Claims fraud has been a major focus for insurers seeking to maximize profits. This task requires significant investment in analytics and in review personnel. Another source, often overlooked, lives at the other end of the insurance lifecycle – premium leakage. Carriers may be able to realize similarly large benefits by reducing premium errors through a few simple adjustments designed to encourage better customer behavior and thereby an accurate rating.
The source and size of the problem
Premium error, and its close relative, premium fraud, are committed during the quoting stage. Applicants can purposefully lie on their application – fraud. Or applicants can make inadvertent omissions and errors on the application – error.
In both cases where an applicant provides inaccurate information, the rating engine or underwriter will misprice the premium for the risk that is actually present. As a result, the carrier will undercharge for the appropriate risk. In the aggregate, the carrier will experience higher claims than expected for the premium charged. This results in a worse loss ratio and lower profits.
The amount of lost profit is staggering. Quality Planning reported that in the US, auto insurers missed out on $15.9 billion in revenue in 2009 due to premium rating errors, resulting in lost profits of $3.18 billion. And that’s just one line of business!
Encouraging ethical behavior
Finding cost effective ways to reduce premium leakage is key to recouping this lost revenue. Interestingly, small changes in the application process appear to yield outsized results. Two ways to improve the accuracy of application information are:
- Increase completeness by making the application smarter and having it prompt applicants for missing information.
- Increase truthfulness by providing an ethical trigger before the application is completed.
- Application completeness: While not all carriers have implemented them, web based applications are a boon to streamlining processes and implementing straight through processing via automated underwriting. Unfortunately, they run a high risk of missing key information. By enhancing these forms with logical checks, reminder notices, call-outs, and other Web 2.0 features, applicants can be directed to notice important aspects of the form, and be aided in filling in the form completely. By leveraging web services and other call-back processes to pull in outside information, the form can be made even more complete. Examples include pulling in car information from a VIN or accessing building information from an address. All of this seeks to create a complete form before an applicant hits submit.
- Application truthfulness: Some portion of applicants see the rating process as a chance to optimize or to game the rating engine. However, when they are reminded, prior to filling out the form, that the application requires honest answers, applicants are significantly more likely to answer truthfully and avoid “white lies” or larger fraud. Psychological research has shown that by simply moving a signature block from the bottom of a form to the top, untruths are reduced by 46%. That’s a monumental difference for such a simple adjustment. And it’s one that echoes a common practice in the world of law: we ask those taking the stand to “tell the truth, the whole truth, and nothing but the truth” before they testify, not after.
Looking outside of the business process to find profit
When trying to maximize profits carriers often look to the common historical industry actions of reducing operational costs and reducing claim fraud. This keeps the focus within the company – what data does a carrier have, how does it manage it more efficiently, and how can it spot errors within the claims data sooner. A more complex solution that can be more beneficial requires looking outside of the process to identify inputs that can significantly impact the outcome. By modifying two aspects of input into the rating process, carriers may be able to gain an increase in truthfulness and in accuracy that will enable them to rate risk more accurately, thereby gaining premium or mitigating unintended exposures. Both will help carriers earn better profits.
If these kinds of ideas spark your curiosity, you’re exactly the type of client we’d love to work with to help you access new revenue and profit opportunities.