Visualize: Insights that power innovation

Mileage drives $5 billion in annual premium leakage

By Jimmy Engström September 28, 2017

speedometer 1000 002Underreported mileage is a major factor in claim volume, driving more than $5 billion each year in premium leakage.1 Primarily as a result of increasing miles driven, non–bodily injury claim frequency is rising to prerecession levels, squeezing auto insurers’ margins.2 The research is featured in a Verisk Insurance Solutions’ Innovation Paper, The Challenge of Auto Insurance Premium Leakage.

Self-reported mileage estimates are notoriously inaccurate, and some policyholders knowingly misstate annual miles driven to obtain a less expensive premium. In a 2012 survey, 16 percent of consumers said it was acceptable to lie to an insurer about miles driven.3 Compounding the issue, one-time events can cause isolated mileage spikes, while changes in residency, employment, or covered vehicles can also nullify historical odometer readings.

For these and other reasons, many insurers exclude mileage from their rate plans or employ overly wide mileage rating bands. However, a Verisk study shows the value of more and narrower bands: the lowest annual mileage grouping of 0–3,000 miles had 44 percent fewer claims than the average for the total portfolio studied, while the highest band—more than 20,000 miles—had 28 percent more claims than the average.4

Clocking the concern

Accounting for 18 percent of premium leakage, misreported mileage would seem to pose a leading concern for all auto insurers. The urgency only increases as the economy improves and gas prices decrease, putting more cars on the roads more often. Miles driven set new records in 2016, and that number continued to climb on a seasonally adjusted basis in 2017, approaching 3.2 trillion miles annually.5

Top 25 insurers appear to be the cohort most concerned about underestimated mileage compared with three other sources of premium leakage—unrecognized drivers, garaging, and violations. Those below the top 100 are least concerned, according to the 2016 Verisk Auto Insurance Premium Leakage Survey. Why the disparity?

Premium leakage chartOn average, among insurers that have mileage programs, a third of policies are monitored.6 This suggests a three-year rotation of mileage surveys or that mileage isn’t as rigorously monitored outside of California, where miles driven—confirmed through two-way outreach—is a required rating variable.

An investment that pays

Verisk client experience with mileage leakage recovery shows an overall average return on investment of 7:1 for the first year. Where outreach is used, 57 percent of policies undergo mileage band adjustments up or down.7

Solutions tailored to the individual insurer may be needed in many cases. But capturing accurate mileage lends itself to emerging data-driven models and technological tools that compensate for the human factor while empowering and reassuring policyholders. New advancements, including sophisticated analytics, smartphone apps, telematics, and connected cars, enable collection of near-real-time mileage data, as well as matching of drivers and vehicles, to ensure accurate mileage at point of sale and over the life of the policy.

The Innovation Paper is based on the findings of two recent Verisk research initiatives. The premium leakage survey explored insurers’ concerns, programs, and plans regarding premium leakage. Verisk also conducted a client analysis for 82 insurers split evenly between the standard and nonstandard markets. The insights from these initiatives provide readers a deeper look at premium leakage by source, best practices for tackling it, and cutting-edge tools that can enable a focused, strategic approach to balance growth, retention, and profitability.

References:

  1. Verisk estimates
  2. Auto frequency, severity: Woes persist,” Visualize, September 6, 2017
  3. Study: Fraud tolerance falling, but is fraud falling?, Coalition Against Insurance Fraud, 2013
  4. Are Low-Mileage Drivers Better Insurance Risks?, Verisk Insurance Solutions (originally published by Quality Planning Corporation), 2009
  5. U.S. Federal Highway Administration
  6. 2016 Verisk Auto Insurance Premium Leakage Survey
  7. Verisk client experience

Jimmy Engstrom is assistant director of product development at Verisk. You can contact him at Jimmy.Engstrom@verisk.com.