Car insurance rates can vary quite a bit depending on a number of different factors, like where you live, whether you’re married or single, what kind of car you drive, and more. These factors are meant to determine how likely customers are to file a claim, but some car insurance companies will increase your rate simply based on your shopping habits, according to a new report from The Markup and Consumer Reports.
In 2013, Allstate asked Maryland regulators if it could update its risk analysis formula. They asserted that their customers were paying outdated premiums and asked regulators to run each policy through a new algorithm with a number of different variables that would help determine how much of a risk that customer was, and thus, how big of a premium they should pay, according to the report. But when Consumer Reports combed through this data recently, they found some problems with the formula. “It resulted in a ‘suckers list’ of Maryland customers who were big spenders and would squeeze more money out of them than others,” they reported. While less than half of Allstate drivers were between the ages of 41 and 62, 73% of them were assigned increases in their policies, sometimes as high as 20%. On the other hand, drivers with already cheap policies were assigned smaller increases of 5%.
Namely, the report pointed to a practice known as “price optimization,” which is when insurance companies charge customers based on factors other than risk. Basically, if an insurance company believes their customer is unlikely to search for better rates, they’ll charge them more, betting that the customer won’t bother trying to fight it.
This practice of price gouging, or explosively raising the price of services for factors beyond risk, is illegal according to the Consumer Federation of America. Sure, insurance companies are allowed to change your rate according to certain risk factors, like prior accidents, but they can’t just charge you more for the sake of charging you more. Worse, if you’re a loyal customer who hasn’t shopped around for a better policy in years, there’s a chance you could pay more just because the insurance company doesn’t think you’ll leave them for another carrier. As Bob Hunter, a representative from the Consumer Federation of America, explained to NPR:
“A sophisticated algorithm crunches that data and spits out an index showing how sensitive a customer is to price increases. Only the insurance company knows the index. Clients may see a loyalty discount on their premiums but Hunter says it may not be what it seems. ‘They’ll give you a discount for loyalty,’ Hunter says. ‘But, they’ll give you a 10 percent discount after they’ve raised your rate 25 percent.’
The Consumer Federation of America recommends that state commissioners require all insurance companies to “testify regarding if they use price optimization in pricing, in underwriting or in any other way.” Considering the recent push for healthcare insurance pricing transparency, it is possible that there will be a move towards transparency in other industries as well. In the meantime, if you want to avoid getting price optimized, experts recommend shopping around for better insurance rates. Take a few minutes to search for better rates online or call different insurance companies to see what their rates are. Even if you don’t find a lower rate, it might keep your insurance company from gouging you just because they don’t think you’re a savvy shopper. In other words, don’t be afraid to shop around for a better car insurance premium.
Simplicity Bryan is deeply entrenched in the worlds of self-help, gratitude, personal finance, and organization. She’s happiest paddleboarding with her pup and storytelling with a purpose. You can follow her here.
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