April 6, 2020

How auto insurers can eliminate premium leakage

Charlotte Kosche

Sr. Content Writer

Premium leakage is one of the personal auto insurance market’s most pressing problems. Insurers lost $29 billion due to premium leakage in 2016 — an 82% increase compared to 2008.

Smartcar helps alleviate premium leakage by letting policyholders share accurate vehicle telemetry with their insurers. Here’s why premium leakage poses a big challenge for most auto insurance providers and how Smartcar’s solution works.

What is premium leakage?

Premium leakage occurs whenever erroneous underwriting information leads to poorly assessed risk and inaccurately priced insurance premiums. Premium leakage can be caused intentionally as well as unintentionally. Common reasons include soft fraud and hard fraud on the part of the policyholder or the insurance agent, accidental misreporting, and inaccurately collected information on the part of the insurer.

No matter whether the losses are caused intentionally or unintentionally, premium leakage occurs in many different areas of auto insurance. These areas range from regular drivers who aren’t included on a vehicle’s policy to misstated claims and vehicle title defects. Three of the most common types of premium leakage are underreported mileage, misrepresented garaging locations, and invalid VINs. Together, they account for 36% of all premium leakage. Let’s have a closer look at these topics and their impact for personal auto insurers.

Mileage underreporting

More than half of drivers underreport their mileage to insurance providers every year, according to a study by the California Department of Insurance. A quarter of drivers understate their annual mileage by 6,000 miles or more. Inaccurate mileage reporting leads to underwriting without a full picture, unnecessarily high risk, and poorly priced premiums. Most importantly, it costs the personal auto insurance industry $5.4 billion in premium leakage every year.

Garaging misrepresentation

Garaging misrepresentation is a less known but similar problem, causing the industry $2.9 billion in annual losses. More than 10% of personal auto insurance policies have verifiable garaging address defects. Those misrepresentations range from policyholders forgetting to update their address after moving to customers lying about their garaging location for a lower rate.

Invalid VINs

Mileage and garaging aren’t the only factors that contribute to premium leakage. Roughly 5% of policyholders report an invalid VIN to their insurer, as the long alphanumeric string is prone to manual typing errors. Insurers don’t always verify their policyholders’ VINs. They lose $2 billion in annual premium income as a result.

How does premium leakage affect the insurance industry?

As previously mentioned, premium leakage costs personal auto insurers billions of dollars every year. But short-term monetary losses aren't the only burden that premium leakage places on insurance providers. In fact, the long-term effects of premium leakage are even more severe.

Short-term and long-term monetary losses

While premium leakage costs amounted to $29 billion in 2016, annual losses are likely increasing by 7.8% every single year. In order to avoid devastating effects in the future, auto insurers need to act quickly and find ways to fight premium leakage today.

Underwriting, pricing, and policy renewals

Beside causing monetary losses, premium leakage causes suboptimal underwriting and inaccurately priced premiums. In the long term, these errors lead to miscalculated policy renewals and unnecessarily high risk for the insurer.

Customer retention

Premium leakage is a large contributor to customer churn. Oftentimes, policyholders have to pay an additional $400 to $700 per year to account for premium leakage. Among policyholders that are looking to switch insurance providers, 64% cite the price of their premium as the primary reason.

Data costs and future strategy

Finally, some insurers choose ineffective solutions in the fight against premium leakage. A common approach is the purchase of third-party data sets to verify a vehicle’s VIN, mileage, and other information. Unfortunately, those data sets come at a high cost and are often inaccurate. Beside cost and inaccuracy, purchasing third-party data isn’t a scalable, future-proof strategy. As cars are becoming increasingly connected, customer demands and industry regulations are shifting away from aggregate data marketplaces towards higher consumer privacy standards.

How to eliminate premium leakage

Given the extent and impact of premium leakage on personal auto insurers, the industry is in dire need of an instant, effective, and affordable solution. This is where Smartcar can help. Several insurance providers across the country are already using our recently launched premium leakage solution, which allows insurers to eliminate all premium leakage caused by underreported mileage, garaging misrepresentation, and invalid VINs.

Smartcar’s premium leakage solution

Smartcar is the first and only car API for auto insurance providers. Our technology allows vehicle owners to quickly and easily share accurate telemetry with their insurance providers. By seamlessly verifying their policyholders’ mileage, garaging location, and VIN, insurance providers are able to effectively reduce premium leakage.

How it works

First, insurance providers embed the Smartcar Connect authorization flow into their website or mobile application. Smartcar Connect permits insurers to collect user consent. Policyholders can link their car to the insurer’s app with just three clicks. They select their vehicle brand, log in with their connected services account, and review a detailed list of the types of information they will share with the insurer (e.g. read odometer, read location, and read VIN).

After the policyholder has granted access, the insurance provider is able to verify a vehicle’s mileage, location, and VIN. Instead of having to manually request this information every time, insurers can set up webhooks that will automatically send one or more types of data to the insurer at scheduled time intervals.

Smartcar’s technology works on most new vehicles (2015+) across 17 car brands in the United States. Our API integrates directly with the cellular modem that is already built into cars, allowing insurers to retrieve accurate data directly from a vehicle’s instrument cluster. This eliminates the need for third-party solutions like aftermarket hardware devices or smartphone telematics technology. It makes Smartcar’s solution cost-efficient and tamper-proof.

How much do insurers save using Smartcar?

With Smartcar, insurance providers are able to eliminate premium leakage from underreported mileage, garaging misrepresentation, and invalid VINs. Our customers have been able to save $15 million per 1 million policies in the first year alone.

Today, our technology is compatible with 40 million vehicles on the road in the United States. As more and more cars feature cellular connectivity, this number is going to reach 116 million by 2025. Annual savings with the Smartcar API are thus quickly increasing over time. If you would like to know exactly how much your business can save using Smartcar, head to the “Your savings with Smartcar” section on our insurance use case page.

This is how Smartcar allows insurers to effectively eliminate the growing problem of premium leakage. Using our API, insurers have not only been able to reduce premium leakage to instantly save millions of dollars. They have also invested in even higher long-term savings, increased customer retention, and a scalable connected car strategy to be successful in the future auto insurance market.

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