We would all love to believe that everyone working in insurance is the paragon of honesty and ethical behavior and that it is the outsiders, the criminals, the general bad actors who are committing fraud against the industry. Unfortunately, this simply is not the truth. Although not the norm, insurance industry professionals have been known to participate in fraud schemes, and agent gaming is just one of the ways it happens.
Agent gaming occurs when insurance agents manipulate the details of insurance policies to alter the premium, to improve risk acceptability or to maximize their commissions and key performance metrics. It is a bad practice that can add risk to an insurer’s book of business while leaving a trail of upset policyholders. Despite the severity of the problem and the potential impact on insurers and insureds alike, agent gaming has been difficult to detect and mitigate. Fortunately, insurers have new technology that can help them.
What drives agent gaming
Insurance agents have incentives to sell a high volume of policies in the shortest time, but there are obstacles. While 65% of insurance customers still prefer to work with an agent, digital insurers create competition. This has led to financial pressure that may drive some agents to cut corners so they can write new accounts.
In addition, both home and auto insurance rates rose in 2022, which means it can be a lot harder to keep customers happy. If agents can’t provide competitive pricing, customer loyalty can erode, and policyholders may default to doing their own research and comparisons, leading to defection.
These challenges can act as a misaligned incentive for insurance agents. Because agents act as a conduit between policyholders and insurers, they have the opportunity to misrepresent policyholders when shopping for quotes. An insurance agent can increase the chances of a quick sale by manipulating a policyholder’s information or modifying essential facts to arrive at either a more affordable premium quote or to ensure the quote is considered acceptable by the insurer.
Agent gaming hurts insurers and policyholders
Premium leakage is one of the primary effects of agent gaming, and it’s part of an expensive problem for insurers. Industry insiders believe premium leakage in total may account for as much as 14% of an insurer’s direct written premiums. In other words, if an insurer has $500 million DWP, premium leakage will cost the organization $70 million per year in lost revenue.
Policyholders usually have no idea they’re part of an agent gaming scheme. Once the scheme is discovered, however, it can have bad consequences for the individual. For example, the insurer may decide to raise their rates, part ways with the policyholder or, in the event of a claim, deny or partially deny the loss. This can represent a surprising and unwelcome financial burden on the innocent policyholder.
Agent gaming can go the other way, as well. Instead of making premiums artificially lower, agents may inflate commissions by making policyholders’ premiums higher by signing them up for unnecessary coverage. Even if the scheme is detected, policyholders may never be able to recover these incremental premium expenditures.
Given the variety and scale of its impact, agent gaming can’t simply be regarded as a cost of doing business. This practice costs substantial amounts of revenue – and unwinding agent gaming schemes can cause a considerable amount of customer dissatisfaction. Therefore, insurers need ways to catch agent gaming earlier, before the scheme becomes entrenched.
Manual investigation catches agent gaming after the damage is done
It can be difficult to detect agent gaming via manual review. A premium manipulation scheme, for example, will often reveal itself with a long list of policies that have abnormally low (or high) premiums. A clever, but dishonest, agent will avoid gaming every single one of their policies to evade detection. In fact, looking at their list of policyholders might reveal only a few customers with lower rates than normal.
Even comparing a bad actor’s book of business with other agents' may not reveal them to be an obvious outlier. Manually comparing agents with one another takes time, and it’s difficult for investigators to review a large sample of agents, given other priorities.
In many cases, agent gaming schemes aren’t revealed until a policyholder files a claim. At this point, the insurer has already lost significant revenue due to premium leakage.
Detecting agent gaming schemes sooner with AI solutions
AI solutions are capable of more nuanced analysis. They’re able to compare every agent in an insurer’s network against every other agent to find the biggest statistical outliers. This gives insurers a much better picture of the agent gaming that may already exist in their book of business.
Being an outlier doesn’t necessarily mean an insurance agent is gaming the system, however – it might just mean that an agent is a good salesperson. Therefore, AI solutions need to be capable of drilling down into individual policy details.
Here’s an example: If an agent understates a home’s square footage or replacement cost to devalue the property and obtain a lower rate, the AI should be able to spot the problem using external data. For example, the AI solution could access county assessors to find the exact square footage of the home and then flag the discrepancy for investigation.
The crux of the matter is that AI doesn’t just perform this check for existing policies. AI solutions are also capable of flagging agent gaming in real time during the application process. In other words, insurers don’t need to wait until they start to lose revenue before they detect agent gaming schemes. Instead, they can keep their agents honest throughout the entire policy lifecycle.