It makes sense that if you have a car accident, your insurance premium could go up. What doesn’t make sense is that if you don’t have an accident, you could also end up paying more, for no reason at all.
The explanation behind such price hikes is that more and more insurance companies are adopting a practice called “Price Optimization.” This involves analyzing data on consumers to find out who will shop around and who won’t. If a computer algorithm estimates that you aren’t likely to be a savvy shopper, your premiums could likely go up.
That means that even if you are a careful driver with a great credit score, no tickets, accidents or other damage claims, you can still find your insurance premiums getting a significant hike. Someone down the street with the exact same driving history and profile won’t pay a penny more if the computer analysis discerns that a sudden, unexplained premium increase would send him or her shopping for a new policy.
While the idea of charging different consumers different prices for the same thing isn’t a new idea — just look at the airline industry or your nearest auto dealer — the advent of big data and consultants who crunch the numbers and refine the calculations is making it easier. According to a 2013 survey by Earnix, a software provider of price optimization products to the insurance industry, 45 percent of large insurance companies and 26 percent of all insurance companies in North America were optimizing prices.
Consumer advocates blast the practice, which they call discriminatory, because it doesn’t base the driver’s premium on the amount of risk he or she poses to the insurance carrier. According to the trade publication Insurance Journal, insurance commissioners have moved to limiting the use of price optimization in eleven states — California, Delaware, Florida, Indiana, Maine, Maryland, Ohio, Pennsylvania, Rhode Island, Vermont and Washington — and the District of Columbia.
In September, the Consumer Federation of America called on a task force at the National Association of Insurance Commissioners that is studying the practice to recommend that states prohibit its use. According to the federation, price optimization violates state insurance laws that ban unfairly discriminatory rates.
“Price optimization is a method that uses non-risk-related information to systematically move insurance premiums away from their cost-based level. No one denies this,” the CFA wrote to the insurance commissioners. “Systematically moving prices around to reflect non-risk information causes rates to be unfairly discriminatory and illegal in virtually every state. The only conclusion that can be drawn from a review of price optimization techniques is that price optimization is illegal and must be prohibited.”
In the meantime, consumers don’t have to wait for their state insurance commission to take action. Instead, just start shopping around. According to J. Robert Hunter, a former Texas Insurance Commissioner who’s now Director of Insurance at the Consumer Federation, with just a couple of phone calls or visits to a few websites, one hour of insurance shopping can cut as much as $125 per car off your bill. Consumer Reports polled insurers in September and found that Amica Mutual and State Farm don’t use price optimization.
An even easier approach might be to make just one phone call — to your agent. Ask why your rate has gone up and what you can do to lower it. Also review your coverage to make sure you’re not paying for unwanted extras and that you’re taking advantage of discounts, such as good driver and good student deductions, or savings from bundling home and auto policies into one package.
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