2004 Seminar on Ratemaking – Session PL-6
Identity Theft Insurance
Charles P. Orlowicz
March 2004
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

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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.)

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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.)


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Possible Long-Term Credit Problems, Even
After “Resolution” of the Fraud
Possible Cost of Criminal Defense
Possible Expenses of Psychological
Counseling
Some Other Facts
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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

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Policy Limit & Deductible
Effective and Expiration Dates
Exclude Intentional Loss
Exclude ID Theft Perpetrated by an
Immediate Family Member
% of Cases Discovered Within the Given Time
(Hypothetical)
100%
80%
60%
All Cases
Non-Zero Cases
Zero Cases
40%
20%
0%
0
10
20
30
Months
40
50
60
% of Non-Zero Cases Below the Given Payment Size
Average Payment Size = $2,500 (Hypothetical Data)
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
$0
$2,000
$4,000
$6,000
$8,000
Fraudulent Debt Payments by ID Theft Victims
$10,000
% of Non-Zero Cases Below the Given Cost (Hypothetical)
100.0%
80.0%
60.0%
Total - Avg Cost = $300
New Accounts & Other Frauds - Avg Cost = $415
Other Existing Accounts - Avg Cost = $75
Existing Credit Card Accounts - Avg Cost = $275
40.0%
20.0%
0.0%
$0
$200
$400
$600
$800
Cost to Correct ID Theft Excluding Fraudulent Debt Payments
$1,000
Non-Zero Average Cost to Correct ID Theft by
Time to Discovery (Hypothetical Data)
$250
$200
$150
$100
$50
$0
0
6
12
18
24
Time to Discovery in Months
30
36
Rating Variables

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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

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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:



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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

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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?