Filed Under:Markets, Personal Lines

We see you: Catching garaging fraud

Garaging fraud occurs across the country and costs over $2 billion a year in lost premiums. (Photo: Shutterstock)
Garaging fraud occurs across the country and costs over $2 billion a year in lost premiums. (Photo: Shutterstock)

Insurance carriers are constantly looking for better ways to fight fraud. As technologies become more advanced, new options are appearing on the market. Telematics and usage-based insurance are generating a lot of interest, with the telematics market forecast to show a 50% compound annual growth rate by 2020.

But could fraudsters (people knowingly committing a crime) be exposing a flaw in how carriers collect data to determine fraud? What is the likelihood that fraudsters will sign up for “pay as you drive” insurance models? And, can insurance carriers afford to wait for lengthy telematics installations and data collected over a period of time to properly quote and renew policies?

While auto carriers ramp up telematics and usage-based insurance models, a sizable number of policyholders continue to commit fraud because they can get away with it. Fortunately, there are alternate ways to catch insurance fraud using “where” data.

A more effective way

One type of “where” data is the kind we all use and share everyday – checking into a restaurant from a social media app, or using a map app to get driving directions from one's current location.

But the type of “where data” carriers should care about the most is vehicle location data. By law, every vehicle must display a license plate. Vehicle location data captures license plate information to provide vehicle sightings and the associated location data, including the date, time and location where the vehicle was sighted. Unlike telematics or “pay-as-you-drive” plans, the driver is not required or ever asked to opt in; if someone drives a vehicle, he or she is automatically opted in to this type of data.

Rather than hoping policyholders opt in to telematics or “pay as you drive” programs, carriers can cut down on garaging fraud at the quote and renewal by using vehicle location data solutions to fill in the blanks. For example, your policyholder reports an address in Greenville, South Carolina, but the vehicle location data shows that vehicle has never been seen at that address. It has, however, been seen 180 times at a location in the Bronx. That's the power of “where” or vehicle location data – the sightings don't lie, but people often do.

parked cars in an apartment parking lot

Industry estimates show that garaging fraud can be responsible for up to $2 billion in premium leakage annually. (Photo: Shutterstock)

Taking on garaging fraud

Garaging fraud is such a commonly accepted behavior that policyholders often brag about how much money they can save with it. The industry estimates that insurance premiums are one percent higher than they would be without garaging fraud. For carriers, every one percent of a rating error left uncorrected causes a 20% profit loss. As a result, garaging fraud adds up to more than $2 billion in annual premium leakage.

Garaging fraud can be committed in several ways. For example:

The unintentional fraudsters:

  • Snowbirds: They fly both ways. They either comprise the 750,00 people who temporarily move to warmer climates during cold winters in other parts of the country, or the other 600,000 who can't take the heat and get out of the South or Southwest during the summer.

  • College students: More than 2.5 million U.S. students are returning students who live out of state, and take the old family truckster with them when they drive back to school. Carriers miss the majority of these students who change where they keep their vehicles.

  • Movers: Carriers often change the billing address, but fail to verify and/or change the garaging address. With more than 7.5 million people moving out of state each year, this is a demographic worth keeping an eye on.

Red Toyota in front of a house

Customers who lie about where they garage their vehicles may be less than truthful about other factors involving their coverage. (Photo: Shutterstock)

The “Shame on You” Fraudsters:

  • Agents: Carriers report some agent issues which usually occur when there is an unusual number of garaging issues with the agent's book.

  • Consumers: Those who knowingly commit garaging fraud are less likely to be high-risk drivers, so their rates are already low and they can fly under the radar on the garaging issue.

With cases like this all over the country, a $1,000 fraud here and there really adds up to a hefty amount. In fact, sample book tests demonstrate millions in premium leakage.

For example, one carrier's customer listed the garaging address in Baytown, Texas with an annual premium of $813. However, the vehicle sightings data showed 150-plus sightings in New York from June 2010 to June 2015, which added up to $1,085 in annual premium leakage and $5,500 premium leakage to date. And that's just one example of a single customer from a single carrier.

“Where” data solves the garaging fraud problem by collecting data on where the vehicle is frequently spotted, allowing carriers to “score” the policyholder's address against the vehicle location data and tell the carrier whether it needs to investigate further.

In addition to nabbing garaging fraudsters, intentionally or not, the “where” data can also identify high-risk policies (e.g., if the vehicle is actually being kept in a crime-ridden area with high vehicle theft risk, not in the safer neighborhood listed on the policy).

Evidence shows garaging fraud is predictive of loss

If policyholders are comfortable with committing garaging fraud, the question becomes: what else are they okay with? Chances are if someone is willing to lie about where they live; use a P.O. Box, second address or a friend's address to avoid paying the correct premium for the risk, they will lie about other things as well. Lies like, “existing damage was the result of a recent car accident, the car was stolen even though it was recovered at my boyfriend's apartment, my injury is very severe, or I was only visiting New York from Florida when my car was stolen.”

Attitudes about fraud are changing, yet too many people still have a Robin Hood complex when it comes to insurance carriers. A recent Insurance Research Council survey found that 18% of respondents believe it is acceptable to make up for premiums paid in the past.

Carriers are beginning to take the position that liars lie, and that these liars are inherently higher risks. In fact, an analysis shows that carriers can look at policies flagged for garaging, and predict which of these will add up to higher losses down the road. These are the carriers who don't want liars on their books.

Carriers may still opt for telematics/pay-as-you-drive plans as part of a comprehensive fraud-detection plan, but “where” data can provide insights that telematics can't. Vehicle location data can impact the bottom line, helping carriers get fraud off their books more quickly, saving them and law-abiding policyholders millions.

Alex Young (ayoung@drndata.com) is vice president and general manager, insurance, for DRN.

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