Veracityid (www.veracityid.com) and we'd love to show you how we're saving carriers up to twenty points of loss ratio by eliminating fraud before it's baked into a policy.

Six auto insurance trends driven by the pandemic.

It's been a century since the United States has experienced a pandemic on the scale of the current COVID19 outbreak, resulting in radical short term changes to the economy and people's lifestyles But the crisis is also driving six trends in the auto insurance industry whose impact will continue long after the virus is gone.

Social distancing is accelerating direct channel sales growth. Stuck at home, more customers are transacting their insurance business directly and finding it easy. This is accelerating the already established trend towards direct sales as the baby boomers are replaced by digitally adept customers from the Millennial and Generation Z cohorts.

Cooped up customers are spending more time shopping for insurance. With many families hurting financially and having time on their hands, customers are spending more time and effort shopping for the best rate. They are using aggregators, carrier quotation websites and traditional agents to solicit record numbers of quotations.

Customers are using the knowledge they gained from shopping to manipulate rates more. Modern quotation systems make it easy for customers to run multiple rate scenarios, omitting drivers, switching addresses or transferring commercial vehicles to personal policies. Today's extreme financial pressures and the relative anonymity of direct channels are making these types of frauds more common.

Pressure from direct channel manipulation is pushing agents to cut more corners. To stay relevent, agents need to demonstrate that they can get their customers  'better rates' whether justified or not. This is shrinking the difference in  new business first year loss ratios between the historically unprofitable direct and more profitable agent models. We see both getting worse.

Insurance card scams are proliferating. More customers are  signing up for insurance using a pay plan simply to get the insurance card and and then failing to pay the premium installments. Unless, of course, they have a claim.

Pre-existing damage claims are set to grow. Many consumers are saving money by cancelling their comprehensive and collision coverage. But the casualty events will still happen. This is resulting in even higher levels of 'single vehicle' claims without police reports being filed in the early weeks of new policies.

None of these challenges are new to the industry but the pandemic's extreme isolation and financial distress are making them worse. And the intensifying shift to (largely unprofitable) direct channels means that dealing with these challenges will be more difficult and failing to do so will be more expensive.

idFusion solves these problems. The idFusion Fraud Identification, Intervention and Management platform is designed to identify and resolve these types of frauds in real time at the point of sale regardless of channel. In future posts we will describe each of these fraud challenges and our solutions for them in more detail. Learn more at www.veracityid.com

How to fight fraud and please sales at the same time

One of the biggest issues in insurance fraud prevention is managing error rates. The goal is to detect as many of the frauds hiding in the quote/application stream as possible. But this must be balanced against the risk that false positives will drive away good customers.

The devil is in the Type 1 (false positive) and Type 2 (false negative) error details. Fraud fighters can increase the 'tightness' of their business rules to minimize the chance of missing a fraudster only at the cost of increasing the number of good customers who are mistakenly turned away. It's a tough trade-off but we have developed a solution in our idFusion fraud management platform that allows carriers to substantially reduce false negative errors without losing good customers.

idResolve - our highly flexible, real time, in transaction intervention solution - allows carriers to instantly reach out to customers/agents and resolve false positives, putting good customers back on the path to coverage while causing the dishonest to abandon. Because of this, carriers can tighten their rules to minimize the undetectable false negatives and then using idResolve, sort through and recover the resulting large number of false positives. By doing so we can maximize fraud reduction at the lowest possible cost to customer conversion.

Why is this? When a customer who is attempting fraud is challenged by idResolve they almost always abandon their session, seeking a less observant carrier. On the other hand, when a customer simply makes a mistake they don't abandon. Instead, they welcome help to correct the error. Indeed while we haven't fully tested it, we believe that the best customers actually will be more satisfied with carriers that help them get their details right at the point of sale.

So a major advantage of idFusion over simple "one and done" data panels or black box fraud scoring systems is the ability to radically reduce the error rate by constructive, real time interaction with customers.

Auto insurance carriers will continue to lose to Geico and Progressive until they deal with Point of Sale fraud.

A strange thing happened to the US auto insurance industry last year: two carriers - Geico and Progressive – gained market share while the rest of the industry lost it. Which has got to be frustrating for the rest of the industry because carriers haven't been standing still. Indeed, they've been making major investments in areas such as:

New Core Systems.  Carriers have spent billions on 'digital transformation', using automation to accelerate the speed and reduce the cost of serving insurance customers. 

New Channels and Markets.  Opening direct digital distribution channels and expanding into new segments and geographies to widen their sales reach.

Increased Marketing Spend. Fighting for greater share by ramping up advertising and online lead generation spending.

Yet frequently, these efforts have delivered nothing but unexpected losses. As a result, many carriers have put their market and channel expansion plans on hold or at least slowed them down. After all, it makes no sense to win more money losing business. Which perhaps explains why two companies won more than half of all new business last year.

What is going on?

Carriers are struggling to master the changing customer mix.  Responding to the emerging millennial cohort and other hard to serve segments (high risk, low income) the industry has made it far easier for customers to shop and transact for insurance online. Unfortunately, customers are using this flexibility to engage in quote manipulation and submit claims for pre-existing damage in far greater volumes than more traditional customers and channels do.

Carriers have automated away many useful informal controls. At the same time customers have become more aggressive, carriers have been busily automating and bypassing much of the human interaction in their process - interactions and associated delays that historically served to somewhat deter petty fraud. This is because the dishonest like anonymity and immediate results. Lying to a screen to get an instant result is much less stressful than lying to an agent.

Using third party data to replace personal interaction and controls hasn't worked.  In an earlier piece we pointed out that solely using purchased or other data to weed out fraud doesn't and indeed can't work because false positives are often more common than the fraud condition the data is seeking to identify.  The result, is that false positives overwhelm the number of true data discrepancies, driving perfectly good customers away. 

The result is that many carriers appear to be stuck, uncertain how to profitably serve what before long will be the largest part of the market. They've made investments in new capabilities that don't appear to work with the new, tech savvy Millennial customer as their Baby Boomer customer base erodes. Some analysts have even argued that they should give up competing with Geico and Progressive. We disagree.

Because we've learned how to screen out the extra fraud that comes with selling to these new customer segments, dramatically lowering direct to consumer channel loss ratios. It turns out you can make money selling online to tough customers but only if you use advanced technologies and techniques to marshal all available information in real time at the point of sale.

Carriers must stay the course...but build in robust fraud prevention.

Carriers shouldn’t give up but they need to focus more resources on effective real time analytic and intervention tools that identifies, intervenes and eliminates fraud at the point of sale. That's what our idFusion platform does.

We're VeracityID and we give carriers the tools they need to reduce fraud, better select risk and profitably compete for every type of customer and channel they choose.

Real time POS fraud resolution is the Fracking of the auto insurance industry.

You probably know the oil industry's  "fracking" story:  everyone knew there were huge reserves of oil tightly locked in shale rock. They ignored them because the cost of producing that oil exceeded its value. Until an innovator paired new technology with techniques that radically reduced the unit cost of extraction, inventing "fracking".  The rest is history.

Auto insurance rate manipulation and fraud has a lot in common with tight shale oil. Carriers have long known that there is significant fraud in their books - it has traditionally been estimated at 15 to 20 percent. Obviously, the carrier who could figure out how to eliminate this cost could gain a huge edge. But almost all of this fraud is "small ticket" and until now it hasn't been economical to pursue most of it. But like with fracking, someone has paired advanced technologies with new techniques that radically lower the unit cost of defeating small ticket frauds. 

That company is VeracityID
.

WHY AUTO CARRIERS DON’T MAKE MONEY ONLINE – AND HOW TO STOP THE DAMAGE

The auto insurance industry is in the middle of a multi-billion dollar bet on ‘digital transformation’ to reduce costs, improve operational performance and - most importantly – dramatically change the customer experience at every stage of the policy lifecycle. Whether it is one leading carrier’s tagline “15 minutes could save you 15% or more on car insurance”, another’s ‘we know a thing or two because we’ve seen a thing or two” (and paid those claims), or the growing number of carriers claiming to pay claims ‘instantly’ from a photograph – the industry is signaling its commitment to instant decisioning at every step.

And this makes sense in an internet-driven world – where connection, speed and personalization are essential elements of every consumer interaction and hence are strategic imperatives for insurance carriers. But that compelling need also means that carriers are increasing their reliance on data to make risk decisions and reducing the influence of human interaction and judgement.

And the results of that tradeoff have been mixed to date, at best. Carriers are making the consumer experience faster, less complex and more transparent. But the financial impact has been less positive. The combined ratio for the industry has been stuck above 100 for several years now, and the poor performance of direct/online business is a major reason for it.

And we think we know why.

First, the industry has implemented and advertised technology that enables much higher policy churn than ever before. At the same time carriers have ‘trained’ customers to shop actively and have made it easy to do so. In the UK, where online insurance shopping has dominated the market for decades, the average policy life is well under a year and the industry hasn’t earned a consistent underwriting profit since the 90’s. US carriers now report the same trend is emerging in their books. High churn means there isn’t time to ‘recover’ origination costs because it eliminates the luxury of ‘seasoning’ that carriers long relied upon and worsens the impact of rate evasion and early claims fraud on carrier profitability.

Second, and perhaps more importantly, the marked shift from a reliance on judgment to data has eliminated a whole host of informal but very real controls that served to limit lying, cheating and fraud. Informal controls such as an agent’s ability to identify when something didn’t ‘look right’ worked. Not perfectly, of course. But simply by being human agents have proven to deliver a powerful social deterrent to dishonesty. It turns out it's easier to lie to a screen than a person.

But the answer isn’t to go back to an agent-driven model. The world has changed. Customers won’t tolerate it. Carriers can’t justify it competitively or financially. Instead, carriers need to figure out how to replicate and enhance the informal but real interactive role agents play in reducing cheating and fraud. But they must do so at the much higher tempo of the digital age.

Carriers must leverage their data-rich infrastructure to trigger a virtual dialog with customers exhibiting suspicious behavior in their digital activity. They must complement their digital transformation efforts with new tools and skills to monitor, intervene and engage with customers to attract truthful and conscientious customers while deterring the efforts of the deceptive. These tools need to identify risks and act – during live transactions – on a range of concerns. For example,

• Which applicants are ‘wargaming’ quotes and manipulating submissions to get a rate break?
• Who has a record of cheating carriers – during applications, endorsements or claims processes?
• Who doesn’t pay their bills? Who keeps coming back for more?
• Are there ‘ghost broker’ or insurance card schemes occurring?
• Are insured vehicles likely to be used for commercial purposes? Do they have pre-existing damage?
• Which applicants are associated with known or suspected bad actors?

Armed with these and many other data ‘tells’, carriers can engage in very pointed online ‘conversations’ using automated intervention tools to resolve most risks and escalate only the most difficult issues to decision makers. When they do this, carriers will discover that asking bad actors about their questionable behavior will cause them to flee, while the ‘honest’ applicant will appreciate the effort and continue. In effect, carriers will send a ‘digital signal’ that they are paying attention. The result: the innovator gets the honest, conscientious, profitable customers. And the competition gets the dregs.

Show customers you are paying attention to them – and watch fraudsters run away

Direct insurance - whether by phone or over the internet - is fundamentally different from traditional neighborhood agency business on many dimensions. The most obvious and important one is that there isn’t a trained agent looking the customer in the eye, asking the right questions, and placing the applicant with a company whose risk appetite is a good match. The truth is a local agent adds a lot of ‘hidden’ value because it is harder to cheat someone who knows you, and a good agent can often screen out trouble before it starts by inspecting the assets and assessing the persons involved before a risk is accepted. Capturing that value from an agent is very expensive - and that cost explains the rush to online insurance - but it prevents many types of fraud.

Today’s growing book of direct insurance has a very different character and carries much higher risk. These transactions are a fast, inexpensive and easy way for consumers and carriers to interact.  Indeed, many carriers promote their online sales process as faster than the next guy while saving consumers ‘hundreds of dollars a year in premiums’. But this business model relies on (often flawed) purchased or volunteered information, requires instant integration of complex data to make risk decisions, and, worst of all, it is anonymous.  

Fraudsters rely on that anonymity to defraud carriers of 5-10% of NPW – or more – in new business. Whether it is small-ticket cheaters who lie on quotes to get cheaper rates, serial grifters who play the online game just to get insurance cards for themselves or others, or organized criminal rings setting up staged accidents and body shop frauds – all rely on the anonymity of the online transaction to hide in plain sight. 

The simple truth is that fraudsters don’t think you’re watching or able to stop them.  And the fact is they are probably right. Do you actively monitor your quotes for signs of manipulation? How do you know the condition of the assets you insure? Can you tell when they’re playing you with bogus or inconsistent information across time, other quotes or prior policies?  Has the applicant or his associates defrauded you before? And can you do anything about any of it in the 7½ minutes during which you promised to close a policy? 

For most carriers, the answers are no, no, no, no and no.

And so the fraudsters win. Because they are smart. They find the weaknesses in your systems to get rate, coverage and claims benefits they don’t deserve. And they will do it again and again because you’re an easy mark when you don’t watch and cannot act.  Until you find them after the 3^rd or 4^th time they’ve ripped you off – in which case they often just ‘disappear’ - or you stop writing business in that neighborhood because it’s not worth the trouble.  So you eat the losses, say you’ve ‘learned’ a lot from the experience, and pull back.

But you can stop whole classes of fraud if you show them that you can see what they’re doing. If you signal that you are paying attention. f you take appropriate action during live transactions.  Behavioral science experts say people generally won’t cheat if they know that they’re being watched.  VeracityID’s experience is that fraudsters conclude you know what they’re doing if you employ the right set of tools at point of sale, during endorsements and before claims are paid. So they go elsewhere to ply their trade, and with them whole classes of fraud simply disappear.   

VeracityID has the tools to make this happen for auto carriers. Let us show you how you can quickly transform your underperforming online or direct business with a short demonstration or a pilot. Let’s stop fraud in your business, together.

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.

Auto Insurance customers are changing - which means trouble for carriers

"We're not making money on direct, online business" is something we hear from a number of carriers. Some of them are fairly new entrants but there have been reports that top direct marketers are also struggling in their core channel.

The excuses given for this are usally 'too much new competition' or 'the 'good' direct customers are already taken, all that are left are the bad ones'. We would like to propose another theory to explain why it's become so hard to make money selling Auto Insurance directly:  the customers are changing. And changing in two specific ways: they are becoming much better internet users and their understanding of what insurance is has changed.

Increasing internet sophistication is driving more manipulation.
The smart phone revolution has given most Americans an hour or more a day of experience using the internet to solve problems. This is leading to more and more customers engaging in 'wargaming'. Wargaming is our term for when a customer goes to a carrier's site, gets a valid quote, then requests a second quote after changing a piece of information - say the territory or dropping a driver. By doing this a couple times, consumers can get a good feel for how an insurer calculates their premium, resulting in more and more well informed data manipulation. We see it happening all the time. And it is costly,

Healthcare Reform (aka "Obamacare") is changing the way that customers understand 'insurance' Customers' concept of  'insurance' also appears to be changing. The traditional understanding of casualty insurance whether it be health, auto or home was that the policy only covered events that happened during the policy life. Preexisting conditions (healthcare) and damage (P&C) were  understood to be excluded from coverage. But with advent of Obamacare the health insurance market has done away with the concept of preexisting conditions. Instead, health insurance covers any health need during the life of the policy. Consumers may now be comparing their health insurance policy to their  P&C policy with its preexisting damage exclusions and asking 'why doesn't my auto insurance cover this?'

Another aspect of Obamacare may be driving consumers to think differently about insurance. Obamacare limited the difference in  health premiums between the sick/old and healthy/young to three times the healthy/young premium. Consumers compare that to  auto insurance's much greater rate disparities and conclude that they're 'unfair'.

Many customers' concept of what is 'fair' is changing in ways that hurt carrier bottom lines. The result may be that many consumers have been persuaded that things that in the past that they would have considered dishonest are in fact the way things ought to be. That filing preexisting damage claims and manipulating data isn't so wrong after all. And with their much better insight into how their premium is calculated, they're in a much better position to do so.

One caution: while the theories we've proposed here are supported anecdotally by the data and interactions that we see in our customer relationships, we do not know of any scholarly study that directly addresses these issues. We're hoping to encourage enterprising academics to take up the challenge of understanding these market changes.

Carriers need to upgrade their fraud identification and resolution capabilities But in the meantime, we are convinced that these factors are driving at least some of the direct auto channel profitability problems and that they they will have more and more impact as time goes by. So it's essential that carriers enhance their abilities to detect, intervene and resolve fraud to counteract this growing problem. And that's what we do.

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

Insurers can't stop fraud and misrepresentation with only data - Part 1

Insurance carriers use third party data to validate the information auto insurance customers are submitting to get a quote because getting the details wrong about rate-able factors almost guarantees that a policy will be a loser. So carriers use purchased data to test what the customer provides.

While useful, this approach has several pitfalls that can lure carriers into a false sense of security:

The Problem of Data Errors. All data sets have errors: mis-keys, lagging data, missing data, and so on. In the real world, a data set with 95% accuracy is almost unheard of. And third party data sometimes combines multiple data sources which makes things even worse. For example a head of household data set may be merged with a college marketing data set to identify young drivers living in a household. When data vendors create this type of 'synthetic data' the errors multiply.  For example imagine a scenario where two nearly perfect (95% accurate) data sets are being combined to create synthetic data. Combining them drives their new 'Synthetic' data accuracy down to about 90% (.95 * .95). Combine three data sets and it falls even further.

Consumer errors. Most consumers shop for insurance online, even if they eventually use an agent to complete the transaction. This means that consumer errors from mis-keys, misunderstandings and carelessness are frequently introduced into the process. Errors that serve to magnify third party data's error problems.

Fraud and rate manipulation are low probability events. There are many ways that consumers can manipulate data to reduce their premiums or get payments they don't deserve but each of these taken in isolation is a small probability event, a few percent at most. With purchased data having error rates of at least 5 and typically 10% and with consumers making mistakes, the overall number of both false positive and false negative errors on any given data diagnostic can easily equal five or ten times the number of true positives. 

So you can see how impractical it is to use purchased data alone to judge whether a specific customer has submitted accurate data. More work must be done to validate the initial data diagnosis. And critically, most of this work must be done immediately, during the quote session.

It is important to note that this problem isn't particular to insurance. Indeed, if you follow medical research you'll constantly hear "studies show" that this or that food item or activity is healthy or deadly. If you live long enough, you'll hear it described both ways. Using large, complex data sets to diagnose small probability events is inherently difficult, so difficult that government regulators won't allow drugs, diagnostics or medical devices to be marketed simply based upon this form of 'epidemiological' analysis. They require double blind controlled experiments.

Which isn't really possible when quoting insurance online. So what can insurance carriers do to reduce data diagnostic error rates sufficiently to detect, deter and defeat fraud without also rejecting a large proportion of good customers? There are three keys to diagnosing and eliminating misrepresentation and errors in the insurance quote and application process:

• Leverage all sources of data, not just purchased ones.
• Triangulate between  different data types.
• When in doubt, ask the customer.

This approach is described in Part 2 here.

VeracityID solutions detect, deter and defeat the most frequent and costly auto insurance frauds, during quote, binding, endorsement and at claim.

 Learn more at VeracityID.com

Insurers can't stop fraud and misrepresentation with only data - Part 2

In part one (it can be accessed here) we explained that there is a fundamental limit to the ability of data alone to identify small probability events - the error rates inherent in the data and the acquisition process end up dwarfing the targeted events. This results in far more false positive and false negative errors than actual true positives.

What can insurance carriers do to reduce their data diagnostic error rates so that purchased data can become useful? We believe that there are three keys to diagnosing and eliminating misrepresentation and errors in the insurance quote and application process and critically, they must be done during the few minutes of the quote session.

Leverage all sources of data/information. 
There are five different types of data derived from very different sources. 

• Synthetic data is composed of data sets merged together from other data usually gathered by others for other reasons. 
• Harvested data is data that the vendor (or carrier) collects themselves with the intention using it to evaluate customers. As a result it should be more accurate than synthetic.
• Customer data is simply what the customer shares in the quote process. 
• Customer behavior is what actions the customer takes during the quote or series of quote sessions. People often say one thing but are telling a different story with their actions.
•  Finally customer interaction is information derived from a direct intervention with the customer. 

Triangulate between different sources. 

The way to reduce the probability of a false result is to use different types of data from different sources to get a better perspective. For example if synthetic data says that there is a teenage driver but the customer's data says there isn't, then a data capable carrier would triangulate by first looking at the customer's quote behavior: did he get a first quote with the young driver in the policy and then remove them on a second quote? Other analytics could be used to test anomalous relationships between different types of customer data. For example, are there an unusual number of vehicles for the number of listed drivers? Or barring that, a carrier could gather customer interaction data by asking questions driven by the identification of a possible missing driver.

One important caveat. There are often multiple providers of the same data but one provider's data cannot validate a second provider's if - as is usually the case - both data products are derived from the same underlying data sets. This is why getting customer data, behavior and interaction is so important: it's new information.

When in doubt ask the customer.
This raises two questions: First, how can you ask the customers in an automated online quote process? It must be automated. Carriers need the capability to trigger specific automated question/data gathering cascades based upon a specific diagnostic failure. That way the questions are integrated seamlessly into the quote process. It can be done quickly and cost effectively, we're doing it for carriers today.

Second, How does asking the customer about their data make the decision better given it's the customer's veracity that is in question? The answer lies in human nature: people who provide deceptive data know that they are being dishonest. It makes them very uncomfortable when a carrier immediately and specifically asks them about the data they were manipulating. As a result the true manipulators will often abandon the quote. If they don't, the carrier can often take steps to limit liability. For example in the case of the young hidden driver, the carrier simply insists that that driver either be placed on the policy or be explicitly excluded.

The other reason to talk to the customer is all of the false positives. It's quite likely that many of them are customer misunderstandings or mistakes. When these people are asked about the data they don't abandon, they welcome the help to get the right data so they can get a valid quote. By intervening with these customers, carriers help guide them back onto the path to coverage, improving conversion rates while reducing fraud.

Up front fraud and rate manipulation can be managed.
Historically the auto insurance industry has been fatalistic about up front fraud - the dollar value per event was too small and the time frame too short to do much. This is no longer true. Data capable carriers are using data and real time interventions to reduce their premium leakage and preexisting damage claims fraud losses by amounts that - depending on the channel - equal ten to thirty percent of net premiums written.

VeracityID solutions detect, deter and defeat the most frequent and costly auto insurance frauds, during quote, binding, endorsement and at claim.

Learn more at VeracityID.com

The Definition of a Good P&C Insurance Customer

What makes a buyer of personal auto insurance a 'Good' customer? If we define 'good' as 'profitable' over the lifetime of the relationship then there are really two behaviors that characterize them:

Loyalty - the willingness to stick with the same carrier and not churn to the cheapest alternative every year.

Honesty - telling the truth about their risk characteristics up front and filing honest claims thereafter.

Of the two, carriers focus on Loyalty far more than honesty. They routinely track loyalty and have programs to recognize and reward faithful customers. Yet the the value of Honesty is potentially far greater. Or more specifically, the cost of dishonesty is much more expensive per case than that of disloyalty.

This prompts some interesting research questions: 

• What is the value of Honesty?
• How much of the value of Loyalty is really Honesty? In other words, do dishonest customers jump in and then jump out while the honest persist?
• How can carriers legally reward honest customers? (More carrot, less stick)
• How good are carriers in finding the dishonest in the first place?
• If Honesty and Loyalty are highly correlated then should carriers find ways to reward them more?

Let me know if you have any thoughts or reactions because at VeracityID we're focused on finding the answers to these and related questions, for Auto Insurance and the P&C industry overall. 

What P&C Insurers can learn from New York City

Thirty years ago New York City was a mess, the streets were trash strewn and potholed and people were fleeing in droves. There were so many panhandlers, squeegee men, gang bangers and prostitutes that it seemed like they owned the place. Then Rudy Guliani was elected Mayor and named William Bratton to be police chief. Bratton was a proponent of Professor James Q. Wilson's 'Broken Windows' theory. Wilson argued that the disorder and incivility that unchecked petty crime caused bred attitudes and behaviors that made the city's serious crime worse.  He argued that if New York wanted to reduce crime it should start by cracking down on the petty lifestyle crimes: littering, prostitution, panhandling, graffiti. New York City took his advice and as a result is now the safest big city in America.

The Automotive Insurance industry has a similar problem. Our work with carriers indicates that petty 'underwriting' fraud - where customers hide or lie about their true risk profile to get a lower rate - is disturbingly common. While there are some fitful efforts to fight it, petty fraud has historically been a low priority in the industry - the cost gets passed on to policyholders. But like with New York, the pervasive nature of petty underwriting fraud sends a signal to less ethical customers that it's OK or at least not risky to cheat their insurance carrier. And what starts as a little 'white' lie to get a lower rate can erode the moral barrier to more serious fraud.

This less than optimal state of affairs was understandable so long as there was no cost-effective way to find and resolve this type of fraud. But that's no longer true because increasingly there are automated techniques and tools that can identify, intervene and resolve many underwriting frauds during the customer's quote session. My company, VeracityID has pioneered many of them. Their existence means that aggressive carriers can improve their bottom line, get a jump on the competition and reduce the cost of insurance to consumers.

It's an exciting time to be in this business.