Managing Rate Evasion: TransUnion Risk Verification Platform

Managing Rate Evasion: TransUnion Risk Verification Platform FEBRUARY, 2010

Rate evasion is a costly problem for personal-passenger insurance carriers. Recent studies have shown that insurers lose approximately 10 percent of total premium to rate evasion and that 5 percent of all automobile claims had rate evasion issues. Most customers are honest and provide accurate data during the application process. It is just a small percentage of applicants that misrepresent their personal identifying information, driving or vehicle characteristics, in an attempt to receive a reduced rate. Rate evasion is addressed differently by carriers today. All carriers have some element of rate evasion built into their rating plans. This is unfortunate for the honest policyholders who have to shoulder additional costs to pay for the rate evasion. Many carriers have rate evasion solutions that address the problem after the policy is issued. This is a difficult and expensive solution. It is also not the most effective approach. Carriers miss the majority of rate evaders, and in some cases will find a claim has already occurred before they are able to fully investigate the application data. Application pre-fill, a new service recently introduced to personal-passenger automobile carriers, is providing the opportunity to dramatically decrease the time required to make a quote by inserting the applicant s previous policy information into the quote system. While this brings additional efficiencies to the quote process, it could actually increase rate evasion. The pre-filled data will contain the information the applicant used in their previous policy. If they were evading rates into the past, pre-fill products will further future evasion by extending the false data to the new application. Consumers who may have decided not to evade rates on their new policy will face a difficult decision when the agent who is processing their request asks to confirm their current address. How will the applicant explain they have a new address but haven t moved? Effective rate evasion tools must be integrated with pre-fill solutions. Pre-fill and automated application verification tools must be used in concert at the point of quote to effectively fight rate evasion. It is critical that rate evasion is addressed in real time during the quote process, prior to issuing the policy. Early adopters of an effective point-of-sale rate evasion tool will have the opportunity to remove the cost of rate evasion from their rates, build a competitive price advantage and reward their honest policyholders. TransUnion Risk Verification Platform allows carriers to do just that.

TransUnion Risk Verification Platform delivers real-time, actionable data at the point of quote through a hosted environment. Risk Verification Platform focuses on four areas: 1) Identity and garaging 2) Vehicle history 3) Undisclosed drivers 4) Carrier-specific data interfaces Risk Verification Platform is able to verify identity and garaging information by accessing the most complete set of comprehensive, current data sourced from many independent databases. Data is accessed from the TransUnion Consumer Database, high-risk fraud databases, the Social Security Administration, telephone directories, property and assessor records, driver s license files and other sources. Using advanced match logic, Risk Verification Platform is able to determine the identifying and garaging data with the highest probability of accuracy. Delivered in real-time it can be used to confirm or challenge information provided by the applicant. Risk Verification Platform contains some of the most complete and up-to-date information available for vehicles. In real-time, Risk Verification Platform can deliver brand histories. Carriers are able to immediately identify vehicles that do not have an original title. Junk, salvage, flood, fire and rebuilt titles can be identified instantly. Recent accident information is available, including recent collision damage estimates and estimates that resulted in vehicles being declared a total loss. An undisclosed driver on an application is one of the most common forms of rate evasion. Through access to Department of Motor Vehicle data and other broad consumer files, Risk Verification Platform is able to identify applications for households that might include youthful drivers and alert the carrier to the identity those individuals. Risk Verification Platform has proven highly effective in identifying potential rate evasion or future suspect claims. Through extensive tests using application data from numerous carriers, both preferred and non-standard, Risk Verification Platform has proven its value as a rate evasion tool. For preferred writers, Risk Verification Platform has identified 17 percent of the applications as highly likely to have territorial rate evasion. On eight tenths, or nearly one percent of the applications, Risk Verification Platform has uncovered garaging addresses that are commercial or high risk addresses. The high risk addresses include post office box services, bars and nightclubs all places a personalpassenger vehicle should not be garaged. A relatively low percentage of the policies have Social Security numbers of a person who is deceased or a number that was issued prior to the applicant s date of birth. While this is a small number, it is a critical item for follow-up. These are individuals who are not using their own Social Security number, but have gone through the effort of finding a number that is valid and has been issued by the SSA. Vehicle data is also critical. One point nine percent of applications to preferred carriers, nearly one in every 50, included Identity & Garaging Incidents PREFERRED NON-STANDARD Territorial rate evasion 12.5% 12.5% Commercial/high-risk 0.8% 0.8% Deceased SSN 0.2% 0.3% SSN issued prior to DOB 0.2% 1.1% Vehicle Incidents PREFERRED NON-STANDARD Total loss 0.6% 2.0% Flood/fi re 0.5% 0.8% Rebuilt 1.9% 5.2% Recent damage estimation 0.6% 0.9% Undisclosed Driver PREFERRED NON-STANDARD UDD/youthful 3.0% 5.0% vehicles that had been rebuilt. Many of these carriers will not write a policy or extend all lines of coverage to vehicles 2010 TransUnion LLC All Rights Reserved 2

that are rebuilt. However, the carriers lacked an efficient method of identifying rebuilt vehicles prior to issuing the policy. Zero point six percent of applications included automobiles that had a repair estimate for collision damage in the previous 90 days. Without Risk Verification Platform carriers would have no indication they should examine these vehicles to determine if existing damage needed to be excluded from the policy or if a claim had been paid but had not yet been reported to the claim history database providers. The online, real-time delivery scenario integrates easily with the agent s pointof-sale/quote process. Eighty to 95 percent of the time, the agent or call center representative sees nothing different. In a small percentage of the cases 5 to 20 percent of the time depending on the carriers needs the agent is prompted to answer one or two additional questions. The change to the quote process and system is minimized and very configurable. Risk Verification Platform can be readily customized for each carrier. The messaging is configurable and can be set by state, line of business, distribution channel and other criteria important to the carrier. The ideal configuration is a full integration at the point of sale with additional clarifying questions delivered to the agent for verification. Risk Verification Platform can also be implemented in a batch environment for use after quote. This is recommended for carriers as a proof of concept or an initial production deployment step, to enable benefits realization while online integration is developed. Risk Verification Platform does not require any new rate changes or filings. It can be implemented without reviewing or changing your current rating plan. Risk Verification Platform creates real enterprise value immediately at point of sale, and throughout the policy lifecycle and enterprise processes. Risk Verification Platform creates an immediate hard benefits stream through additional premium capture at the point of sale. Risk Verification Platform creates subsequent, measurable hard benefits through loss avoidance and reduced claim frequency. Risk Verification Platform creates additional benefits through improved efficiency and effectiveness in multiple functions, improved data integrity, improved customer segmentation and overall rate adequacy, enabling best practices throughout the enterprise. Risk Verification Platform can be used at new business, renewal, PIF segment analysis, and claims FNOL processing. 2010 TransUnion LLC All Rights Reserved 3

The following are examples of actual policies flagged for referral by Risk Verification Platform. In these examples, carriers provided application data from policies they issued. TransUnion then processed the applications through Risk Verification Platform and analyzed the results. In these examples the value and benefit of using Risk Verification Platform to screen and validate application data at quote, prior to issue is readily apparent. Example 1- Multiple Identity Issues In this policy, the applicant insured a single vehicle on March 10, 2009. Without an online validation tool at point of quote, nothing seemed suspicious to the agent and the policy was issued. Two weeks later the policyholder filed a claim. When the application data for this policy was verified by Risk Verification Platform several hits were returned. Risk Verification Platform found no relationship between the name and address the applicant provided. In addition, the address itself was not found on any of the Risk Verification Platform databases. The phone number provided was for a land line, however, Risk Verification Platform determined the phone was installed more than 150 miles from the ZIP code provided with the applicant s address. Had this carrier been using Risk Verification Platform at point of quote, they could have configured it to return messages to the agent, requesting confirmation of the address and the phone number. By requesting this information perhaps by simply asking for a copy of the phone bill the agent could have quickly determined if the application should be completed. If the applicant refused to provide proof, the agent could tell the consumer the application would not be accepted and the policy would not be issued without the confirming information. In most situations like this one, the consumer is knowingly providing false information and will simply end the application process. They will contact the carrier s competitors until one is found that is not verifying application data. That carrier will be the one dealing with the questionable claims. Policy XXXXXX095 Policy issued on 3/10/2009 Claim filed on 3/24/2009 (14 days after policy inception). RVP Hits Name-input address no match Input address not found Input phone not in state and is >150 miles from input zip code Example 2-Insurance Credit Risk Score Evasion This is an example of a growing trend in rate evasion: Credit Risk Score Evasion. In this case the name, address and Social Security number were valid. In addition, the combination of information was valid. Unfortunately for the carrier, the valid information did not belong to the applicant. The applicant, knowing his poor credit score would result in a well-deserved surcharge, decided to provide his father s information. He knew the names were similar enough to pass manual scrutiny and he knew he would have access to mailed correspondence at his parents house. Risk Verification Platform, however, was able to determine that the name actually belonged to the father. 2010 TransUnion LLC All Rights Reserved 4

Had the carrier been using Risk Verification Platform they could have instructed the agent to ensure they had sufficient proof that the identifying data provided was accurate. When that proof was not forthcoming, the correct credit risk score could have been accessed and a fair rate quoted. Policy XXXXXX639 Customer provided a name, address and SSN on application. RVP Hits Name, address, SSN belong to applicant s father Example 3- Commercial Use This is an application that likely would have generated interest. The individual insured three vehicles but only one driver. While the number of people owning two vehicles is rising, it is still unusual to find an application for an individual with three. In this case Risk Verification Platform identified two additional potential drivers in the household. It also determined that two of the vehicles presented as personal-passenger autos were actually 15-passenger vans. If the carrier was using Risk Verification Platform at quote they could have asked the applicant about the two additional drivers and either excluded them from the policy or rated for them, depending on whether the applicant wanted them covered on the policy. In addition, the agent could have been instructed on the appropriate action to take regarding the vans. Risk Verification Platform would have been configured to provide those instructions consistent with the carrier s policy for treatment of those vehicles. Policy XXXXXX153 Customer registered one driver and three vehicles. RVP Hits Two undisclosed drivers Two of the vehicles are 15- passenger vans Example 4- Serious Vehicle Questions In this case, the carrier issued a policy that included two vehicles. At the time the quote was made and the policy issued, the carrier had no way to know the history of the vehicles. The total loss claim was filed three days after the policy was issued. This certainly would have attracted the attention of the carrier s claim department. The second claim, coming just two months after the first, would likely have triggered a red flag during the claim process and possibly Policy XXXXXX287 Policy covering two vehicles issued on 1/2/2009 Total loss claim for vehicle 1 filed on 1/5/2009 Claim for vehicle 2 filed on 3/6/2009 RVP Hits Vehicle 1 dismantled on 5/29/2008 Vehicle 1 rebuilt title issued on 10/24/2008 resulted in activity by the Special Investigative Unit team. If the carrier had been using Risk Verification Platform it is very possible they would not have issued the policy and would not be dealing with two claims. In that case, the applicant would likely have been scared off by the carrier s ability at quote to quickly learn the first vehicle had been rebuilt. Example 5- Multiple Policies with Potential Existing Vehicle Damage Listed on the next page are four policies uncovered in a validation of Risk Verification Platform against recently issued polices by a national carrier. In each of the four cases, a vehicle that was included in the policy had been in a collision repairfacility receiving a damage repair estimate in the days prior to the application. If the carrier was using Risk Verification Platform they would have had two opportunities in each case to avoid a potential fraudulent claim and ensure they were getting the fair premium for the risk. First, the carrier could have taken action to determine if the vehicles had been repaired. If not, they could have excluded the damage from the policy and not be facing a possible claim in the very near future. In the second case, the carrier would not have found information about the incident that caused the damage on an MVR report. If the damage was repaired 2010 TransUnion LLC All Rights Reserved 5

by another insurance carrier who had been covering the risk at the time of loss, that claim detail would not have been on any of the claim history databases. If the carrier was using Risk Verification Platform, they would have the opportunity to ask the applicant about the incident and possibly instituted a surcharge. They could also flag this policy for an MVR at renewal to determine if a citation was issued and recorded to the driver s record. Policy XXXXXX451 Issued on 3/6/2009 RVP Hit: Collision estimation on 3/5/2009 (1day prior) Policy XXXXXX515 Issued 3/7/2009 RVP Hit: Collision estimation on 3/6/2009 (1 day prior) Policy XXXXXX337 Issued 3/9/2009 RVP Hit: Collision estimation on 3/8/2009 (1 day prior) Policy XXXXXX486 Issued 3/14/2009 RVP Hit: Collision estimation on 3/10/2009 (4 days prior) The following are case studies from users of Risk Verification Platform. Case Study 1 In this case study a large nonstandard auto agency writer validated Risk Verification Platform against application data for newly issued policies. The Risk Verification Platform information was saved and then compared to the claim activity from the policies three months later. The results confirmed that Risk Verification Platform would have dramatically reduced rate evasion while improving loss ratio. For this carrier, address discrepancies proved to be a much larger problem than what had been experienced by other similar nonstandard writers. At best, they have a much more transient customer base. Or they have a much greater rate evasion problem. Thirteen percent of applicants had significant territorial rate evasion. Significant evasion occurs when the potential negative rate differential (the difference between the rate calculated with the applicant provided address and the Risk Verification Platform-provided address) was greater than 10 percent. In addition, in 16 percent of the policies, no known address could be found for the applicant on Risk Verification Platform or the submitted address did not exist. The rate of vehicle issues returned was also higher than the rate returned on other nonstandard carriers. Vehicle identification number (VIN) errors were found on 2.3 percent of the vehicles. 6.6 percent of vehicles were branded with rebuilt or salvage titles. Nearly 1 percent of personal-passenger vehicles are 15-passenger vans. In 2007, there were approximately 136 million privatepassenger cars in the U.S. and a little over 500,000 15-passenger vans. The ratio of 15-passenger cars to privatepassenger vehicles is 0.3 percent. Referral Policies Earned Adjust Earned Income Loss Loss Ratio No 8,322 3,606,458 3,620,330 1,223,127 33.9% Yes 2,406 933,728 1,104,757 437,801 46.9% TOTAL 10,728 4,540,186 4,725,087 1,660,928 36.6% Note: Loss Ratio is average of 3 months into policy period; not fully developed. Case Study 2 In this case study the carrier is a large direct writer. They elected to implement a batch rollout for a select portion of the policies written. Risk Verification Platform has the ability to rank-order policies for referral on a number of different criteria. This allows carriers to pinpoint the applications they will pursue. This method of rank-ordering applications for manual follow-up is referred to as assigning referrals. At the start of the study, this carrier determined they would invest the resources necessary 2010 TransUnion LLC All Rights Reserved 6

to pursue 50 policies per day. Risk Verification Platform was configured to produce the 50 referrals likely to contain the highest amount of premium rate evasion found that day. The following table shows the results of the pilot. Policies Study RVP Top Policy Referrals RVP Actionable Policies 50 policies 38 policies Average Premium $1,122 Average Premium Uprate % 132% Average Incremental Premium $ $1,481 Using the prioritization feature of RVP, the top 50 referrals each day would generate over $1.2M per month. On an average basis, the 50 daily referrals produced 38 upon which the carrier elected to follow. The average premium differential was an under-rate of $1,122. The average premium up-rate achieved was 132 percent. By focusing on just 50 referrals a day, this carrier would generate over $1.2 million dollars in additional premium per month or nearly $15 million per year, on a monthly volume of 40,000 newly issued policies per month. Case Study 3 Case study three is a large national carrier that uses a multi-channel distribution model, that includes direct and agency. This carrier has had Risk Verification Platform fully implemented for several years and has seen the benefits expand from simply reducing rate evasion to impacting processes throughout the policy life cycle, and the enterprise. Overall, this carrier reported a return of $132 for every dollar spent purchasing and operating Risk Verification Platform. They found claim frequency dropped by 2.6 percent. This carrier rank-orders referrals. They act on some of the referrals but not all of them. The carrier flags policies that had been referred by Risk Verification Platform but were allowed to be issued unchallenged. When tracked through the life of the policy, the carrier found that polices referred by Risk Verification Platform were four times more likely to have a suspicious claim than those not referred. Due to improved quote accuracy resulting from the use of Risk Verification Platform, the carrier was able to take a rate reduction in one of their more competitive states. Risk Verification Platform delivered on its long-term promise of providing competitive advantage to carriers, and most importantly, it rewarded the honest policyholders. Those policyholders who had been giving accurate application data had been subsidizing the rate evaders. Now they were rewarded for their honesty with lower, fair rates. Risk Verification Platform can help carriers improve their pricing accuracy and address fraud before policies are issued. Risk Verification Platform decreases losses by verifying identifying and vehicle information at the point of quote. It allows carriers to more fully identify exposure and more accurately set rates. It identifies applications that, if issued as policies, may result in fraudulent claims. Risk Verification Platform helps carriers increase profitability and establish fairness for their policyholders. 2010 TransUnion LLC All Rights Reserved 7