Many auto insurance carriers will provide a reduced rate or discount for vehicles that are classified as ‘Farm Use’. A typical auto underwriting definition for Farm Use is:

“A vehicle may be classified as farm use if it is principally garaged on a farm or ranch,
is used in farming/ranching activities and is not used for commute or pleasure use.”

The idea behind the reduced rate is that the perceived likelihood of theft, damage, or collision with another vehicle is minimized if the vehicle is kept strictly on the farm. These discounts can be upwards of 15-20% in many cases and would yield substantial premium discounts when applied. Though the rationale behind these discounts is sound, the application is flawed in that many vehicles are misclassified as ‘Farm Use’ and are getting discounted rates when the risk is really not reduced.

Although there is no automatic way to identify vehicles that are falsely classified as farm use, there are certain likelihood indicators or ‘flags’ that might warrant re-underwriting a policy. A recent study by Quality Planning (QPC) of 80,000 vehicles that were receiving the ‘Farm Use’ discount showed that 8% were residing in zip codes that had less than 1 percent agricultural usage according to the 2000 Census Survey. It may be worthwhile for a carrier to follow up its farm use policyholder and verify that the vehicle(s) in question is actually garaged on a farm or ranch. QPC has seen ‘luxury’ cars that were classified as farm use vehicles: Mercedes, Porsche, BMW, Jaguar – what is the likelihood that these vehicles are really being used for farming activities? Some carriers capture the occupation of the drivers on their policies – what is the likelihood that a vehicle is really used on a farm if the drivers’ occupation is ‘Programmer’ or ‘Accountant’? In both cases – not very likely.

These likelihood indicators are not just theoretical; QPC has significant experience in actual application – auditing and verifying policy information, including Farm Use. In a recent study of a carrier for which QPC provided Precision Re-Underwriting™ services, vehicles that were flagged for invalid farm indicators had a 35% rate of reverting to a non-Farm Use classification when contacted. This led to significant premium uplift (15-20%) in these cases, more accurately reflecting the risk taken on by the carrier.

by Michael Begonia

There’s a baseball analogy for just about every aspect of real life. Take, for example, child safety: “In life as in baseball, it’s the number of times you reach home safely that counts.” Or, taking risk: “You can’t steal second base unless you are willing to take your foot off first base.” We have colleagues who “pinch hit for us”, customers who ask for a “ballpark price” and competitors who play “hard ball.”

So, how does baseball play into the mundane world of auto rating integrity? Well, right “off the bat”, we can tell you that auto premium leakage is costing most companies between 5% and 10% of their deserved written auto premium. Policyholders, both new and prospective, can “throw your underwriters a curve” if the policy information they provide is incorrect, incomplete or outdated. If you issue a new policy based on this compromised information, you start out with “two strikes against you” and your profit potential is minimized.

Contrarily, if you were to validate that information at, say, the point of quote or the point of sale, you could validate annual mileage, confirm commutes, identify all the household drivers and correctly pinpoint garaging addresses. It’s a “home run strategy” that is easy, economical and efficient.

At QPC, we’ve been helping our clients “get back in the game” since 1985. We have a “major league” list of clients who would be happy to share their experiences. Give us a call (415-369-0707) or “touch base” via the internet at www.qualityplanning.com.

“Play ball!”

by Bob U’Ren

I had always been a diligent recycler from a very young age.  My family has always composted and used grey water in our garden.  We rode our bikes to the grocery store.  Having grown up during a years-long drought in California, it still pains me to this day when the water is left running while someone brushes her teeth.  When I first started working for Quality Planning, I was the sole admin for an office of 60 people.  After so many orders placed to our local big-box store, orders which consisted mainly of paper plates and bowls and plastic ware, it had slowly dawned on me that there was a huge disconnect from my earth-friendly habits at home and our office habits.  And so began the process of greening QPC.

Amazingly enough, the steps QPC started to take to reduce our environmental footprint also ended up saving us money in the long run.  One of the first major steps we took toward a greener future was to move away from paper plates and plastic ware.  Sure, there are issues with dirty dishes in the sink and forgetting to run the (energy and water efficient!) dishwasher, but compared to the money wasted and trees destroyed due to our former practices, I’d say it’s worth the trade-off.  Many of us now print double-sided, and only print when needed, further reducing our reliance on paper products.  The majority of us now use the conference room monitors for meeting agendas and meeting notes rather than printing them out for each person.  And even Accounting, the biggest consumer of paper in the office, is now e-filing!  If you’ve ever gotten an email from me, you have seen this signature at the bottom:

We also kicked the water delivery habit and found a perfect replacement in an installed water filtration system which not only saved us money and freed up space in the break room, but also reduced our reliance on gasoline powered trucks to deliver fresh, clean water.

Greening is a movement, and QPC isn’t the only one on the bandwagon.  Verisk is now accepting scanned copies of legal agreements rather than requiring printed hardcopies.  QPC’s office building is starting a composting initiative and they’ve stocked the restrooms with foaming, natural hand soap.  During our most recent remodel of the 9^th floor, QPC’s contractors have used recycled insulation and earth friendly paints.  The city of San Francisco is considering banning waterway-polluting plastic bags completely in order to force a change in the habits of its citizenry.  And that’s what it’s really all about – changing habits and affecting a cultural shift.  It happens slowly, and of course there are always more things we can and will do to make QPC a more environmentally friendly work place.

by Carissa Clarkson

In today’s tech-heavy world, it’s easy to forget about the human element of data security.  We’ve all seen elaborate computer hacking schemes in movies and television shows.  Occasionally, we even hear about them in the news.  Over the years, the IT industry has responded to threats – both real and perceived – with better firewalls and other threat mitigation products.  Legislators have followed suit, enacting regulations meant to fortify privacy walls.  While important, these approaches to data security fail to protect against the weakest entry point into any environment – the end-user.  Technology is ever changing, but the human propensity to trust remains.  Social engineering – the manipulation of an individual to divulge information – takes advantage of this trust.

Consider this: It’s less effort for a car thief to pretend to be a valet than it is for him to overcome an alarm system.  Today’s social engineering threats act in much the same way.  As a form of confidence scam, thieves trick a person into believing that they are dealing with someone who is genuine and trustworthy.  While most employees are familiar with various phishing, lotto, and advance-fee (Nigerian Prince) email scams, few consider the gravity of poorly protected usernames and passwords.  Studies have shown that alarming numbers of employees will readily submit their account information on unknown “research” websites for a free pen or candy.

Stolen passwords can lead to instant access to otherwise secure data. If the employee is unaware of the theft of his password, he might never know that he has compromised his work environment.  For a business that deals with sensitive customer data, this is a worst-case scenario.  Threat prevention is reliant upon the integrity of user accounts.  While any data breach is unacceptable, the one you don’t even know about is the most dangerous.

The bottom line is that in the 21st century workplace, ensuring that employees are well trained to recognize social engineering attempts is the single most important security measure that a company can take.  At Quality Planning, we take pride in ensuring that our employees are knowledgeable about security threats so that our customer data remains protected.

by Patrick Clancy, QPC IT Manager and Prince of Nigeria

The way in which a policyholder uses a vehicle is of primary concern to an insurance company. Traditionally vehicle usage is broken into pleasure, commute, farm and business. Business is the highest risk that a company will underwrite for a private passenger auto policy. Business use, as defined by the International Risk Management institute, should be designated if “the use of the auto is required by, or normally involved in, the duties of the insured in an occupation, profession, or business, other than driving to and from the insured’s place of employment” (*).

The impact on insurance providers due to the improper classification of business use vehicles is significant. Business use has its own classification due to the increased risk that the segment brings. Risk factors for business use are typically 20 – 40% greater than the risk factors for pleasure or commute classifications. Misrating a business use vehicle results in the company incurring all of the loss associated with the vehicle without receiving the full premium necessary to cover these losses. This leakage of premium will erode the profit from the rate being charged and possibly exceed the total premium collected.

Misclassification also affects the ability of actuaries to determine proper rates. When experience shows large losses in other use classifications due to the misrating of a business use vehicle, the associated risk factors will be skewed. This will result in the improper rating of not only the business category but the more common pleasure and commute segments, as well. This improper rating will limit a company’s ability to remain competitive with its rates.

QPC’s RISK:check^® and Precision Re-Underwiting^TM products use advanced analytics to identify these misclassified vehicles. Then our trained Customer Service agents contact policyholders to confirm actual use of the vehicle. This corrected data eliminates premium leakage and helps return profitability to the auto book.

* International Risk Management Institute. IRMI on personal auto insurance. Dallas: IRMI, 2003.

by Kris Morton

I grew up in a small, hilly, heavily wooded town. Every blind curve and ditch, of which there were many, had one or more sad stories of bad car accidents that had occurred over the years. Luckily for me (though perhaps not for my parents) I didn’t have to worry about how those narrow, windy roads translated in terms of car insurance premiums, since I wasn’t paying for my own insurance until I had moved to a flatter town with much wider, friendlier roads. By that time though I could well appreciate that different geographic areas (or “territories”, if you will) experience different rates of loss, and the relative frequency and severity of the car insurance claims can vary greatly from territory to territory.

However, the territory underwriting factor can be easily mis-rated. Having moved around multiple times since college, I am intimately familiar with the hassles of keeping my current address up-to-date. I have had many acquaintances who, after updating so many other accounts with their new addresses, couldn’t be bothered or didn’t realize the necessity of updating the garaging addresses for their personal vehicles. And in this age of paperless billing it’s hardly even required to update one’s mailing address anymore, so not even that incentive remains. But as my former college buddies moved off to big cities, without an updated garaging address they weren’t paying the correct amount for the added risk of keeping their cars in a city. And any claims they filed would still be counted towards the old territory still listed on their policy. This bad data has the potential to affect future rates, which can confound an insurance carrier whose goal is set up its rates as accurately as possible.

Thankfully, it’s really quite easy to get these addresses updated. For every time I’ve moved, the accounts and addresses that were quickly updated were from the companies and services that took that little bit of extra effort to reach out to me and make sure my information in their system was current. For the companies that I rarely heard from it took many months, if not years, longer for me to get around to updating my information. I’m sure there are people out there who are really good about keeping all of their information current all of the time, and I admire them. But I also know that there are many people like me, and I know that I appreciate the companies that take the time to contact me. I hope they, in turn, appreciate having as much accurate data as possible, because in the insurance world, accurate data leads to accurate pricing … a primary requisite for long-term profitability.

by Kirsten Clemmensen

So, what is all the buzz about annual mileage?

As I travel the country calling on Personal Lines carriers, it seems that most everyone is  looking at implementing or strengthening their position on annual mileage as a key PP Auto rating factor.   Over the past 10 years, a good many carriers decided to eliminate mileage-based factors from their state rating plans. They felt that it was too hard to monitor and that many policyholders may be misrepresenting their actual miles.   Why now are companies not only adding mileage back into their filed rates, but making mileage a primary rating factor?

In some ways, the answer is obvious.  Not many losses occur when the insured vehicle is parked in the driveway!  It seems logical that pricing mechanisms would align “on the road” exposure with cost of the product.  Studies have shown that annual mileage and commute mileage are two of the most influential factors for predicting auto losses.   QPC found that someone driving 8,000 annual miles has a relative loss factor 42% higher than someone driving 3,000 annual miles.   Annual mileage also has a direct impact on claims severity.  Someone driving 20,000 annual miles has a relative average claim cost 77% higher than someone driving 3,000 annual miles.

There is no question that the advent of usage based insurance is catching on quickly and will likely be a popular product option going forward.  Usage based models are taking on many forms:   Pay As You Drive (PAYD), self-reported mileage, verified annual miles, telematics-based driving behaviors.   Bottom line, carriers are again incorporating mileage as a key pricing factor by matching premiums to exposure.

As a key component of our Rating Integrity services, QPC has been studying, collecting data, and working with carriers to validate mileage and commute estimates for over 10 years.   If you are considering revisions to your auto rating plan that include mileage based data, give us a call.

by Ron Hoying, QPC Regional Executive