Auto Insurance Rates: The New Road Rage

Automobile-insurance companies instituted new methods to get more money from policyholders. Critics say a new pricing tactic is illegal. You also might encounter fees that are related to the use of vehicle-monitoring devices.

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Imagine if an automobile-insurance company increased the premium on your existing policy simply because you never bothered to shop for a policy from another company. That sounds ridiculous and possibly illegal to us, but it’s precisely what some insurance companies are doing in 2014, experts tell Consumers Digest. The insurance industry calls this tactic price optimization, and although state insurance commissioners are aware of the issue, it’s unclear what can be done to protect consumers.

Price optimization is just one of the problems that you might encounter in 2014 when it comes to automobile insurance. Although the vehicle-monitoring devices that most companies offer come with at least a 5 percent discount on your policy, they also give insurers an opportunity to sock you with service fees and the capability to compile information that could come back to haunt you in the long run, experts say. In the future, insurers will offer mobile applications that will tell them where you’re driving, measure your acceleration and braking and assess your commute schedule, all of which could affect your premium. Furthermore, insurance companies don’t give discounts to drivers whose vehicles have newer features that are designed to make the vehicle safer to drive, such as adaptive cruise control.

In other words, in 2014, plenty of evidence exists to suggest that automobile-insurance companies—like most insurance companies—remain determined to do what’s best for them rather than what’s best for you.

PRICE POINTS. The details about the use of price optimization are murky, largely because it’s unclear which automobile insurers use it and precisely when the practice started. However, two independent experts whom we interviewed insist that some U.S. automobile-insurance companies use price optimization and that others are likely to follow in 2014 and beyond.

Price optimization works like this, according to Robert Hunter, who is the director of insurance for Consumer Federation of America: Instead of basing your premium solely on your risk potential, insurers further adjust rates based on the likelihood that you’ll switch insurers if your rates increase. How can insurers predict whether you’re the type of customer who won’t flinch if you experience a rate increase? Insurers look at market analysis and put consumers in different segments based on data, such as where each consumer resides or his/her income level, Hunter says.

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For instance, actuarial standards that are set by each insurer and Insurance Services Offices, which provides statistics, data and policy language to insurance companies, cite that two 30-year-old men who live in the same neighborhood and who drive the same number of miles in similar vehicles should have nearly identical automobile-insurance rates. However, when insurers apply price optimization, one person might pay, say, $700 per year and the other might pay $750 per year if the insurer determined that the second man was in a market segment that didn’t shop for insurance as much as the other did. Such an approach is illegal, Hunter says, because even though two customers have the same risk factors, one faces unfair discrimination, which violates state laws.

The scope of price optimization is potentially huge, experts say. Hunter estimates that no more than 33 percent of customers shop around for better rates, so at least 67 percent of automobile-insurance policyholders—that covers 52 million vehicles—have the potential to see their premiums increase because of price optimization. It’s unclear by how much that your premium would increase if price optimization were to be applied. However, in Europe, where insurers use price optimization, insurance-company profit increased by an average of 4 percent each year since insurers implemented price optimization 10 years ago, according to a September 2012 report by Earnix, which is an insurance-industry consulting company that sells price-optimization software. Hunter believes that the percentage increase on those who are victims of price optimization could be as much as 8 percent to account for an overall profit increase of 4 percent.

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