You expect your auto insurance rate to go up after you buy a new car, cause an accident, or add a young driver to your coverage. However, some insurers raise rates based on irrelevant data, such as magazine subscriptions or what products you buy.
Even if your driving career is impeccable and you’ve been loyal to your insurance company for the past 10 years, you may pay higher premiums than someone with the same driving career, car and career path. Why would that be? Price optimization.
What is price optimization?
Price optimization is the practice of charging higher rates based on the possibility that people will not shop around for lower prices. Insurers generate algorithms based on all kinds of personal data, including loyalty to other providers and shopping behavior, but not on your driving habits. This is a separate formula from other common auto insurance rate factors, such as age, area of residence, gender and the type of car you drive.
Washington, D.C. Robert Hunter, director of insurance for the Consumer Federation of America, a Washington, D.C.-based nonprofit, explains that insurers often get royalty discounts, but if they inflate the price by up to 30 percent, a 5 or 10 percent royalty discount is not worth it.
According to Nerd Wallet’s rate analysis, with the average cost of auto insurance in 2019 at $1,621 per year, price optimization may cost more than you think.
For example, Consumer Watchdog, a nonprofit based in Los Angeles, detailed a recent case where Farmers Insurance was charging regular customers in California a total of $26 million to $29 million a year, an increase of 4 to 13 percent per year.
We are taking action.
The publication of the report follows Sinn Féin’s announcement this week that it would publish a bill banning the practice in the Irish market on the grounds that it would impose artificially high premiums on consumers. In the United Kingdom, the Financial Conduct Authority (FCA) recently decided to ban the practice entirely, and in the United States it is banned in more than 20 states, including New York and Florida.
As for Sinn Féin’s move, Ms. Rowland said that all measures must be “fine-tuned” to ensure that consumers are not harmed, and that the best way to achieve that is to continue this “detailed work.”
While the evidence found in the report suggests that immediate action may be warranted, Ms. Rowland said it would be “preliminary” and that it is important to gain a detailed understanding of the market.
Who is affected by price optimization?
Price optimization is illegal in 20 states, but the CFA says the strategy should be banned in all states. “Some companies still use it, and some have completely abandoned it,” Hunter said. “We don’t know what any of it is. “It says. And while all states require that rates not be excessive or unfairly discriminatory, he said some state insurance commissioners don’t pay attention to price optimization. “It’s hidden in the rates, so it’s hard to find.”
Because companies use different algorithms to determine rates, price optimization can affect anyone who doesn’t often compare insurance rates. Companies that are not affected by price optimization can also save hundreds of dollars a year by comparing rates.
Roland noted that dual pricing has some benefits for consumers, some because they “will get a better price than they would normally expect,” and therefore require further analysis to determine “the most effective consumer protections.”
Shop around at least once a year
Buying auto insurance isn’t attractive, but one hour of rate comparison can also pay off your next vacation. Whether you shop online, through a dealership or a combination of the two, here are some simple instructions on how to compare auto insurance rates.
Your car insurance premium changes every six months, so it may be helpful to look every time you get an insurance renewal, but if you find it troublesome, aim for once a year.
Sarah Brown, president and CEO of Keller-Brown Insurance Services in Shrewsbury, Pennsylvania, notes that rate changes aren’t necessarily a matter of time; they’re a life event. She sees the greatest rate inflation when customers add younger drivers to their policies or buy new cars. She says it’s best to look around before buying at a higher rate.