White Lies – The $29 Billion Auto Insurance Fraud That Impacts You

Little white lies.  No one ever gets hurt by little white lies.

Well, don’t tell that to the insurance companies that are losing big money when consumers lie or omit information on the insurance policies. Verisk Analytics, a company that specializes in property/insurance risk, concluded companies are losing $29 Billion a year in lost premiums because consumers are not being truthful about their driving habits.

They call it Premium Leakage and it’s huge problem for insurance companies because drivers have figured out exactly what lies to tell to keep their insurance premiums low.

Premium Leakage can be caused by any number of sources but the most common tend to be:

  • Consumers– Dishonest or erroneous reporting of information by the applicant to lower their premiums.
  • Insurance Agents -Agents that guide applicants to shade the truth to lower their rate
  • Unreliable Documents -Absent or unverified prefill functions that omit important underwriting information

Most Common Lies That Cause Premium Leakage

There are 5 misrepresentation types that account for most of the fraud related losses for insurance companies.

 1) Unrecognized Drivers ($10.3 Billion in Losses)

When drivers fail to add a teenager or household member to their policy but allows them to drive their car, they are causing premium leakage.   Not adding a teenager to your policy can save you over $2,000 a year so it is easy to see why so many people would avoid adding them to the policy.  But teenagers are risky drivers, and if they crash, others end up bearing the burden of cost.

About 15% of insurance policies have a hidden driver that the insurance companies do not even know about.

2) Mileage Misrepresentation ($5.4 Billion a Year)

It seems like everyone probably does this.  When the insurance companies ask, “How many miles do you commute to work?”, many of us are tempted to fudge on the low side.

And how do they get the right mileage?  They use data that is collected on odometer readings that are done when you have your car serviced.  If your mileage is above the average you claimed, they will hike up the mileage and charge you the difference.

3) Not Reporting Violations and Accidents ($3.4 Billion)

If you try to trick the insurance company into believing that you are a good driver by not reporting your accidents, that is fraud and it costs them big money.

Many insurance companies try to fight this type of misrepresentation by signing up for alerts from the DMV when there is a new accident or ticket that hits a driver’s record.

4) Garaging ($3 Billion a Year)

Garaging is a term that insurance companies use to identify misrepresentations of where the vehicle is located.   By using a low-risk zip code, consumers can save themselves 35% or more a year in insurance.    It’s easy to see why a small little white lie, like changing your address can be such a big temptation to consumers.

Verisk estimates that about 10% of insurance policies have some discrepancy with the address that results in premium leakage.

5) Identity Fraud ($2.8 Billion)

One way to avoid paying high premiums is to manipulate your information so that insurance companies cannot locate your bad driving record.  Whether that is transposing a few digits of your driver’s license or manipulating your address, it’s a big problem that results in big losses to the insurance companies.

Who Cares?  The Insurance Companies are Rich

Why does this fraud even matter?  I mean the insurance companies are not really losing money right?  There are no victims here.  The drivers are simply getting lower insurance premiums.

Wrong.  The victims of insurance fraud are actually all the other honest people that don’t lie.  You see insurance companies use sophisticated models and underwriting to price premiums based on the risk of the driver.

If you lie on your insurance policy, the rates for everyone else need to be higher to cover your risk.  Fraud hurts everyone.

That $29 Billion that insurance companies are “losing” represent mispriced risk that has to be allocated to someone else so the victims of this fraud are really your neighbors, your friends, and your family.

Download The Report

The report by Verisk is an excellent primer on Premium Leakage and I would recommend that you get a copy to read it.  The Cost of Premium Leakage.

Thanks for Reading.

Frank McKenna is the Chief Fraud Strategist for PointPredictive and a Fraud Consultant based in San Diego California