Identity Fraud Expense Coverage

A m e r i c a n A s s o c i a t i o n o f I n s u r a n c e S e r v i c e s

1745 S. Naperville Road, Wheaton, IL 60187-8132Phone: 630-681-8347 | Toll free: 800-564-AAIS | Fax: 630-681-8356

E-mail: [email protected] | Web: www.AAISonline.com

Identity Fraud Expense Coverage

Kimberley A. [email protected]

CAS Ratemaking Seminar, March 2004


Topics for Discussion About AAIS

Examples of Identity Theft

Endorsement Coverages

Pricing the Product

Availability of Materials

Your Questions


About AAIS Advisory Organization, formed in 1975

20 Lines of Business Forms, Rules, and Rating Information

Statistical Reporting

Technical Support Services


What is Identity Fraud? Use of another person’s personal

identifying information without permission

Includes Purchasing goods and/or services Obtaining credit Borrowing money Obtaining employment Committing crimes

Became a federal crime in 1998


How does it happen? Loss or theft of identifying papers

Documents in the trash

Theft of mail

Employee dishonesty

Internet shopping or spam email (“Phishing”)


How widespread is it? Reports to FTC Clearinghouse almost double

every year since 1998.

FTC Identity Theft Survey released in September, 2003, found that 27.3 million victims over the last 5 years, 9.9 million in the last year alone.

These numbers include two types of losses Account theft (17 million; 6.6 million) ID theft (10 million; 3.3 million)


What does it cost consumers? Damaged credit

Collection agencies

Criminal Record/Civil Suits

Insurance/Utilities/Employment

CASH $$$ $5 billion in out of pocket expenses in the last year,

according to FTC Survey Victims of ID theft have more than 3 times the expenses of

victims of account theft $5 billion does not include time lost at work, etc.


Identity Fraud Expense Coverage Endorsement and manual supplement for

non-AAIS affiliates

Endorsement will require customization

Insured selects limit, shown on endorsement or declarations


New Definitions “Identity Fraud” is the use of personal identifying

information of an insured without permission, in a manner that violates federal, state, or local law

“Expenses” means Costs to obtain, reproduce, or notarize required documents Costs to send required documents Costs for telephone calls Research fees Loss of earnings (no more than $250 per day per insured

and total of $5,000 for all insureds.) Loan application fees Attorney fees with company’s prior consent


Coverage Period Coverage provided for expenses incurred as a

result of identity fraud: Occurring any time prior to the policy period, and Discovered during the policy period or up to one year after.

Coverage applies even if perpetrator(s) are not identified

No coverage for expenses Business related Insured committing fraud Fraud discovered prior to policy Fraud discovered after one year after end of policy


A few more things Insured selects per occurrence limit

Deductible of $100 applies

Series of acts committed by one person is considered one occurrence

Limit does not accumulate from policy period to policy period

Coverage is excess over other insurance or types of redress

Policy conditions are modified to allow for “Discovery” basis

Supplement provides rating information for limits of $5,000, $10,000, $15,000, $20,000, $25,000, and $30,000, plus rating for each addl $5,000.


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Pricing Pricing based upon GAO 3/2002 report:

Identity Theft: Prevalence and Cost Appear to be growing

Includes monetary loss information as reported to the FTC Clearinghouse

Early reporters may not know extent of monetary damages

Monetary damages include long distance calls, document copies, fees, postage, attorney fees


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Pricing

Further…non-monetary damages are reported to the FTC Clearinghouse

include time lost from work, that is considered a monetary loss under the new endorsement

Price should reflect that coverage is provided on a discovery basis, which is broader coverage


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Pricing - Adjustments to data Trend and ALAE: to reflect that these costs are

increasing over time and the cost of ALAE adjustment is 20%

Development: since the majority of the reported incidents do not reflect the final cost to the victim

assumed 80% would be in the next cost range up, special treatment for “no cost” fraud claims

80% of the reports to FTC indicating no monetary losses were distributed to the other categories proportionally


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Pricing - Final Selections

Assumed frequency is 500,000 fraud reports per year from approximately 150 million adults (0.0033)

Projected severity for 15,000 limit is $5,857 per claim

Selected loss cost = $25

Additional loss costs for other limits


Availability AAIS will make endorsement and

supplement available to non-affiliated companies

Contact Rick Anderer, at800-564-AAIS or [email protected]

Additional questions can be answered by me at [email protected].