J. Robert Hunter, Director of Insurance at CFA and former Texas Insurance Commissioner, says it's never been more important to shop around for insurance.
“You may have been with your auto insurance company for many years. You may even receive a loyalty discount of five or ten percent on your bill. You have filed few or even no claims during your years with the insurer. You are a great customer and it may seem that there’s no reason to complain about your auto insurance," Hunter said, warning that it's just such customers who are targeted by rate increases.
“Watch out! Your insurer may be increasing your premium by far more than your loyalty discount, precisely because you have been so loyal. Even if you have a perfect driving record, many insurance companies are raising rates on people just like you – people who do not shop around," he said. "Newly revealed insurance practices show that reasons you might be vulnerable to price increases are such things as staying with one insurer for many years, never calling the company with complaints or simply buying your insurance through an agent rather than online.”
Are you being PO-ed?
The name insurers use for such practice is “Price Optimization,” referred to as “PO.”The industry uses personal consumer data and statistical models to measure how likely each customer is to shop around and how much of a price increase he or she will tolerate, Hunter said. After determining what economists call the “price elasticity of demand,” insurers push up premiums based on how unlikely it is that a customer will shop around for a better price, even if the driver has never caused an accident or been issued a ticket.
Many insurance companies, including about half of the larger ones, raise a driver’s premium if they conclude that the driver is not likely to leave their company, the CFA reported. This means millions of drivers are possibly being charged a premium that is higher than the amount considered appropriate and fair for their risk profile.
What should a consumer do?
The best defense against being PO-ed is to shop around, according to Hunter.
“Even before the advent of price optimization it was very important to shop for insurance since prices vary so widely. But now, to avoid being POed, shopping is critical,” Hunter said.
Hunter said consumers should also call their state’s Insurance Commissioner and tell her or him to stop insurance companies from using this Price Optimization scheme to unfairly raise rates on customers.
