No-Fault Auto Insurance Fraud in New York State

Trends, Challenges & Costs

Hearing on No-Fault Auto InsuranceNew York State Senate Insurance Committee

April 26, 2011Robert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

New York’s No-Fault Fraud Tax: Estimated Aggregate Annual Cost, 2005-2010 ($ Millions)

$203.6

$231.0

$192.9

$116.3

$67.8

$1.4$0

$50

$100

$150

$200

$250

2005 2006 2007 2008 2009 2010

Fra

ud

Ta

x (

$ M

illio

ns

)

*2010 figure is based on data through Q4:2010.Source: Insurance Information Institute calculations and research from ISO/PCI data.

No-Fault Fraud Is Costing Honest New York State Drivers Hundreds of Millions of Dollars

The total fraud tax levied on New York vehicle owners exceeded more than $200

million in 2010 for the second straight year.

NY’s no fault fraud tax burden soared by 241% between 2006 and 2009

Figure 1.

3

New York’s No-Fault Fraud Tax: Estimated Cumulative Cost, 2005-2010 ($ Millions)

$812.9

$609.3

$378.4

$185.5

$69.2$1.4

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

2005 2006 2007 2008 2009 2010

Cu

mu

lta

ive

Fra

ud

Ta

x (

$ M

illio

ns

)

*2010 figure is based on data through Q4:2010Source: Insurance Information Institute calculations and research from ISO/PCI data.

The cumulative no-fault fraud tax burden on New

York vehicle owners exceeded $813 million from

2005 through 2010

No-Fault Fraud Is Costing Honest New York State Drivers Hundreds of Millions of Dollars

Figure 2.

4

Estimated Per Claim Cost of No-Fault Fraud in New York State, 2005-2010

$1,311

$1,581

$1,379

$848

$489

$9$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

2005 2006 2007 2008 2009 2010

Fra

ud

Ta

x P

er

Cla

im

*2010 figure is based on data through Q4:2010.Source: Insurance Information Institute calculations and research from ISO/PCI data.

Fraud and Abuse Are Raising the Costs of Insurance in New York State

The estimated per claim cost of no-fault fraud (a.k.a. Fraud

Tax) was $1,311 in 2010NY’s no-fault fraud

tax of $1,311 accounted for 15.1% of the average claim

cost of $8,664 in 2010

Figure 3.

5

NY No-Fault (PIP) Claim Severity Has Trended Up Sharply Upward, 2005-2010*

$8,664

$5,873$6,129

$6,853

$7,492

$8,269

$8,692

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

2004 2005 2006 2007 2008 2009 2010

Source: ISO/PCI Fast Track data; Insurance Information Institute

The Average Cost of New York No-Fault Claims Rose Rapidly in Recent Years

No-Fault claim severity (average cost per claim) is up 47.5%

($2,791) in 2010 compared to 2004

Figure 4.

6

New York State No-Fault Claim Severity, 1997–2010:Q4

Sources: ISO/PCI Fast Track data; Insurance Information Institute.

$5,6

75 $6,0

63$6

,699

$8,3

47$8

,327

$7,8

88$7

,507

$8,2

34$9

,235

$8,7

27$8

,577

$7,7

73$7

,311

$6,9

58$6

,870

$6,1

56$6

,052

$5,8

20$5

,991

$5,6

15$6

,094

$5,9

14 $6,2

50$6

,269 $6

,530

$6,6

06$7

,063 $7

,323

$7,3

78$7

,297 $7

,670

$7,7

40$8

,443

$8,1

77 $8,5

07$8

,025

$8,5

63$8

,726

$8,6

46$8

,830

$8,6

46 $8,9

90$8

,647

$8,4

07

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

1997

1998

1999

2000

1:01

1:02

1:03

1:04

2:01

2:02

2:03

2:04

3:01

3:02

3:03

3:04

4:01

4:02

4:03

4:04

5:01

5:02

5:03

5:04

6:01

6:02

6:03

6:04

7:01

7:02

7:03

7:04

8:01

8:02

8:03

8:04

9:01

9:02

9:03

9:04

10:0

110

:02

10:0

310

:04

No

-Fa

ult

Cla

im S

ev

eri

ty

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

No

-Fa

ult C

laim

Fre

qu

en

cy

Avg. Claim Severity

Frequency

About 15% of No-Fault Claim Costs in 2010 Were Attributable to Fraud and Abuse

No-Fault Claim Severity

Claim Severity nearly reached a record high

in 2010:Q2: $8,990

Avg. Claim Severity Rose 63% in 5 years

after 1997 Presbyterian

Decision

Avg. Claim Severity is up 50% since 2004:Q4 though 2010:Q4

Claim Frequency is up 22% since

2008:Q3

Figure 5.

7

Average No-Fault Claim Severity, 2010*

$1

6,3

97

$8

,66

4

$8

,13

7

$5

,04

9

$4

,27

1

$3

,04

6

$2

,15

1

$1

,78

1

$3

6,2

45

$7

,13

6

$5

,51

7

$5

,48

0

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

MI NJ NY FL MN ND KY HI PA KS UT MA

Several States Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.

*Average of the four quarters ending 2010:Q4.Source: ISO/PCI Fast Track data; Insurance Information Institute.

MI, NJ, NY and FL currently are the largest states that have the most severe

problems in their no-fault system

NY has the 3rd highest auto no-fault average claim cost (severity) in the US

Figure 6.

8

New York No-Fault (PIP) Claim Frequency Is Trending Sharply Upward*

1.51

1.571.61

1.55

1.62

1.74

1.48 1.49

1.43

1.55 1.571.52

1.20

1.30

1.40

1.50

1.60

1.70

1.80

08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4

*Claim frequency is defined as the number of claims per 100 earned car years.Source: ISO/PCI Fast Track data; Insurance Information Institute

2008:Q1 through 2010:Q4

The Number and Average Cost of NY No-Fault Claims Have Been Generally Rising Since 2004

No-Fault claim frequency jumped by 21.7% between

Q3 2008 and Q4 2010

Figure 7.

Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years

719.81

1589.80

0

300

600

900

1200

1500

1800

61 66 71 76 81 86 91 96 01 06 11*

Ind

ex V

alu

e (1

961=

100)

All ItemsMedical Care

*Based on change from Feb. 2010 to Feb. 2011. Source: Department of Labor (Bureau of Labor Statistics)

A medical expense that cost $1,000 in 1961 would cost nearly $16,000 based on medical cost inflation trends over

the past 50 years.

Figure 8.

10

No-Fault Fraud Was Front Page News a Decade Ago in 2001

Figure 9.

11

Figure 10.

Sparking Interest in Action…

12

Figure 11.

…And Urgent Calls for Reform

13

Average Expenditure on Auto Insurance, NY State vs. US: 1997-2008*

$959

$960

$930

$939

$1,1

72

$1,1

22

$1,0

83

$1,0

47

$1,0

44

$705

$703

$685

$690

$726 $7

86 $830

$843

$831

$817

$796

$789

$1,1

68

$1,1

00

$1,0

15

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

97 98 99 00 01 02 03 04 05 06 07 08

NY US

In the wake of NY’s first no-fault crisis, the average expenditure on auto insurance in NY state fell by $128 or 10.9% between 2004 and 2008, much more

than the 6.4% drop in the US overall.*Latest available.Source: National Association of Insurance Commissioners.

NY ranked as the 2nd most expensive state during the last crisis, falling to 4th by 2007

Figure 12.

Thank you for your timeand your attention!

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