Legacy Contributes to Leakage

According to the annual Premium Rating Error report from Quality Planning Corp. (QPC, San Francisco), insurance company legacy systems are partly to blame for an estimated $13.7 billion in auto premium revenues forgone in 2002, according to Bob U'Ren, vice president of underwriting and business development, QPC. The premium leakage, contends U'Ren, is due partly to the fact that many auto carriers are operating antiquated systems.

"Legacy systems are patched together with coding that is often incorrect and won't allow claims and underwriting systems to share critical data," says U'Ren. "This makes it exceedingly difficult to first identify rating errors and, secondly, to correct them." As a solution to the legacy conundrum, U'Ren suggests outsourcing in order to bypass the legacy system completely.

But carriers' systems are not entirely to blame for the losses. Premium leakage is an accepted industry loss because policyholders are not always forthcoming with the facts when completing policy applications. Although carriers take premium-leakage-causing factors into consideration when pricing, low-risk policyholders often suffer. "All rates tend to reach a common level and your low-risk customers inordinately subsidize your high-risk customers," says U'Ren.

The study's findings also showed that premium leakage is more prevalent in carriers that put business on the books more rapidly, according to Dr. Daniel Finnegan, founder and president, QPC.