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. 

How customers get auto insurers to pay for preexisting damage (and how to stop them)

Say you have some damage to your car: nothing big, maybe a few dents up front with some scratches amounting to a few thousand dollars in repairs. You’d like to get the insurance company to pay for it but you’ve only got state minimum liability coverage. You’re out of luck, right? Not if you’re willing to cheat. This is the story of Mr. Smith, (not his real name) a mild-mannered accountant who hated paying for auto insurance. Mr. Smith was a 'Policy Rocker', a type of fraudster that preys on insurance carriers and their customers.

Every year Mr. Smith would sign up for the state minimum required liability insurance on his cars. Occasionally his cars would have a fender bender or other damage. When the total damage on any one car grew to between $3,000 and $5,000, Mr. Smith would sign up for an expensive low deductible comprehensive auto insurance policy. In the first week to month of that policy he would file a claim for the accumulated damage on the car, claiming a fictitious casualty ‘event’ that just happened to not have a police report.

Now the insurance carriers that Mr. Smith did this to weren’t stupid. They knew that his claims were a bit ‘odd’ but without proof it was just Mr. Smith’s word against their suspicion. Proving anything would have taken time that carriers didn’t have because regulators require that claims be paid rapidly. Besides, the claims were always fairly small, too small to waste an investigator's time on. So the carriers (there was more than one over the years) just paid. His car gleaming like new, Mr. Smith then cancelled the comprehensive policy and return to his low dollar liability policy until the need arose again.

We call his shifting back and forth between state minimum and comprehensive insurance ‘policy rocking’. Mr. Smith was a hard-core policy rocker, rocking back and forth for many years (and for all we know is still doing it to another carrier).

But with the right tools carriers can shut down the Policy Rocker’s game. The key is identifying likely ‘rockers’ during the quote and application process using specialized business rules. When the rules fire they initiate a specific intervention process that contacts the consumer or his agent through the carrier's quote system. The suspected ‘rocker' is then asked to take photos of his vehicles using a specially designed web app sent to his smart phone. This app takes the consumer through a secure imaging process while registering the GPS, Date/Time and other data that makes it hard to spoof. We call it idMobile.

But the Mr. Smiths of the world usually don’t get that far because once they realize they've been caught, they go down the street to brand X. Which is just fine by us. We're VeracityID and we build real time fraud identification and intervention tools to stop this kind of dishonest.

To beat rate manipulation, Property and Casualty carriers should watch their customers shop.

Most large personal lines carriers feature on-line quotation systems where consumers can get a quote in as little as three minutes. This has resulted in an explosion in the number of consumer quote requests per policy issued. This in and of itself isn't really a problem but the ability to request and get multiple quotes in a short period of time is is teaching some consumers how easy it is to manipulate their data to get a lower premium. That 'education' and the much higher quote volumes means quite a bit of fraud is getting written into policies. In Auto up to ten percent of net premiums written.

It turns out that you can learn a lot about a consumer simply by watching their online shopping/quoting behavior. 

It's a big problem but the fraudsters have a vulnerability that carriers can target: a digital 'paper trail' of their quote history. The way that unscrupulous consumers figure out what mix of the truth, dishonest and withheld facts yields the lowest premium is by varying key rating factors in a series of quote requests. So if a carrier can retain and track a consumer's quote history and apply the appropriate analytics, they can usually pinpoint where the consumer is 'cheating'.

This is harder than it looks because to effectively police this type of fraud, carriers must 1) track and compare quotes for the same risk over time, 2) identify the manipulation(s), 3) estimate the premium impact and 4) intervene and communicate with the consumer. All during a 3 to 5 minute online quote session. This can only be done with highly automated and synchronized analytical and intervention tools that can identify, intervene and resolve the deception within the short time it takes to generate an online quote. That's where VeracityID comes in. We've built the industry's only end to end fraud identification, intervention and resolution solution specifically designed to identify and eliminate fraud at the beginning, before a policy is bound and a commitment made.

Auto Insurers keep looking for their lost keys underneath the streetlight.

Root is a new auto insurance product that uses an app to track prospective customers' driving for a period of time. The premium is based - in part - on the experience gathered by the app. This is appealing because if I think I'm a better than average driver, I am likely to download the app - it's so easy. It's a great customer segmentation strategy that allows Root to simply sort through all the app data for the good drivers and offer them a better rate. But I'm not sure it will improve the pricing of risks much. Why? Because we look for lost keys under the streetlight.

Let me explain: In insurance, it is rarely the risk we can see that is dangerous. It's the hidden risks - the ones that we don't see - that wreck profitability. For example, lets say that Root gets data from a husband and wife that own four cars - they're super safe drivers and so they save 20% on their premium. But what Root doesn't know and its app can't tell it is that three of the four cars are used sixteen hours a day in a delivery business. Driven by 19 to 22 year-olds who are paid for speedy deliveries. The better insight into the couple's driving risk is swamped by the much larger risk that was totally missed.

Root has developed a great system to get much more precise risk data on the drivers that the customer wants Root to see. It's like they have a very bright streetlight - and so long as the keys (risks) are in the cone of light, Root has an edge. But (as with most lost keys) the worst risks are beyond the light's reach. And having such an outstanding tool that generates such insight on the risk we see could lead us to over-focus on what we already know fairly well rather than to search for the unknown risk.

It is these risks: the  hidden ones that customers don't want you to see - that we focus on. VeracityID's mission is to enable carriers to identify and correct inaccurate and/or fraudulent data up front during the quote process and during the life of the policy. We look where where the light doesn't shine.

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 to about $1,000 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. We're VeracityID.

How to solve the Commercial Vehicle Classification as Personal Vehicle Problem

It turns out that quite a few owners of commercial vehicles dishonestly insure them as personal vehicles.  Indeed in our personal automotive insurance policy database of millions of customers, roughly 1 percent of all vehicles are actually commercial. And it's not hard to understand why  - it's a lot cheaper. Commercial auto insurance is more expensive because it carries:

• Higher Liability Minimums: Depending upon usage, commercial vehicles are often required to carry higher liability insurance limits. For example in California a personal minivan seating 7 is required to carry $15,000 per individual /$30,000 per accident/ and $5,000 property damage coverage or roughly $50,000 in total while an equivalent commercial van carrying passengers is required to carry a minimum of $750,000 in general liability coverage.
• Higher Risk:  Commercial vehicles often have many potential drivers, who cannot be evaluated for their driving history.  Commercial policies are also broader - for example they often cover damages from pickup and delivery. And commercial vehicles are used for a wide range of different activities - some of them quite dangerous. All these higher risks lead to higher rates.
• Higher per vehicle value: Commercial vehicles often have expensive features that personal vehicles don't , like heavy duty suspensions or customized additions to carry and store equipment.  So the replacement value is higher leading to higher rates.

These factors result in premiums that can be multiples of an equivalent vehicle on a personal auto policy. So it's understandable that some customers would try to game the system. Unfortunately it's often quite difficult to identify a vehicle with a Commercial Vehicle Misclassification Problem until a claim comes in.  And sometimes not even then.  This is because:

• Many commercial vehicles are the same makes and models as those commonly used as personal vehicles so Vehicle Identification Numbers are not a useful guide to identify them.
• Nor is Commercial registration a reliable guide to commercial use because to save money, policy holders often register commercial vehicles as personal ones.
• The total value to be covered often will exclude expensive commercial modifications that were acquired in the after market and not reflected on vehicle purchase records.

Needless to say, the Commercial Vehicles Misclassification Problem is a significant source of premium leakage. Assume conservatively that these misclassified vehicles would carry a commercial premium twice that of a personal policy. If the data are right and 1% of all insured vehicles in a portfolio are misclassified, then the premium leakage for this type of misclassification alone could equal or exceed 1% of revenue.  If that's the case then eliminating even a fraction of these data defects could have a significant impact.

VeracityID can help insurers crack this problem. idFusion gives insurers tools like idAnalyze (TM) which allows them to create business rule sets that serve as risk indicators for the presence of a commercial vehicle.  idFusion then enables insurers to automatically intervene within the customer or agent's application session and gather additional information or documents such as a photograph of the vehicle to validate the customer's claim. Indeed, idFusion delivers the alerts, workflow and tools that enable insurers to identify, address, intervene and ultimately prevent these events from occurring.

The good news is that the Commercial Vehicles Misclassification Problem has a solution that idFusion can deliver for insurers. The bad news is that if they don't choose to implement then it's the honest policy holders that foot the bill. We think that's wrong - which why we founded VeracityID.

How to get your auto insurance company to fix your car for free

Say you have some damage to your car:  nothing big, maybe a few dents up front with some scratches amounting to a couple thousand dollars in repairs.  Here's how to get an insurance company to pay for them. For free:

Step 1 - Sign up for a Comprehensive and Collision policy with a low deductible - don't worry about the expense - the goal here is to get the best coverage possible. Get immediate coverage and ask them to bill you.
Step 2 - Immediately file a claim for the damage you want repaired.
Step 3 - Within a few days the claim will be paid.
Step 4 - Once the work has been done or you've cashed the check, cancel the policy, just throw the premium notice away.

Is this honest? No. Does it happen? Yes. For three reasons:

Some consumers cheat. Using our visibility into millions of policies we've found that customers who establish new Comprehensive and Collision policies submit claims at a two to four times higher rate in the first month than in the other 11 months of their coverage period. Clearly some customers are 'saving up' their claims for when they get 'better' insurance. And insurance companies encourage this behavior by letting them.

Insurers don't check: Insurers struggle to prevent this because to do so they need to have indications as to which claims are for preexisting damage. But since we estimate that 97 percent of US consumer auto policies are written without a physical inspection insurers end up paying all of the claims. So long as the claim size is modest <$5,000 insurers likely won't scrutinize the claim.

Insurance information systems are fragmented antiques.  It is quite likely that your insurance company - or one you can find  - has no real time integration between its billing and claims paying systems. Typically they'll note the enrollment event but often only update premium payment status periodically.

Regulations enable it. And since most jurisdictions require claims to be paid far sooner than the time in which a premium bill becomes past due, a dishonest customer can game the gap caused by weak insurer technology.

A 'Policy Rocker'?

And even if the customer can't get it fixed for free, he can still get thousands of dollars damage repaired for the price of a single month's payment plan premium. Customers do this every day, rocking back and forth between Minimum State Liability and Comprehensive and Collision for free.

The First Month Excess Claims Problem is an example of how idFusion can be used to discover and measure the magnitude of hidden fraud. idFusion gives insurers tools like Policy Time Migration which arrays all customer policies by Policy Year. Using this, carriers are able to identify and analyze event "hot spots" across the Policy Life Cycle by time and policy element. Hot spots like First Day/Week/Month Excess Claims . Once problems are identified, idFusion delivers the alerts, workflow and tools that enable insurers to address and ultimately prevent these events from occurring.

The good news is that the First Month Excess Claims Problem has a solution that idFusion can implement for insurers. The bad news is that if they don't implement it then it's the honest policy holders that foot the bill. We think that's wrong - which why we founded VeracityID.