Quality planning, a company that helps validates policyholder information for auto insurers offer new information about the use of odometers as a tool to predict mileage. According to a study that they have published in their site, the use of odometers show that more than half of the cars have an error percentage of 25%. They say that this measurement tool fails the test because it works under that assumption that the use of cars remains the same for every year.
The annual mileage of a certain car is important especially since it directly correlates to auto loss costs. This helps in the decision making of insurance companies. Many believe that the odometer is a good tool that will predict annual mileage. However, as we have said earlier, it actually fails to help predict future mileage.
According to Dr. Raj Bhat, a certain methodology does not automatically mean it is accurate and acceptable just because it is based on measurable data. This is due to the idea that there are many factors that can affect driving behavior and this affects how much the vehicle is used for every year. Thus he suggests that the odometer be used together with other methods to measure the mileage that a vehicle is subject to each year. He suggests that the odometer readings on only be used as a baseline rather than the actual predictor of annual mileage.
For this study, they used 4.5 million vehicles. They took the odometer readings from these cars, specifically readings for the years 2004 and 2009. More than half of the cars that they have tested showed wrong estimates by 25% or more. With this as the finding, they said that using the odometer alone would make insurance companies charge policyholders with wrong premiums and rates. This shows that there is a need to change the system and improve them in order to find better predictors of such action.
The odometer as a tool fails as a predicting tool simply because it does not account for possible changes in individual situation of the car owner. Without accounting for this change, the assumption that the car will be used in the same way year after year will not produce accurate results. Accurate results are important especially in this line of business especially since it greatly determines the premium that will be offered to policy holders.
Dr. Bhat also said that the misallocation of premium rates by insurers can have a negative effect, primarily affecting their integrity. It affects insurers in two ways. First is that they could overcharge their consumers in which, if found out, may cause them to lose even their best customers. The other effect is that they would essentially lose profit.
It is important for insurance companies to produce accurate information for the premiums that they are to offer their consumers especially now that consumers are becoming more aware of the products and services that they use. It is recommended for insurance companies to change or re-evaluate their system of assessment and predictions in order to provide better service to consumers.