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.