Are Car Insurance Companies Illegally Jacking Up Rates?

Photo (cc) by TheTruthAbout

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:

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
12 Expenses You May Be Tempted to Claim as Tax Deductions — but Shouldn’t
12 Expenses You May Be Tempted to Claim as Tax Deductions — but Shouldn’t

Thinking of trying to deduct a few of these things on your federal tax return? That could be a costly mistake.

10 Times You’re Right to Be a Cheapskate
10 Times You’re Right to Be a Cheapskate

Clever shoppers can save money without sacrificing quality. Here is how to do it.

26 Things Everyone Should Keep in Their Car
26 Things Everyone Should Keep in Their Car

These tools and conveniences help protect drivers from hassles and calamities on the road.

5 Reasons You Should Work for as Long as You Live
5 Reasons You Should Work for as Long as You Live

These benefits might make you think twice about retirement.

The 3 Worst Money Mistakes You Are Making at the Gas Station
The 3 Worst Money Mistakes You Are Making at the Gas Station

Beware these cash-guzzling missteps when you stop at any gas station.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making
10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

7 Social Security Rules Everyone Should Know by Now
7 Social Security Rules Everyone Should Know by Now

Confusion over Social Security is a shame, considering how many of us will need this money badly.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

They don’t make coffee makers like this anymore.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

14 Things You Should Stop Buying in 2021
14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

Is Writing a Check Still Safe?
Is Writing a Check Still Safe?

Every time you pay by check, you hand your bank account numbers to a stranger.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

6 Ways to Protect Your Retirement Accounts From Hackers
6 Ways to Protect Your Retirement Accounts From Hackers

Imagine having $245,000 stolen from your retirement account — and not being reimbursed.

9 Mistakes People Make When Cleaning With Vinegar
9 Mistakes People Make When Cleaning With Vinegar

Cleaning with vinegar can save you a lot of money, but using it like this can cost you.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

4 States Where Taxes on Social Security May Fall Soon
4 States Where Taxes on Social Security May Fall Soon

These states are considering reducing — or even eliminating — income taxes on Social Security benefits.

10 Things Successful Retirees Do Differently
10 Things Successful Retirees Do Differently

These habits and characteristics can help put you on the track to success.

7 Hidden Sections of Amazon Every Shopper Should Know
7 Hidden Sections of Amazon Every Shopper Should Know

These little-known departments of Amazon are gold mines for deal-seekers and impulse shoppers alike.

7 Costly Health Problems That Strike After Age 50
7 Costly Health Problems That Strike After Age 50

As we age, our bodies wear down. Here is how to cut costs associated with some common ailments.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.