Do Carriers Charge Higher Auto Insurance Rates For Loyal Customers?

A number of state insurance commissioners have expressed concerns about how insurance companies use non-insurance related data to determine their policy holders’ auto insurance rates. Several state insurance regulators are investigating the practice known as “price optimization.” This practice can cause carriers to charge higher auto insurance rates for their most loyal customers. Rather than rewarding them for their loyalty, insurance companies use statistics to seek reasons to maintain or raise their premium payments.

Auto Insurance Rates and “Big Data”

Industry observers have noticed that insurers are using data not directly related to a customer’s driving history to determine their auto insurance rates. Insurers reportedly use data ranging from shopping habits to credit history to calculate the auto insurance rates they charge to their policy holders. J. Robert Hunter, director of insurance for the Consumer Federation and a former Texas insurance commissioner, cited how insurers use “Big Data” to analyze customer habits, while “diminishing the weight they place on risk-related factors” typically used to set auto insurance rates.

Auto Insurance Rates and “Price Optimization”

One way in which insurers punish their most loyal customers is with “price optimization.” The practice, which is banned in three states, allows insurers to raise the premiums of customers who fail to compare auto insurance rates among different carriers. The carriers reportedly use income and credit data to target low-income customers and raise their auto insurance rates, despite failing to offer more coverage. Mr. Hunter told the Wall Street Journal that the practice was “terribly unfair,” while California Insurance Commissioner Dave Jones said that it “represents a fundamental threat to fairness” in setting insurance rates.

State Agencies Target Auto Insurance Rate Hikes

Numerous state insurance regulators are targeting carriers who use dubious practices to increase auto insurance rates. Price optimization is banned in California and Washington State, while other states are reviewing the practice. Washington State Insurance Commissioner Mike Kriedler issued a “Technical Assistance Advisory” stating that his agency was “going to go after” carriers that used such practices to hike auto insurance rates.

Industry Defends Auto Insurance Rate Practices

A leading insurance industry group refutes the claims that carriers use unfair practices to determine auto insurance rates. Robert Hartwig, president of the Insurance Information Institute, said that the idea of carriers using outside data to justify unfair pricing practices was “patently false and utterly nonsensical.” He also claimed that carriers use outside data “to supplement traditional actuarial tools” used to calculate auto insurance rates. He stated that the use of non-insurance data was not “in violation of risk-based principles” used in traditional insurance rate calculations.

Source: Insurance Business America

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