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 Phone: | Toll free: AAIS | Fax: | Web: Identity Fraud Expense Coverage Kimberley A. Ward CAS Ratemaking Seminar, March 2004

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 Topics for Discussion n About AAIS n Examples of Identity Theft n Endorsement Coverages n Pricing the Product n Availability of Materials n Your Questions

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 About AAIS n Advisory Organization, formed in 1975 n 20 Lines of Business l Forms, Rules, and Rating Information n Statistical Reporting n Technical Support Services

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 What is Identity Fraud? n Use of another person’s personal identifying information without permission n Includes l Purchasing goods and/or services l Obtaining credit l Borrowing money l Obtaining employment l Committing crimes n Became a federal crime in 1998

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 How does it happen? n Loss or theft of identifying papers n Documents in the trash n Theft of mail n Employee dishonesty n Internet shopping or spam (“Phishing”)

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 How widespread is it? n Reports to FTC Clearinghouse almost double every year since n 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. n These numbers include two types of losses l Account theft (17 million; 6.6 million) l ID theft (10 million; 3.3 million)

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 What does it cost consumers? n Damaged credit n Collection agencies n Criminal Record/Civil Suits n Insurance/Utilities/Employment n CASH $$$ l $5 billion in out of pocket expenses in the last year, according to FTC Survey l Victims of ID theft have more than 3 times the expenses of victims of account theft l $5 billion does not include time lost at work, etc.

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 Identity Fraud Expense Coverage n Endorsement and manual supplement for non-AAIS affiliates n Endorsement will require customization n Insured selects limit, shown on endorsement or declarations

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 New Definitions n “Identity Fraud” is the use of personal identifying information of an insured without permission, in a manner that violates federal, state, or local law n “Expenses” means l Costs to obtain, reproduce, or notarize required documents l Costs to send required documents l Costs for telephone calls l Research fees l Loss of earnings (no more than $250 per day per insured and total of $5,000 for all insureds.) l Loan application fees l Attorney fees with company’s prior consent

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 Coverage Period n Coverage provided for expenses incurred as a result of identity fraud: l Occurring any time prior to the policy period, and l Discovered during the policy period or up to one year after. n Coverage applies even if perpetrator(s) are not identified n No coverage for expenses l Business related l Insured committing fraud l Fraud discovered prior to policy l Fraud discovered after one year after end of policy

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 A few more things n Insured selects per occurrence limit n Deductible of $100 applies n Series of acts committed by one person is considered one occurrence n Limit does not accumulate from policy period to policy period n Coverage is excess over other insurance or types of redress n Policy conditions are modified to allow for “Discovery” basis n 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.

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 12 Pricing n Pricing based upon GAO 3/2002 report: Identity Theft: Prevalence and Cost Appear to be growing n Includes monetary loss information as reported to the FTC Clearinghouse l Early reporters may not know extent of monetary damages l Monetary damages include long distance calls, document copies, fees, postage, attorney fees

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 13 Pricing n Further…non-monetary damages are reported to the FTC Clearinghouse l include time lost from work, that is considered a monetary loss under the new endorsement n Price should reflect that coverage is provided on a discovery basis, which is broader 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 14 Pricing - Adjustments to data n Trend and ALAE: to reflect that these costs are increasing over time and the cost of ALAE l adjustment is 20% n Development: since the majority of the reported incidents do not reflect the final cost to the victim l assumed 80% would be in the next cost range up, special treatment for “no cost” fraud claims l 80% of the reports to FTC indicating no monetary losses were distributed to the other categories proportionally

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 15 Pricing - Final Selections n Assumed frequency is 500,000 fraud reports per year from approximately 150 million adults (0.0033) n Projected severity for 15,000 limit is $5,857 per claim n Selected loss cost = $25 n Additional loss costs for other limits

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 Availability n AAIS will make endorsement and supplement available to non-affiliated companies n Contact Rick Anderer, at AAIS or n Additional questions can be answered by me at