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What is Premium Leakage?

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. I couldn't find anything on the CGL, but it is probably in the same range.

Thus, premiums 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.

What, then, 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.

Premium leakage is caused by incorrect (not a complete list):

Construction: According to ISO, 32.5 percent of building construction classes are incorrect
Occupancy
Protection: ISO states that 37.5 percent of protection information is incorrect
Exposure
Class codes
Radius of operations: ISO reports that 9 of 10 trucks are classed as local
Payroll
Sales
Driver characteristics: 12 percent of policies have unreported/hidden drivers per ISO
Use class
Experience
Costs
Improperly applied credits
Missed employees
Improper use of a preferred tier company
Incorrect territory
Addition of broadening coverage endorsements without proper premium charge
Simple miscalculation

Because premium leakage is an agency problem as well as a carrier problem, agents must help carriers guard against premium leakage. Remember, at least $3.6 billion per year are is not being paid to agents all because of this one problem.

Last Updated: January 4, 2019