Premium Leakage Loss May Be Exceeding $30B

As written by Chris Boggs, Executive Director of Big "I" Virtual University

According to Verisk (ISO to you and me), premium leakage is a $29 billion problem in personal auto alone. Other lines likely add approximately $4 billion per year. For example, ISO estimates that commercial auto experiences approximately $2 billion per year and commercial property about $1.2 billion per year. ISO did not have info on the CGL, but it is probably in the same range.

Thus, premium leakage in the ISO-governed property and casualty premium world are more and $30B too low industry wide. This means agent commissions are about $3.6B too low. Further, loss ratios are incorrect, and your contingency bonuses may be too low. So, premium leakage is not just a carrier problem, it is a problem that flows down to agents.

So then, what is premium leakage? Premium leakage is defined as: Premium and/or revenue lost due to misclassification, missed exposures, exposure changes, fraud or the failure to recognize and address other material facts related to premium. Basically, premium leakage results from misapplying or missing any premium-affecting factor.

Areas where premium leakage is common include (not a complete list):

-Construction: 32.5% of building construction classes incorrect
-Occupancy
-Protection: ISO states that 37.5% of protection information is incorrect
-Exposure
-Class codes
-Radius of operations: ISO reports that 9 of 10 trucks are classed as local
-Payroll
-Driver characteristics: 12% of policies have unreported/hidden drivers

Because premium leakage is an agency problem as well as a carrier problem, agents must help carriers guard against it. Remember, at least $3.6 billion per year  is not being paid to agents as a result.