Identity Theft Insurance Charles P. Orlowicz November CAS Annual Meeting – Session CS04 A division of the property and casualty subsidiaries of American International Group, Inc.

What is Identity Theft? The unauthorized or illegal use of a person’s name, social security number, or other means of identification

Examples Credit Card Fraud – New or Existing Accounts Phone or Utilities Fraud Bank Fraud – New or Existing Accounts Investment Fraud – New or Existing Accounts Employment Related Fraud

More Examples Government Documents or Benefits Fraud Loan Fraud – Auto, Real Estate, etc. Stolen ID Used at Time of Arrest Internet Account Fraud

Latest Year United States Frequency of Identity Theft Existing Credit Card Accounts: 5.2 Million Persons Existing Non-Credit Card Accounts: 1.5 Million Persons New Accounts & Other Fraud: 3.2 Million Persons Total Victims: 9.9 Million Persons FTC – Identity Theft Survey Report, September 2003

Worst Case Scenario? (How to Have a Really Bad Week) Day 1: Surprise! Your checking account has been emptied. Numerous checks have bounced. Day 2: You learn that your three auto loans are all in default. (What auto loans?!) Day 3: Your credit report shows 15 unknown credit card accounts. All are maxed out. Day 4: You discover that someone else has been working under your SSN for several years.

Worst Case Scenario? (How to Have a Really Bad Week) Day 5: You receive a large medical bill for insurance co-pays & deductibles for treatments that you never had. Day 6: You and you possessions are ejected from your home for failure to pay your mortgage. (What mortgage?!!) Day 7: Watching TV in a local bar, you see a posting from the FBI’s most wanted list. In the AKA section is your name and SSN.

Financial Implications “Victims are generally not liable for losses based on fraudulent actions taken by identity thieves using their personal information. A variety of laws limit consumers’ liability in these situations. Such laws include the Truth in Lending Act… and the Electronic Fund Transfer Act…. Consumer liability for losses associated with check fraud and loan fraud are typically limited by state statute or common law.” FTC – Identity Theft Survey Report, September 2003

Financial Implications (Cont.) Average of $500 Spent on Resolution $160 When Only Existing Accounts Fraud $1,180 When New Accounts & Other Fraud Average of 30 Hours Spent Resolving 15 Hrs When Only Existing Accounts Fraud 60 Hrs When New Accounts & Other Fraud FTC – Identity Theft Survey Report, September 2003

Financial Implications (Cont.) Possible Long-Term Credit Problems, Even After “Resolution” of the Fraud Possible Cost of Criminal Defense Possible Expenses of Psychological Counseling

Some Other Facts Cost of resolution is positively correlated with length of time to discover the ID theft. Probability of recurrence is higher than original probability of ID theft. Over 60% of ID Theft Victims are able to resolve the problem at no personal cost. Credit monitoring increases the probability of early discovery.

Description of Coverage Legal Costs (May Include Criminal Defense) Re-filing and Re-application Costs for Various Credit or Debt Instruments Notary, Telephone, and Postage Costs Wages Lost Due to Time Taken to Resolve ID Theft Call Center to Provide Guidance to Victim

Limitations of Coverage Policy Limit & Deductible Effective and Expiration Dates Exclude Intentional Loss Exclude ID Theft Perpetrated by an Immediate Family Member

Rating Variables Policy Limit and Deductible Will we reimburse expenses or will ID restoration services be provided directly? Is Credit Monitoring included in the product offering? If yes, how frequently? Is Criminal Defense covered? Is “Wage Loss” for self-employed professionals covered?

More Rating Variables Is coverage for ID Theft perpetrated by a family member included? How important is the coverage in the product offering? How prominently is it advertised? Will our Call Center be used or will the insured provide this service for its clients?

Possible Target Markets Coverage may be marketed as a free benefit offered to customers or members of any of the following: Banks Credit Card Issuers Financial Advisors Credit Monitoring/Information Companies

More Possible Target Markets Coverage may be marketed as a free benefit offered to customers or members of any of the following: Non-Profit Agencies & Associations Other Affinity Groups Coverage may be offered as an employee benefit.

International Questions Identity Theft is a growing problem in many countries besides the United States. Some questions to consider: How do the pertinent laws of France, Italy, the UK, Japan, Brazil, etc. compare with those of the USA? Are necessary rating statistics obtainable?

More International Questions Would an ID Theft insurance product be affordable in the target country? Would it sell? Is country-specific Call Center expertise available? Is an appropriate distribution system available?