Sunday, December 23, 2007

SAY YES TO RENTAL CAR INSURANCE?

Frequent business traveler James Smith says he's saved "tons of money" during the past 30 years declining car rental companies' optional insurance coverage. But, he acknowledges, it could have come in handy at times.

Smith, an economist in Asheville, N.C., has paid $1,100 for damages to three rental cars in the past five years. Last year, a valet damaged his rental car in Maui, and his parked rental car was scraped in Buford, Ga. In 2002, he backed a car into a rock in Ireland.

Smith was unaware that his personal auto insurance policy would have covered most of the damages in Ireland, so he didn't make a claim. In the other two incidents, he had to pay deductibles.

Like Smith, many travelers are unsure about their coverage when they approach a car rental counter. The National Association of Insurance Commissioners (NAIC) surveyed 632 consumers in September, and 42% were "either thoroughly confused or had only a rough idea about insurance."

The association of top state insurance officials says 34% of consumers surveyed by telephone bought a rental car company's insurance just to make sure they were covered.

"When renting a car, many consumers purchase unnecessary insurance and end up wasting money," says Walter Bell, Alabama insurance commissioner and NAIC president.

Renters should check whether their personal auto insurance policy and a credit card used for the rental provide sufficient coverage without buying additional insurance, NAIC says. Many credit cards include some collision and theft protection, but the benefits are usually secondary to personal auto insurance or the coverage sold by a car rental company.

But, as Smith learned, protection provided by credit card companies can be tricky.

He says he used a Visa card, which provides secondary insurance coverage, to pay for the rentals in Ireland and Georgia, but he wasn't reimbursed because he didn't notify the credit card company within 45 days of each incident.

And personal auto policies that provide coverage for renters often include conditions. For example, they may not cover rentals on business trips and may limit coverage for long-term rentals. Personal policies also may not cover rentals in foreign countries.

'Important profit center'

Sales of insurance or damage waivers that absolve renters involved in an accident are an "important profit center" for a car rental company, says auto rental consultant Neil Abrams.

Avis, for example, sells five kinds of coverage: a loss damage waiver, supplemental liability insurance, two types of personal accident insurance and personal effects protection.

About 30% of renters at Enterprise Rent-A-Car buy some type of insurance coverage, spokeswoman Christine Conrad says.

Travelers appear divided on the value of optional coverage.

Smith says buying insurance coverage from a car rental company would have covered his $1,100 in payments and spared him the hassles of dealing with the rental company, his insurance company and his credit card company. Nonetheless, he continues to decline rental coverage, which he believes is too expensive.

Frequent flier Richard Leck of Bedford, N.H., agrees, calling the insurance products offered by car rental companies "a rip-off." "I can't imagine anyone other than an inexperienced traveler, or someone without any other insurance, taking out coverage," says Leck, president of a management consulting firm.

Nashville antitrust lawyer Alan Marx says auto rental companies are charging too much for insurance coverage. "It reminds me of the old insurance policies that were sold in airports to cover you on a single trip," he says. "Pure gravy for the seller but a lousy deal for the buyer."

But some renters think it makes sense to buy coverage from the car rental companies.

"I learned my lesson the hard way, so when traveling overseas, I always get the insurance coverage," says Michelle Trombetta of Minnetonka, Minn.

Trombetta, a manager in the health care industry, says it's a hassle dealing with a rental car company and others involved in an incident abroad.

She says a hotel valet in Dublin scratched her rental car.

The rental company charged her the equivalent of $865 until the damage could be fully assessed. The car rental company then billed the hotel, but the hotel disputed the amount for months. Trombetta says it took four months for the hotel to reimburse her.

Van Potts, the owner of a company in the beverage industry, says he buys collision coverage mainly for peace of mind.

He pays only $24.95 per car rental for collision coverage, a special rate because he has an American Express Platinum card. A resident of East Greenwich, R.I., Potts returned three cars with damage in the past 10 years. "The car rental company pressures you to pay upfront (for damage), and it's a pain to file to recover the money from insurance companies. You have to pay an insurance policy deductible, and the price of your insurance goes up."

Fred Fleischner, spokesman for two rental companies, Dollar and Thrifty, says optional coverage can be a good idea even for travelers with coverage under their auto policies. "We recommend it to customers who have full coverage at home so they can keep their good standing with their insurance company" even after a wreck, he says.

Enterprise's Conrad says consumers should take the time to understand what their insurance company and credit card issuer will cover. "Being underinsured or uninsured when involved in an accident can have devastating consequences," says Conrad.

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Tips for car renters

The National Association of Insurance Commissioners gives the following insurance coverage tips for auto renters.

*Before renting, ask your insurance agent whether your personal auto policy covers a rental car.

*Ask your credit card company what coverage it provides.

*If your personal auto policy doesn't provide rental car coverage, ask the cost of adding a rental insurance rider.

*If you don't own a car, consider buying a non-owner auto insurance policy that provides benefits in addition to rental car coverage.

*If you are unclear about car rental insurance options or are concerned that a rental company is giving bad information, check with your state insurance department.

TEXT OF INFO BOX BEGINS HERE

Daily rates for car rental insurance products

Two popular products sold by car rental companies are the loss (or collision) damage waiver and supplemental liability insurance. The following are the companies' daily rates, which can vary by type of car and rental location.

Company Loss damage waiver Supplemental liability insurance

Alamo$10.50-$22.99$11.95-$12.95

Avis$9-$35.99 $10.95 or $12.95

Budget$9-$35.99 $10.95 or $12.95

Dollar$8.95-$34.99$8.95-$12.99

Enterprise$10-$15$10-$16

Hertz$9-$35.99$10.95-$12.95

National$10.50-$22.99$11.95-$12.95

Thrifty$8.95-$34.99$8.95-$12.99

(c) USA TODAY, 2007

Tuesday, November 27, 2007

HOW TO BUY A SUPERCAR

Learning how to finance, insure, and properly drive your new supercar are the best ways to ensure a sound investment

You've had a good year. Whether because of a big bonus or because a cash-rich private-equity firm bought your company, now it's time to stop daydreaming about that beautiful high-performance supercar you've been lusting after and actually buy it. But before you sign that check and cruise off into the horizon, make sure to put in the due diligence that will save you from getting taken for a financial ride.

It's easy to fantasize about choosing between million-dollar cars like the Pagani Zonda and Bugatti Veyron, but actually paying for one is something else. Creating a sound financial plan for your lease or purchase is the most important detour you should take between your door and the car dealership.

Financing companies like Woodbury [Conn.]-based Premier Financial Services and Hallandale [Fla.]-based LeaseTrader.com specialize in the leasing of collectible, vintage, exotic, and luxury cars, and act as liaisons between dealers, banks, and leaseholders.

Leasing: Approach With Care

Premier CEO Mitchell Katz says that potential leaseholders should be cautious about the lack of flexibility in traditional lease arrangements. "People are so anxious to get the car, they don't always take a look at termination clauses," he says, which could lock you into a big investment for longer than you think.

His company offers a program called Simple Lease, which gives clients the options of terminating the lease at any time, switching cars mid-lease, and buying or selling the car for its residual value upon the termination of the lease.

The company deals only with cars valued $25,000 or higher, though the typical client springs for wheels in the $200,000 range. The company's list of 10 hottest cars to lease in 2007, based on consistent consumer demand and strong resale, include the Ferrari 599 GTB, Lamborghini Murcielago LP640, Aston Martin DB9, and Porsche 911 Turbo.

Special Insurance

Don't forget that your supercar will also need super insurance. If you go with an average insurance agent and underwriter, you will most likely enter into an Actual Cash Value policy, where an adjuster decides what amount you will receive for damages when they happen.

A handful of standard insurance companies, and a growing number of underwriters that specialize in luxury cars, offer Agreed Value policies, where repair values are negotiated from the beginning. An estimated 95% of all standard insurance companies do not provide Agreed Value policies, because collector cars present too many risks and variables like mileage that create too much fluctuation in their market value.

Since 1991, Fresno [Calif.]-based Leland West has offered the Select Auto Insurance Program, a selection of Agreed Value policies specifically tailored to coverage of expensive and hard-to-replace autos. Their plans place restrictions on ownership, such as annual mileage, business or commuting use, parking, and alterations to the car. But being insured by a company that knows how delicate your investment is means that you will be able to do things like take the car to special-treatment repair shops or get towed from an accident on a flatbed truck.

Super Driver's Ed

Once you've balanced the books, one question separates you from the open road: Do you know how to properly drive a car that could be worth more than your house? If you're planning on driving your supercar -- which will likely accelerate from zero to 60 mph in under four seconds and max at over 200 mph -- to anywhere near its high-performance capacity, a few professional driving lessons are a wise investment in both your personal safety and your car's. It will also help bring down those insurance premiums.

One option is Skip Barber Racing School, which is held at more than 20 racetracks in North America. Would-be Jeff Gordons can enroll in the High Performance Driving School, a $1,595 one-day or a $2,895 two-day course. Pro instructors in the school teach students how to handle challenging real-life driving scenarios, such as what to do when approaching wet surfaces at high speeds.

"While the car industry focuses a lot on high-performance hardware, driving school is about the software -- what's in your head. How are you setting yourself up to drive this vehicle?" says Dan Hubbard, marketing director for Skip Barber Racing School.

Carmakers' Schools and Car Clubs

The High Performance Driving School, a new program for 2006, also gives potential buyers the opportunity to test a variety of high-end European cars, such as the BMW M3, Porsche 911 Turbo, and Audi S4, before they commit to a lease or purchase on the basis of a dealer test drive alone.

Also, most of the bigger high-end performance carmakers also offer their own driving schools, including Ferrari, Porsche, and Lamborghini, which may be arranged as part of an ownership package. Those lucky enough to buy from British boutique builder Ascari can get schooled at the Race Resort Ascari, near Ronda, Spain -- supposedly the world's most exclusive track and the world's only racing-dedicated resort.

Before the salesman hands you the keys, one more piece of advice: Car clubs are a great opportunity to educate yourself, access all the resources a supercar owner might need, and find a group of people with a common love for driving fast and showing off.

~~~~~~~~

By Douglas MacMillan

Wednesday, November 21, 2007

COOLER ELITES. WILL THE RULING CLASSES SAVE THE WORLD?

When the rich and powerful gathered for their annual meeting at Davos in January, at the World Economic Forum, climate change was on their collective minds. Signs reading MAKE GREEN PAY served as a backdrop for the usual panels, featuring CEOs and highend pundits holding forth on global finance and the terrorist threat. And, participants say, global warming was the number one topic amid the shmoozing, where the real business of the retreat is conducted.

There’s some good news here. Given the risk that a climate catastrophe could hit soon and suddenly, we’ve got to make some dramatic changes very quickly. What CEOs and portfolio managers think and do is an urgent question; we may not have time for mass movements to develop and force elites to do the right thing. They’ve got to get started now, or all could be doomed.

But you’ve got to wonder how serious they are about doing something. Chris Giles, economics editor of the Financial Times , said at Davos that there’s no evidence that CEOs and Cabinet ministers were about to make “tough decisions” to avert catastrophe.

Had I been invited to Davos, I could have earned an I AM OFFSET pin by paying a mere $93 to “offset” a New York to Zurich round trip flight a journey that produces more than six tons of carbon emissions. About 60 percent of attendees performed this act of penance, though as A.C. Thompson and Duane Moles show in this issue, carbon offsets are a pretty dubious business. The more serious question is Davos style jet setting sustainable? wasn’t likely to come up when consciences were assuaged by the offsets.

But maybe this is too negative. Let’s savor the spreading climate consciousness among the corporate elite. Amazingly, the CEOs of the Big Three US auto companies and Toyota appeared before a Congressional committee in mid March to endorse limits on carbon emissions and they failed to rise to the bait when a Republican panel member, Joe Barton, characterized the human contribution to greenhouse gas emissions as “trivial.” Even ExxonMobil, the most recalcitrant of the oil companies, has a statement of concern on its website. When the auto and oil industries feel they have to talk the climate change talk, then something is happening.

A milestone in the evolution of elite opinion was last October’s publication by the British government of the Stern Review , an overview of the economics of climate change, named after former World Bank chief economist Nicholas Stern. While many have (rightly) criticized the review for its excessive caution, its political contribution shouldn’t be underestimated: It promoted the idea in elite discourse that there would be substantial economic costs to doing nothing about climate change. As Stern showed, it’s not good for the GDP when crops fail, storms intensify, pandemics spread and coastal cities flood.

Another milestone was the creation in January of the US Climate Action Partnership (USCAP). Among the players are such noted friends of the earth as GE, DuPont, PG&E, Caterpillar and BP (which tries to be the greenest of the oil companies but is still an oil company, and one with a terrible worker safety record at that). Joining those firms are some of the most business friendly environmental organizations, like Environmental Defense (ED) and the Natural Resources Defense Council (NRDC). While USCAP’s manifesto calls for relatively modest reductions in greenhouse gas emissions, and seems in no hurry to get there, it is remarkable to see such bluechip corporate names signing on to any kind of green program, even if it is a rather pale shade of green.

And then in late March yet another group formed, Investors and Business for US Climate Action, a coalition of institutional investors (including not only union and public sector pension funds but also big private sector names like Merrill Lynch), foundations and businesses. Among their founding documents was a letter to George W., urging him to take serious action on the climate and asking for a meeting.

All that’s not to say the denialists have gone into hiding, and it’s no surprise that the dead enders at the Wall Street Journal editorial page are leading the resistance. The creation of USCAP was greeted by the Journal ’s Kimberley Strassel with a real screamer of a piece, denouncing the “jolly green giants” for secretly wanting to make money on carbon reduction while appearing high minded in public. True enough, but Strassel won’t cut them an inch of slack: “At least when Big Pharma self interestedly asks for fewer regulations, the economy benefits.”Reducing greenhouse gas emissions, in WSJland, has no upside at all.

Aside from overt denialists, there are some important players who are MIA, such as the insurance industry. Back in the early 1990s, I attended a conference co-sponsored by that industry and Greenpeace. Greenpeace wanted to prod insurers into countering the weight of the denialist auto and oil industries. After all, the insurance companies will have to pay out larger claims as hurricanes and floods get more severe. At the time, their European counterparts, especially the reinsurance industry (which insures the insurance companies), worried aloud.

But the US insurance industry would hear none of it; it was interested only in tighter building codes, better computer modeling and inventing new financial instruments. Though they were too discreet to say it openly, their plan for climate change was either to jack up premiums or to stop writing new policies—thus Allstate has largely pulled out of Long Island.

Nearly fifteen years later, little has changed. The US insurance industry is mainly concerned with technicalities, while the Europeans sound alarms. A 2006 paper from the Insurance Information Institute emphasizes scientific uncertainty about the relation between climate change and storm frequency and severity, notes that there’s no simple relation between storms and industry profitability, comforts readers with praise of the industry’s “resilience” and reminds them that they can always jack up premiums in dangerous areas (“where places, things, and people are expensive to insure, insurance will be expensive”).

By contrast, Swiss Re, the reinsurance giant, opened a 2002 paper on the topic by noting the necessity “to prevent global warming from accelerating to such [a] degree that humans are no longer able to adjust themselves in time,” which they identified as “a task for governments and the community of states.” A former consultant to the US insurance industry, who quit in disgust, told me that European insurers are “run by smart people who care about science” whose governments have been prodding them into action, while their American counterparts are “bottom line hacks” whose government has been just fine with their indifference.

The Wall Street Journal editorialists have a point when they say that the corporate members of USCAP are betterpositioned than their peers to make money from greenhouse gas reduction. GE, for example, which is busily touting its “Ecomagination” program, is poised to sell “clean coal”

products, solar panels and even nuclear power plants. But short of a revolution, there’s no imaginable way to reduce greenhouse gas emissions unless someone can make money off it.

It’s painful for someone like me, who instinctively gravitates to the more radical position on most issues, to admit that the “better deal for business” is still a lot better than nothing. But it’s worth examining the problems with their proposals, with the hope of agitating for something better. There’s the simple point that Stern’s and USCAP’s emissions targets aren’t ambitious enough. But there are also problems with their favorite strategy: cap and trade schemes.

These work by setting maximum emissions for polluting entities, be they individual factories or power plants or entire countries, based on historical baselines; these limits decline over time. Entities that come in under the limits are free to sell their remaining emissions rights to entities that can’t make the limits.

An early version of cap and trade was the 1990 domestic US agreement to limit acid-rain-causing sulfur dioxide emissions by coal burning electric utilities. Cap-and-trade was at the core of the Kyoto Protocol: Individual countries were capped and then free to sell their credits, and countries themselves were expected to develop cap-and-trade systems for their own polluters. Despite US rejection of Kyoto, the European Union established a cap-and-trade system to meet its obligations under the protocol.

The record of these models is mixed: The acid rain reduction agreement is seen as fairly successful; sulfur dioxide emissions are more than a third below what they would have been without the program. But SO2 emissions are mostly limited to power plants; by contrast, greenhouse gases come from millions of sources, from factories to lawn mowers, a more daunting administrative task.

The EU carbon scheme has had a less auspicious history Launched at the beginning of 2005, some 12,000 installations were covered, responsible for about 45 percent of the Union’s carbon dioxide emissions. Other greenhouse gases, and more installations, would be incorporated into the system in later phases. For the first sixteen months of the system, carbon permit prices more than tripled, only to collapse in April 2006 on the revelation that a number of countries had given their industries such generous caps that the industries were already in compliance and had no need to reduce emissions. This is just one of the problems with cap-and-trade schemes. Consider the burden of monitoring many thousands of sources just what should their baseline emissions levels be, anyway? The temptation to cheat, to game the system, would be enormous. Already an entire industry has grown up around the trading system analysts and brokers and traders who hope to make money from the scheme but contribute not much of anything to saving the planet. Also, cap-and-trade permit prices are tremendously volatile, more so even than the stock market. Volatility makes long term planning very difficult.

A far better approach would be to tax carbon. A carbon tax would be simple gasoline, coal and other fuels would be taxed based on their carbon content and nearly impossible to evade. It could be introduced quickly, unlike the multiyear phase in of the complicated EU cap-and-trade system. The tax rate could start low and then increase, to allow energy users to adjust. Unlike the market volatility of CO2 and SO2 permit prices, a carbon tax would be predictable, making it much easier for businesses and consumers to plan ahead. And as Charles Komanoff of the Carbon Tax Center argues, at least part of the proceeds of the tax could be rebated to poor and middle income households through the income tax system, neutralizing any inequities. The unrebated balance could be used to subsidize alternative energy research and production. Given the historical successes of government funding of basic research in computing and medicine, there’s every reason to believe the products of this work would be very promising.

But the corporate elite and their favorite enviros hate the thought of carbon taxes. (One exception: FPL, née Florida Power and Light, recently endorsed a carbon tax.) In a weird piece for the website Grist, ED’s chief scientist, Bill Chameides, said that carbon tax advocates would give Congress a big pot of money to play with, which they’d use to subsidize their favorite technologies in pork-barrel fashion. Sounding like he was reading from GOP talking points, Chameides declared, “History has shown that the marketplace does a better job of developing new technologies, and a tax takes money out of the marketplace.”

In fact, that sort of ideology ignores history, which is replete with examples of market failure and cases of state support in crucial economic and technological development. The point of a carbon tax is to raise the cost of energy, seriously, and encourage people to use less of it while developing new, carbon free sources. And the idea that Congress wouldn’t be tempted to play favorites with a massive carbon permit scheme is surreal.

That brings us to the crux of the problem: Raising the cost of energy means big changes in the way we live. Corporate friendly enviros don’t like to hear that. In an interview, NRDC’s global warming czar, David Hawkins, denied that sacrifice would be necessary because Associate Profesor yet unrevealed technological breakthroughs will allow us to gorge on energy and everything else. The investor and business coalition speaks confidently of “win-win” changes.

But the sailing might not be so smooth. Though advocates of cap-and-trade, like Hawkins, deny this, they seem seduced by a set and forget appeal to the technique. If, by some currently near unimaginable miracle, serious restrictions on greenhouse gas emissions were enacted, it might not look like win-win. Few things annoy Americans more than higher energy prices, or being forced to take the train instead of the Escalade.

For people on the left, it’s hard to parse the politics of the climate issue. We’re used to a world in which business interests and their favorite politicians will do the right thing only if they’re forced to by popular mobilization. That’s not true of the climate issue: Though there are activists seriously devoted to the cause, it’s a long way from being the foremost concern of millions. So it’s tempting to look at the latest elite mobilization as something that could get a head start on avoiding catastrophe while we hope for more action from below. But you really have to wonder how serious these freshly mobilized business interests are. Can we trust them? Do we have any choice? ■

By: Henwood, Doug

INSURER TATTLES ON KIDS WHO SPEED

Safeco Insurance unveils a teen driving package today that notifies parents when their young driver speeds, breaks curfew or drives outside of an agreed-upon area.

Parents can also use the Internet and global-positioning satellites to find their car at any moment.

"Teensurance," available in all 44 states where Safeco provides auto insurance, is the first time that a major national insurance company has combined multiple safety programs in a single package designed to prevent teen deaths. The Seattle-based company has 4.3 million customers, according to its website.

About 19 teens die from crashes every day, according to federal data. Dave Snyder, vice president of the American Insurance Association, a trade group, called the Safeco program a major step toward reducing those numbers. "This has potential to get at one of our greatest public-health issues: death and injury among young people from vehicle crashes," he says.

Jim Havens, Safeco's vice president of consumer solutions, says parents and teens who used the $25-a-month package in a trial run found that it helped new drivers earn trust fast.

"It flips the conversation completely around, from the parent saying 'no' to the parent being in the know," Havens says.

Teensurance includes an online survey that helps parents identify a teen driver's weak spots and provides a contract to help parents set limits on driving time and range.

None of the driving information collected by an independent firm in California will be seen by Safeco, the company says, even if an accident leads to a claim. But the insurer will measure aggregate program data to determine if Teensurance drivers have fewer crashes than young drivers who are not in the program. Such a benefit might lower rates for Teensurance drivers, Safeco says.

Teensurance includes roadside assistance and allows parents to unlock a car remotely if keys get locked inside, a common mistake made by inexperienced drivers.

Carolyn Gorman, vice president of the Insurance Information Institute, says, "You can say, 'I hope you are driving under the speed limit,' and your child will say, 'I am, I am,' and you just have to shake your head and cross your fingers and go along with the game. If you have this kind of specificity, you are actually being an effective parent, rather than an enabler."

Safety researchers say the most dangerous time for teens is the first few months that they drive alone.

"The longer you can have that protecting influence of the parents, the better," says Anne McCartt, senior vice president for research at the Insurance Institute for Highway Safety. "It's hard to think of other ways that can be as effective as things inside the vehicle."

Mary Hanke, a single mother from Sammamish, Wash., enrolled in Teensurance when her daughter, Christina, 17, was ready to drive. "If my daughter speeds, I get a phone call," she says. "I can check at any time on the Internet where she is. She is a good kid, and I want to keep her that way."

(c) USA TODAY, 2007

Saturday, November 17, 2007

SECRETS OF THE DIGITAL DETECTIVES

THE pleasure of reading a classic detective story comes from the way that the sleuth puts together several clues to arrive at a surprising conclusion. What is enjoyable is not so much finding out who the villain is, but hearing the detectives explain their reasoning. Today, not all detectives are human. At insurance companies, banks and telecoms firms, fraud-detection software is used to comb through millions of transactions, looking for patterns and spotting fraudulent activity far more quickly and accurately than any human could. But like human detectives, these software sleuths follow logical rules and combine disparate pieces of data--and there is something curiously fascinating about the way they work.

Consider car insurance. Every Monday morning, telephone operators at insurance firms listen to stories of the weekend's motoring mishaps, typing the answers to several dozen standard questions into their computers. Once, each claim form then passed to a loss adjuster for approval; now software is increasingly used instead. The Monday-morning insurance claims, it turns out, are slightly more likely to be fraudulent than Tuesday claims, since weekends make it easier for policyholders who stage accidents to assemble friends as false witnesses. A single rule like that is straightforward enough for a human loss adjuster to take into account. But fraud-detection software can consider dozens of other variables, too.

If a claimant was nearly injured (because of an impact near the driver's seat, for example), the accident is less likely to have been staged and the claim less likely to be fraudulent, even if it is being filed on a Monday. Drivers of cars with low resale values are proportionately more likely to file fraudulent claims. But that factor is less important if the claimant also owns a luxury car, which suggests affluence. And if the insurance on the luxury car has expired, the likelihood of foul play drops further, since this increases the likelihood a person will drive a cheaper but properly insured car. And so on.

The staggering number of combinations, each an indication of fraud or legitimacy, underscores the limitations of human analysis. Fraud-detection software, however, can evaluate a vast number of permutations and deliver a fraud-probability score. And such programs are getting better as new claims provide extra statistics that can help tune the computational recipes, or algorithms, used to detect fraud.

German insurers, for example, recently noticed that claimants who call back shortly after filing, angrily demanding speedy settlement, are disproportionately more likely to be cheaters, says Jörg Schiller, an insurance expert at the Otto Beisheim School of Management in Vallendar, Germany. Evidently fraudsters consider themselves good actors. But when pugnacious policyholders call after the 20th of the month, the probability that they are acting decreases slightly, since funds from the previous month's paycheque may be dwindling. Mr Schiller says most car insurers in rich countries now use fraud-detection software, and those in developing countries are adopting it rapidly.

Play your cards right

With an estimated $250m in annual sales, and yearly growth topping 25%, the largest and fastest-growing category of fraud-detection software is that used to spot fraudulent credit-card transactions. According to the Association for Payment Clearing Services, based in London, such software is largely responsible for reducing losses from credit-card fraud in Britain alone from £505m ($925m) in 2004 to £439m ($799m) in 2005. Merchants implementing anti-fraud software for the first time commonly see losses from fraud reduced by half. Such software evaluates many parameters associated with each credit-card transaction, including specific details of the items being purchased (derived from their bar codes), to evaluate the likelihood of foul play in the form of a numerical risk score. Any transactions that score above a certain pre-defined threshold are then denied or challenged.

Buying petrol seems innocent enough. If no attendant is present, however, the risk score goes up, because fraudsters prefer to avoid face-to-face purchases. Buying a diamond ring soon after buying petrol results in an even higher risk score: thieves often test a card's validity with a small purchase before buying something much bigger. A $100 purchase at a shop that sells hard liquor is more likely to be fraudulent than a more expensive shopping spree at a wine shop, because whisky is easier to fence. A purchase of sports shoes is risky because trainers appeal to a demographic with less money than, say, buyers of golf clubs. Buying two pairs of trainers increases the risk, as this may indicate plans to resell them. Shoes in teenage sizes bump up the score further, since pre-teens are less likely to buy stolen goods. Sales in London, New York or Miami, all cities with vibrant black markets for shoes, push scores higher, as do purchases made during school holidays. The fraud history of individual shops can also be taken into account.

Seasoned criminals can, of course, figure out such rules and change their behaviour in an attempt to avoid detection. Some types of purchases are less likely to be fraudulent. A shopping spree in a linen shop, however, does not have much appeal to most criminals. However, says Mike Davis, a fraud expert at Butler Group, a consultancy, the "vast majority" of fraudsters are low-level opportunists fairly easily foiled by today's fraud-detection software. The situation, he says, is "spectacularly better" than it was just a few years ago.

But the technology trips up cleverer fraudsters too, using a variety of tricks. The software can, for example, assign a customised scoring algorithm to each credit card, depending on its normal usage patterns. That algorithm can then be fine-tuned after each transaction. If a card belonging to a Berliner has never been used to purchase a plane ticket or buy goods outside Germany, the system may block an attempt to book a Moscow-Tokyo flight leaving in three hours. An attempt to charge a moped to an elderly woman's card may fail. Cards are often blocked when the volume of transactions for which they are used abruptly spikes.

E-businesses using anti-fraud software now block about 8% of all transactions. Some aborted orders, of course, are not fraudulent. Each "false positive" reduces profits and angers an honest shopper. To limit such damage, risk managers (employed by the software developers or the merchants themselves) study sales data compiled before the anti-fraud software was implemented. This analysis helps retailers find the optimal score threshold to determine which orders they accept.

Online fraudsters have tricks of their own, of course. Carl Clump, the boss of Retail Decisions, a fraud-detection firm based near London with clients including Wal-Mart, Sears and Bloomingdale's, offers an example. Not long ago, American scammers began buying CDs of classical music with their purchases of expensive items, apparently in an effort to deceive anti-fraud systems (since such music is generally assumed not to appeal to young, tech-savvy criminals). Retail Decisions' software, called PRISM, detected the trend. Now, purchases that combine classical or opera CDs with expensive goods receive a higher score than purchases of high-cost items alone.

By reading a computer's internet-protocol address, anti-fraud systems can "geolocate" online buyers, and raise or lower scores depending on where they are. Most systems penalise customers in places such as Eastern Europe, China, Thailand and Vietnam. More dramatically, many merchants block all transactions from certain countries. As this practice becomes more widespread, many countries, mostly in West Africa, are being completely shut out of international e-commerce. SN Brussels Airlines, for example, uses software developed by Ogone, a Belgian firm that protects more than 6,400 European merchants, to shut out all computers in Liberia and Congo. Without it, says Bruno Brusselmans, director of online sales, "I don't even want to think about what would happen."

Telecoms firms have always suffered heavily from fraud, which is thought to reduce industry revenues by around 5%. But new software that identifies fraudulent callers on mobile networks is helping some operators slash their losses. Telecom Italia's 140 anti-fraud engineers trimmed losses this year to less than 1% by freezing about 30,000 phones a month, says anti-fraud director Fabio Scarpelli.

Such spectacular drops in fraud are more commonplace in the developing world, where mobile operators now investing in the technology. David Ronen, of ECtel, a firm based in Rosh Ha'ayin, Israel, with more than 100 telecoms clients and galloping growth in poor countries, says his firm's software establishes the normal calling patterns of individuals in order to detect tell-tale "weird situations". For example, if a mobile account opened in Shanghai, and sparingly used for local calls, begins making numerous calls from Beijing to a few numbers in a distant western province, then it is likely that a phone thief is calling friends back home.

Fair Isaac, a large fraud-detection firm based in Minneapolis, operates a system so fast that it can block dialled calls before they are even connected. The software, called Falcon, is widely used, since laws prevent many telecoms firms from terminating non-prepaid calls once they are connected. Wily criminals are increasingly operating black-market phoning businesses based in parks and on street corners. "You may see 30 people with cell phones on one corner and one guy is dialling all the numbers for them," says Ted Crooks of Fair Isaac. The calls, often to expensive destinations in poor countries, sometimes last days, Mr Crooks says, because cheats use forwarding systems to serve many customers with a single call. Technology that can pinpoint handsets' locations, however, allows calls in "hot" areas renowned for such illicit operations to be blocked.

It is all a far cry from piecing together clues in a country house, or the drudgery of real-life detective work. But the result is the same. Life gets harder for the bad guys, and the honest citizens, who ultimately pick up the bill for fraud, are protected. The digital detectives, like those in mystery novels, arrive at their conclusions by combining apparently trivial morsels of information. But as Sherlock Holmes put it, "I am glad of all details, whether they seem to you to be relevant or not."

Economist Newspaper Limited

DEER ACCIDENTS ARE OFTEN NOT COVERED

Insurers in states with high rates of deer-vehicle crashes are trying to get the word out this winter: Check your auto policy.

Cold months are peak season for deer-vehicle crashes, especially given the soaring deer population. Thousands of the 1.5 million drivers who hit deer last year found out the hard way that their auto insurance did not cover damage to their vehicle.

Only comprehensive insurance pays up in such crashes. "Many people are not aware that the collision coverage under an automobile insurance policy does not cover you if you hit a deer," says Wisconsin Commissioner of Insurance Jorge Gomez.

Nationally, 36 million auto owners don't have comprehensive insurance, says the National Association of Insurance Commissioners (NAIC). Many drivers drop comprehensive coverage because they decide their vehicles are too old or worth too little to justify the cost.

For example in Michigan, the state with the second-largest number of deer accidents, comprehensive policies dropped by 16,000 in 2003, according to a recently released NAIC report. Insurers say that's risky for vehicle owners in states with large deer populations.

Pennsylvania, which tops the list of states with the most deer-related accidents, is bucking the downward trend. The number of policyholders in the state with comprehensive policies actually increased by 85,000 to 6.3 million in the most recent year available, according to the NAIC. And one Pennsylvania-based insurer says its deer-related accident claims have declined in each of the past two years.

Erie Insurance, which operates in 11 states, credits a driver education program it began in 1999 with helping to avoid crashes. In the past year, its deer-related collision claims declined by 6%, even though more drivers were covered.
Deer crashes result in at least $1.1 billion a year in vehicle damage, says the Insurance Institute for Highway Safety.

On average, the collisions cost $2,800 per insurance claim; $10,000 if there is injury to the driver or a passenger, according to the Insurance Information Institute.

Lorie Honor applauds Erie's driver education program and is urging a coordinated national campaign by the insurance and highway safety industries and wildlife management to provide Americans with more information and education about deer accidents. "There is a huge hole in public safety," she says. Honor became involved after her brother, Paul Bollmeyer, and two friends were killed in Wyoming in November. Their vehicle hit a deer and spun into the path of a tractor-trailer.

About 200 deaths every year are the result of animal-auto accidents -- most involving deer, according to the federal government data.

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Deer tips for drivers

To try to reduce deer-related accidents, Erie Insurance
publishes a news release and a policyholder magazine. Advice includes these tips:

*Don't swerve to avoid striking a deer, as that increases the risk of hitting another vehicle or losing control of your car.

*If there is no opposing traffic, use high beams at night to better illuminate deer.
*Don't rely on devices such as deer whistles, which are attached to the outside of a car, to try to scare off deer with an ultrasonic or high-frequency sound. They have not been proved to reduce deer-vehicle collisions.

*If a deer remains on the highway after you strike it, report the incident to the game commission or a local law enforcement agency, as the deer poses a danger to other motorists. If the deer might still be alive, don't go near it because a wild animal with sharp hooves can inflict injuries.

(c) USA TODAY, 2007

Wednesday, November 14, 2007

IN GOOD HANDS WITH ALL THOSE STATES?

One must feel sympathy for Allstate, coping as it must with a thicket of laws, regulations and fees in 49 states as it tries to sell insurance for homeowners and drivers. (See story by Carrie Coolidge.) Or rather, sympathy for its customers. Ultimately, the cost of regulation is passed along to them. And the insurance business is the most politicized, controlled and micromanaged industry in America. That's because it is regulated by the states and not the federal government.

If the states had any faith in free markets, they would ascertain that insurers have enough assets to pay off claims and then let price competition take over. That faith is lacking. So we have states getting very involved in rate setting. The worst is Massachusetts, where the Allstate brand is not to be found, but California is a close second with its new pricing rules, and just about all the states stick their fingers in the pie to some degree.

If actuaries had a free hand, they would discriminate against all sorts of statistically dubious groups. They would charge extra for drivers living in accident-heavy urban areas, for homeowners who insist on building in the path of hurricanes, for deadbeats (turns out there's a correlation between low credit scores and accident-proneness) and for teenage boys. To a committed egalitarian, discrimination is the stuff of wickedness. But a 17-year-old, even one with a clean record, is a high-risk character. Amusing fact turned up in a survey of teenagers by Allstate: 12.8% admit to having read or written text messages while driving.

State regulation is definitely good for teenagers in Boston and for tipsy drivers in the assigned-risk pool. But is it good for consumers overall? Let's put it to the test. The system as it stands now keeps 10,000 state employees busy and runs up a tab of $1 billion a year. That money is extracted in the form of fees from insurers, who pass the cost along to their customers. Let's let any insurer opt out of state regulation in favor of a federal charter. (I'll bet Allstate, Progressive and Geico would go federal in a heartbeat.) Relieved of 50-state paper-pushing burdens and free to pick off the good risks with price cuts, the federally chartered companies would be a formidable competitive threat.

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By William Baldwin