SAN FRANCISCO, CA--(Marketwire - August 12, 2010) - Quality Planning, a Verisk Analytics company that validates policyholder information for auto insurers, offers new insights for private passenger auto insurers regarding the use of odometer readings to predict annual mileage. In a quantitative study published today on its website (www.qualityplanning.com), Quality Planning finds that when previous odometer readings alone are used to estimate future annual mileage, more than half the vehicles have a rating error of more than 25 percent. Odometer predictability fails because of a false assumption that vehicle usage remains similar from year to year.
Auto underwriters are desperate to accurately estimate annual mileage driven because of its direct correlation to auto loss costs. Some carriers, and some regulators for that matter, believe that odometer readings are a good predictor of future annual mileage. These companies collect self-reported odometer readings or tap third-party data sources such as smog or service records to estimate annual miles. But this seemingly rich source of measureable historic data comes up short when used to predict the future.
"Just because the methodology is based on measurable data, does not necessarily mean it is an accurate and acceptable method on which to base premium," said Dr. Raj Bhat, president of Quality Planning. "Numerous factors directly affect driving behavior and therefore the total number of miles a specific vehicle is driven each year. Foremost among these are lifestyle changes and changes in the mix of household vehicles. It is essential to include these factors when predicting annual mileage, because a change in either can affect total miles driven."
Since annual mileage is used to varying degrees by insurers to calculate private passenger auto premiums, this study has wide-ranging significance. Quality Planning recommends that when validating annual miles driven, odometer readings should be used only as a baseline and then supplemented with additional data that accounts for changes in lifestyle and household vehicle mix -- characteristics that can have a direct impact on the actual miles an individual drives.
Study Snapshot
(The complete study is available at www.qualityplanning.com.)
- To test whether past use is a viable predictor of future use, Quality Planning sampled 4.5 million vehicles with valid odometer readings taken between 2004 and 2009.
- For each vehicle, actual odometer readings for two consecutive time periods were used to predict annual mileage for the next consecutive time period.
- Using this methodology, Quality Planning found that in more than half the cases, annual mileage "estimates" would be wrong -- by 25 percent or more.
- The study states that use of the odometer method alone will likely result in a rating error that yields what could amount to significant premium undercharges or overcharges.
- The study concludes that lifestyle and vehicle changes are the main factors that cause a change in annual miles driven and that the odometer-based methodology fails to account for these changes.
Commenting on the study results, Dr. Bhat added: "This misallocation of premium creates long-term rating integrity issues for an insurer. If premium is insufficient, profitability is at risk and the insurer may attract less desirable risks. If policyholders are overcharged, the insurer quickly becomes uncompetitive and vulnerable to losing its best customers."
About Quality Planning
A Verisk Analytics company, Quality Planning is focused on providing rating integrity solutions to auto and home insurers. Quality Planning works with insurance companies to identify areas of significant rating error using sophisticated database management, statistical analysis and modeling, customized survey design, and highly targeted customer interaction. Quality Planning helps clients work within their existing rating plans and charge fair prices to policyholders based on a true representation of risk. The company was founded in 1985 and is headquartered in San Francisco. For more information, visit www.qualityplanning.com.
Contact Information:
Contact:
Tim Cox
Zing Public Relations
650-369-7784