Why Insurance Price Optimization Makes Shopping Around Crucial

Risk evaluations have long been a factor in how much a house insurance or auto insurance policy will cost. However, in a procedure known as “price optimization,” insurers may take into account variables other than personal risk when determining premium amounts. Let’s examine price optimization in more detail, see if you’ve ever engaged in it, and learn how to protect yourself against this pricing strategy.

What Is Price Optimization in Insurance?

Various contexts or sectors may have different definitions of price optimization. It happens in the insurance industry when insurers change premiums based on sophisticated modeling techniques and sizable datasets from databases used for insurance and non-insurance that contain personal consumer data (where allowed by law). After using conventional risk-based pricing methodologies, an insurer may increase a person’s premiums based on characteristics other than that person’s loss risk by using price optimization.

Price optimization is referred to as “profit maximization” by Robert Hunter, the Consumer Federation of America’s (CFA) director of insurance. The insurer may decide to raise the cost of your coverage to what it deems the “ideal” level for your pool of customers merely because it realized that your market segment is less sensitive to price hikes.

Is Price Optimization Legal?

At least 20 state insurance departments have recently released bulletins claiming that a price optimization is an unlawful form of pricing. The following states and Washington, D.C. area on the list: Alaska, California, Colorado, Connecticut, Delaware, Florida, Indiana, Maine, Maryland, Minnesota, Missouri, Montana, Nevada, Ohio, Pennsylvania, Rhode Island, Vermont, and Washington.

Price optimization is strongly opposed by groups like the CFA, which claims that it violates state laws requiring insurance firms to base rates on actuarial criteria. According to a CFA press statement on the matter, the company “prohibit[s] the kind of discrimination upon which Price Optimization relies.” Industry associations, though, disagree.

Despite the restrictions in some states, the industry-supported Insurance Information Institute (III) claims that adopting pricing optimization is neither improper nor improper. The III argues that price optimization doesn’t violate any state insurance department policies because it is frequently employed in non-insurance businesses, where it is accepted and uncontested.

The National Association of Mutual Insurance Companies (NAMIC) agrees that market factors are valid and crucial for determining how much property and liability insurance should cost. However, the NAMIC is in favor of policies that guarantee fair pricing for everyone in the same risk category.

Who Is Subject to Insurance Price Optimization?

Price optimization is referred to as the “schmo tax” by Consumer Reports because it frequently exploits clients who are unable to shop elsewhere. Price optimization can also prey on consumers who think that insurance providers reward steadfast loyalty with substantial reductions. In fact, these reductions might not be sufficient to balance rate increases brought on by price optimization. In an interview with The Balance, Hunter stated that “behind the scenes, [insurers] boost your prices because they don’t think you’ll quit if the rates go up.” Then they exclaim, “Oh! You’re a dependable client. You will receive a 5% discount from us.

There is some debate over the extent to which price optimization is used in the consumer auto insurance sector, but as more states enact restrictions on it, its use may be declining. Nevertheless, Farmers had to pay a $52 million insurance settlement in 2019 for using price optimization in California, where the practice is prohibited. Customers were overpaying for premiums by 4% to 13%, according to estimates by Consumer Watchdog.

Additionally, Allstate has drawn criticism. Regulators in Maryland rejected Allstate’s attempt to alter the cost of auto insurance in the state.

Based on new risk analysis methods, the insurer intended to alter premiums for over 90,000 policyholders whose rates were out-of-date. An investigation by Consumer Reports and The Markup found that the new algorithm would have awarded rate increases of up to 20% to a subset of policyholders who already paid the highest premiums. Only a 5% increase would have been given to policyholders who were thought to have similar risk profiles but were paying lower premiums at the time.

The researchers contended that “it appears that Allstate’s algorithm constructed a’suckers list’ that would simply charge the big spenders even higher rates”—predominantly focusing on middle-aged, male, and non-white consumers. Maryland rejected Allstate’s proposal, but other states granted it, and its new risk analysis is now actively used.

Why You Need To Shop Around for Insurance

Price optimization emphasizes the necessity of constantly comparing insurance quotes so you can keep abreast of reasonable premiums. Hunter advised customers to shop around every few years because they could easily save up to 40% on premiums by doing so.

The insurance sector also concurs that customers who are dissatisfied for whatever reason with their existing insurer should compare their options. You can let your present insurance provider know you’re a price-sensitive customer and that you could cancel if premiums go up by switching insurers or complaining to them about price discrepancies or hikes. Additionally, it might be sage to inquire with your agent as to the reason behind any increase in your rate. You can always move your business elsewhere if you are unhappy with the service you receive along the process.

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