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Did you commit fraud when you bought car insurance?

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Americans might agree that auto insurance companies aren't perfect when it comes to deciding how much policyholders should pay in premiums. Most of us think our rates should be lower. Yet a study by insurance industry data collector Verisk Analytics indicates that – at least for some of us – auto insurance premiums should be even higher.

When auto insurers are deciding whether to offer or renew coverage, they collect information from potential clients. But that data is now so full of misinformation that it could cost auto insurers 14 percent of the annual premiums they collect each year. It's a loss that Dorothy Kelly, Verisk's director of product management, terms "leakage." Others simply refer to it as "fraud." 

"This is a $29 billion annual problem," she said in a recent online briefing. 

Such concerns come at a time when the auto insurance industry is reeling. In February, the nation's largest property-casualty insurer, State Farm, reported a $7 billion underwriting loss for its 2016 car insurance business. Other auto insurers have suffered similar setbacks.

Insurance fraud is front and center in Congress, too with the U.S. Senate Subcommittee on Consumer Protection on Thursday holding a hearing on the subject. 

Insurance companies say the lack of accurate information means that they aren't charging enough for drivers who slam into other cars and damage their own vehicles, as well as those who simply don't provide insurers with truthful information about who's driving and how much.

Information is often left off the application, Kelly said, and some of what's submitted is incorrect for reasons that may vary from negligence to outright fraud. Either way, it's "GIGO: Garbage in and garbage out," she said.

In the past, driving accidents – and the amount insurers paid for the claims arising from them – declined, so there was more tolerance for information gaps. "We were in a market where growth for growth's sake was acceptable," Kelly said. Now, accident rates are soaring, and as cars get costlier even fender-benders are becoming more expensive.

There's also a "growth in remote applications" for auto insurance (read "the Internet"). With little or no personal interaction, the insurer doesn't know the applicant, she said.

What car insurance companies don't tell you about rates 04:06

Then there's the issue of applicants who purchased their coverage from independent agents. "They may not be directed to do what you want," Kelly said. Even agents who work for the insurance company itself need to be incentivized to take the time to fill out an accurate application.

But the biggest challenge – and cost – for auto insurers is the more than $10 billion for "unrecognized drivers": teenagers who attain driving age but aren't added to the policy until it comes up for renewal the next year. Or millennials who moved home after college and now drive the family car and thus become another source of "uncaptured premium."

More than $5 billion is lost because car owners underestimate mileage. 

"Getting accurate data is really challenging," Kelly said. Drivers often say their car is used for pleasure when it's actually on the road for hours each week commuting to and from work.

Unreported violations and accidents would add more than $3 billion to premiums, estimates Kelly, while slightly less than $3 billion comes from "garaging," or where the car is supposedly parked. Savvy automobile owners know that car insurance for areas that routinely experience congested traffic is more expensive, and if possible will use a residential address with cheaper rates as the car's primary location.

Outright fraud is another concern. 

"Fraud is what we're really talking about here," said Steve Weisbart, chief economis at the Insurance Information Institute (III), which represents the property-casualty industry, including auto insurers. "It may not feel like fraud to those who don't report new drivers in their family or where they keep their car, but that's what it is." 

Weisbart said that if the industry caught more of these fraudsters, it could "charge lower premiums to those who are honest." 

While Kelly didn't get into specifics, one area where there is a lot of fuzziness is motor vehicle violations, such as speeding. The former president of the III, Robert Hartwig, said that an old study he conducted showed a high percentage of DWI – driving while under the influence of drugs or alcohol – cases were missing from what he called the "notoriously inefficient department of motor vehicle databases."

"Infractions were either not entered or expunged," said Hartwig, who's now a finance professor at the University of South Carolina.

And apparently it hasn't changed. Many states have "diversion" programs which allow drivers convicted of motor vehicle violations like speeding or reckless driving to avoid having "points" on their driving record. These points – which reflect violations such as speeding – are used by auto insurers to rate drivers and normally result in increased annual premiums.

"Diversion programs are very common and a big business," said Director of Traffic Safety Jake Nelson at the AAA's federation of motor clubs, which have 56 million members. "Pay a fine, take a 20 minute-class and you're in the clear. They are obviously abused by many drivers."

While car insurers might see Verisk's study as a reason to tighten up underwriting standards to curb fraud, consumers may want to double-check the information insurers are using about them for accuracy, said Mark Romano, director of the insurance claims project for the Consumer Federation of America (CFA), a watchdog organization that is also testifying before Congress.

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