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Price Optimization in Auto Insurance

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No reward for loyalty: why your auto insurer might charge you more for not shopping around due to price optimization

Most consumers assume that auto insurers will treat you like royalty for your loyalty—stay with the same company and keep a claims-free record and your premiums will steadily go down is the prevailing theory. But data show and experts contend that the opposite can actually happen, and more often than you’d think.

It’s a tactic called “price optimization,” and auto insurers big and small engage in it. Put simply, price optimization is the practice of raising your individual premium based on the likelihood of you not shopping around for another policy with a different insurer.

How widespread is this practice? A 2013 survey of auto insurance execs and pricing professionals, conducted by insurance industry consulting firm Earnix, revealed that 63% of respondents either currently optimize their prices or plan to implement optimization in the near future; additionally, among companies with more than $1 billion in annual auto insurance premiums, 45% employ price optimization techniques.

Price Optimization from the Insurer’s Point of View

Ron Hettler, president of the Hettler Insurance Agency in Lubbock, Texas, says price optimization is widespread because insurance carriers are seeking to maximize their returns. To squeeze more profit out of policies, they often charge more in rates the longer you are a customer because they’re relatively confident that you won’t jump ship.

“For a majority of customers, a hundred dollar increase in premiums, for example, simply isn’t enough to compel them to switch,” says Hettler. 

Consider that, when you apply for a new auto insurance policy, the insurer has full disclosure of the risks of underwriting your coverage: all accidents are disclosed, credit checks are run, mileage is determined per year on the vehicle, et cetera. Your insurer will likely provide a generous welcome discount on top of bearing the expense of acquiring you as a new customer—costs that include employing an underwriting team to evaluate your risk. But during a policy renewal, the cost of continuing to underwrite your policy can be prohibitive to the carrier. 

“To recover some of those expenses, the insurer may examine its wealth of data and know that a $50, $100 or even $300 increase in your premium isn’t going to provoke you to switch,” Hettler adds. 

A Controversial Practice

J. Robert Hunter, director of insurance for the Consumer Federation of America, insists that insurers don’t engage in price optimization to offset their risks—they do it to gouge policyholders. “They raise rates to make more money, of course. They really do not try to justify it other than to say other industries do it, why not us?” says Hunter, who notes that only four states—California, Florida, Ohio and Maryland—have essentially banned price optimization, although other states are considering measures to also prohibit this practice.

Hunter and other industry experts believe that price optimization is an unfair, illegal and discriminatory ploy that especially penalizes lower-income policyholders who might be less likely to shop around. James Lynch, chief actuary for the Insurance Information Institute in New York City, however, disagrees. 

“Insurers do not raise rates on people for their failure to shop around. I’ve never heard of anyone doing so. Insurance companies truly value long-term customers, and the rates charged reflect that reality,” says Lynch. “One of the ideas that often come up in this discussion is that insurers want to be able to jack up the rates of poor people because they are less likely to shop for insurance.”

To neutralize that latter accusation, Lynch cites the results of a June 2014 Insurance Information Institute Pulse survey (pdf), which found:

  • 90% of Americans earning less than $35,000 annually say they have more choice among auto insurers than they did 10 years ago, a higher percentage than other income groups.
  • 68% of Americans earning less than $35,000 annually compared prices for auto insurance at their last renewal, more than those in other income brackets. 

Reasons for Rate Increases

Be aware that price optimization isn’t the only reason why your insurance premiums may spike. Your rates could go up if your insurer calculates a lower credit-based insurance score for you. This can occur if your carrier engages in credit-based scoring—a practice (currently banned only California, Hawaii and Massachusetts) whereby your carrier reviews your credit payment history, unpaid debt, length of credit history and other factors to determine the risk that you may not pay your premiums.

“Also, policyholders with more accident claims, violations, tickets, and poor driving histories are, of course, charged more,” says Ken Davidson, principal owner of Eagle Independent Insurance Agency in Dallas.

How to Protect Yourself

To prevent yourself from getting “price optimized,” it’s important to remain an engaged and well-educated consumer say the experts. “Shop, shop, shop,” advises Hunter. “It has always been critical to shop around for auto insurance, since prices vary widely. But now it is even more essential. If your insurer sees that you shop, they will not price optimize you and you will save money.”

For best results, try these tips designed to minimize your chance of being price optimized:

  • Compare auto insurance quotes from insurer competitors just before your first renewal period, then every two to three years.
  • Don’t switch for minimum moolah or too frequently. “It will cost you in the long run,” says Hettler, who recommends only switching if the savings are substantial—at least 10 to 15%. “Carriers will penalize customers that move every year to a different insurance company.”
  • Evaluate your risk before you bolt. Remaining with your current insurer can be a better deal if your risks to them have recently increased (such as you having a lower credit score or a longer commute through a bad neighborhood); their underwriting may not be aware of these increased risks, but a new carrier will certainly identify them and quote you higher rates accordingly.
  • Bundle home and auto insurance policies with the same agent and company.
  • Purchase higher liability limits, which can reduce your odds of being price optimized.
  • Pay in one lump sum annual installment if possible and set your policy to auto renew without letting it cancel—two tactics which can also lower your price optimization likelihood. 
  • Consider choosing an independent insurance agent who can represent multiple insurance companies that offer various rates and coverage limits. “When you have a captive insurance agent or buy direct from an insurer, they only represent their product, not multiple products. If their rates go up, they cannot shop for better rates on your behalf,” says Davidson.

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