Are Car Insurers Unfairly Penalizing Customers Because Of Their Shopping Habits?

Sophisticated computer software helps car insurers illegally bump up bills on customers it tags as less likely to switch companies, consumer groups charge in an accusation industry officials dispute.

Whatever the outcome of this flap, it’s a 21st century reminder for consumers to heed some 20th century advice from the Miracles and the Captain and Tennille: Better shop around.

Consumer organizations at a recent meeting of regulators in Orlando said software from a company called Earnix mines consumer data to help car insurers figure out who is more likely to tolerate higher premiums and who is less likely to play the field.

It’s called price optimization.

The Consumer Federation of America wants state regulators to stop insurers from using such techniques, which it calls illegal because they can result in drivers with the same risk profile being charged different premiums. Every state has laws that say prices must be based on risk and may not unfairly discriminate, but “insurance companies appear to be using these techniques without disclosing that fact to state regulators,” a statement from the consumer group said.

It is not illegal, insists Robert Hartwig, president of the industry-funded Insurance Information Institute in New York. Here’s how he explains it: Insurers submit premiums and regulators approve them based on risk, but the result may be a range for a given set of drivers — say, $500 to $550. Insurers have to decide where to set prices within that range. They can use their own judgment, or complex software.

The result has been intense competition that helps consumers by keeping prices down in the long run, he said. Just turn on the TV to see boundless advertising by car insurers that highlights this fierce battle. Companies who set prices a little higher might hope to make more money, but risk losing customers to competitors who set them a little lower, he said.

“There’s nothing nefarious about it,” Hartwig said.

Asked about its position, Florida’s Office of Insurance Regulation “believes price optimization should not be a factor in determining insurance premiums nor have we allowed it,” spokesman Harvey Bennett said.

Then again, consumer groups say insurers aren’t necessarily disclosing this to regulators, yet somebody’s using it — an Earnix survey found nearly half of responding insurers with more than $1 billion in revenue said they use price optimization techniques.

An Earnix executive told The Palm Beach Post that wasn’t intended as a scientific survey, but in any case price optimization is not really new. The difference is the tools are getting better.

“Nothing has really changed,” said Meryl Golden, general manager for Earnix, whose U.S. headquarters is in Westport, Conn. “Companies have always considered some version of how customers are going to respond to changes in rates and the rate-setting process. The estimate using Earnix is just better. It augments the judgments they made previously so they can make better decisions.”

Consumer groups paint a darker picture. Price optimization “is a new strategy to overcharge Americans who have to buy auto and home insurance policies,” said Bob Hunter, the Consumer Federation of America’s insurance director and a former Texas insurance commissioner. “Despite the feigned innocence of the software developers and insurance executives behind these products, the tool is nothing less than an end-run around critical consumer protection rules that are needed to ensure fair pricing of insurance products.”

The software tends to penalize people not for their driving but factors such as where they live, available market options and perceived financial literacy, Hunter says. If a segment of customers is deemed less likely to switch despite higher premiums, he says, prices are raised to an “optimum” level for that group.

“This so-called ‘price optimization’ is the latest effort by insurers to mine personal consumer information and to evade state consumer protection laws prohibiting unfair discrimination in insurance pricing,” said Birny Birnbaum, executive director of the Center for Economic Justice and a former Texas regulator. “Insurers have generally failed to disclose their use of price optimization to insurance regulators.”

Earnix’s Golden responded, “The same actuarial, consumer protection and regulatory standards apply as they always have. Insurers using price optimization software or not must establish rates that comply with the standards and laws.”

Few dispute that insurers routinely take into account more than your driving record when they consider you as a customer. For evidence, just look at auto insurance scores, available for free if you sign up on a site like These scores are based on things like how well you pay your bills, not how well you drive. Insurers defend considering this data, among other factors, because they say research shows a correlation with how likely you are to file a claim.

While the debate on price optimization continues, consumers might do well to bear in mind the advice of Smokey Robinson and friends and shop around. The alternative: Risk the tender mercies of computers all too willing to help you pay a little more.


Source:  Palm Beach Post

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