Are Car Insurance Companies Illegally Jacking Up Rates?

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We recently wrote that car insurance rates have gone up 23 percent over the past five years. The Consumer Federation of America might know why.

It blames a technique called price optimization, which it says illegally discriminates against some consumers. The group points to a survey from Earnix, an insurance consulting company, that shows half of large auto insurance companies use price optimization. Here’s how Earnix describes it:

Larger insurers lead the way in the use of price optimization, also known as scientific pricing. Price optimization is the use of mathematical algorithms to determine optimal values of rating factors to meet specific business goals while maintaining regulatory compliance.

CFA translates that about how I would: Insurers are figuring out what they can get away with charging. “Price optimization is nothing less than the rejection of actuarial standards for the sake of increased profits and at the expense of unwitting policyholders,” CFA says. It alleges that the practice is discriminatory and illegal in every state.

On a page of its website specifically about price optimization, Earnix explains why insurers should do it. “Traditional ratemaking based on risk and cost is no longer sufficient. To realize the full potential for growth and profitability, leading insurers worldwide are using the Earnix software to optimize pricing decisions and maximize customer lifetime value,” it says.

As CFA explains it, price optimization means baseline premiums are established the traditional way based on risk — what we should be charged — and then further “optimized” for certain groups based on whether the software predicts those people will switch insurers if rates go up. “Thus, two policyholders with identical risks as determined by cost-based methods would pay different prices for the same policy,” it says. And it’s usually the poorer consumers who pay more, because research shows they do less comparison shopping.

The CFA has written to state insurance commissioners to ask what they’re doing about price optimization, which is something you can do too. The National Association of Insurance Commissioners website provides contact information for every state. Check out the video below for other ways to save on your car insurance:

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  • Rick Albrecht

    After being rear-ended twice in Sioux Falls, South Dakota, my rates with USAA went up $40 every 6 months and will remain that way for 5 years ($40 times twice a year for 5 years will be $400). Although in both instances the other driver was at fault, and pleaded so in traffic court, I will pay more for my insurance — in both cases the other driver repaid USAA for damages. USAA says my rates aren’t going up, but that I am just no longer receiving their Premium Driver Discount — what kind of a double-edged sword is that for a metric to use. Duh, I’m still paying more!! Repeated calls to USAA have been unsuccessful in getting the discount back. It seems criminal that the play on words is permitted to in effect have me paying more for something I was not at fault for causing. Last week I asked to have a member of their special staff to the CEO contact me — after a week no such call. Great way to reward service members, so much for the advertisements on TV. The rate is still very good, but the customer service — well, you be the judge.

  • Joseph

    It seems every time I get a renewal my provider raises the price. So I call them and ask whats up, when they say “Sorry, its just business.”, I move on to the next provider.