Are Car Insurance Companies Illegally Jacking Up Rates?

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The Consumer Federation of America says insurance companies are discriminating against consumers they think won't ditch if rates go up for no reason.

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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