Addressing Rate Evasion in the Canadian Auto Insurance Industry

Rate evasion — and the misrepresentation of address information, in particular — is a ubiquitous problem in the Canadian auto insurance industry. It’s also a key issue to address as insurance solutions become increasingly digital, from quote to purchase. Adam Agius, Vice President of Insurance at TransUnion Canada, looks at some of the issues and explains how a proactive approach to validating information at point of quote can create a win-win for carriers and honest consumers.

The price of rate evasion

Rate evasion is a form of fraud perpetuated in the auto insurance industry. It’s defined as deliberately misrepresenting information at the point of quote for the purpose of obtaining a cheaper insurance rate.

As with any other kind of fraud, rate evasion affects everyone in the industry. Rate evaders make it difficult for insurers to assess the accurate price of the risk upfront. This can result in under-pricing risks in certain territories and not being able to cover the cost of claims in these areas. In order to recoup these losses, insurers may pass on the cost to honest consumers in the form of increased premiums.

One question that could be asked is: Are these rate evaders more likely to embellish or inflate a claim? If so, these individuals would also be contributing to the already increasing cost of claims, a problem that’s trending nationwide.

Premium location?

Misrepresenting one’s address is a common form of rate evasion in auto insurance. Though there are many variables that go into auto insurance rates, changing their listed territory can reduce a consumer’s premium considerably.

Carriers use data on the frequency and severity of claims to segment a province into territories, with each territory effectively having its own risk profile that works as a rating variable when assessing an insurance application.

As there’s a limit to the number of territories allowed within a province, some can cover a very broad and diverse area — and the difference in premiums between one territory and another can be hundreds of dollars a month.

Knowing this, dishonest consumers try to take advantage of this rating structure by entering false addresses to obtain the lowest premium possible.

A number of insurers are seeking ways to tackle this by taking a more proactive approach to verification early on in the process.

The case for a more proactive approach

One person misrepresenting their personal information, driving or vehicle characteristics in an attempt to receive a reduced rate on their auto insurance premium will have an effect on the bottom line, and could cost an insurer tens of thousands of dollars over a couple years. As the number of rate evaders increases, the impact on the entire portfolio could be material.

Ultimately, losses caused by rate evasion are passed on to consumers in the form of increased premiums — and honest consumers shouldn’t have to carry the cost burden.

Identifying the problem after the policy is issued is both difficult and expensive. It’s also not the most effective approach: Carriers may miss the majority of rate evaders and it’s often difficult and time-consuming to analyze the application data after a claim has occurred

Although an insurer is entitled to deny a claim if it’s discovered the policyholder misrepresented their information, it’s not always easy to prove misrepresentation after the fact.

A number of insurers are therefore shifting focus from point of claim to point of quote, using validation solutions at the onset to prevent dishonest consumers from getting on the books in the first place.

Implementing a rate evasion solution at point of quote can help reduce loss ratios for insurance carriers and result in reduced premiums for honest consumers — and a healthier auto insurance market.

TransUnion’s suite of fraud-focused identity verification solutions, available in all provinces, can assist in mitigating rate-evasion fraud early in the onboarding process.

TransUnion helps insurers validate the addresses of potential customers and reduce the number of policyholders who have intentionally misrepresented their address information in order to obtain a cheaper premium.

Learn more about TransUnion Canada’s identity verification solutions and how they can help you better combat rate evasion.

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