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They analyze data to see who will or won't shop around after they increase prices.

You’d think that doing nothing wouldn’t raise your auto insurance rate but, if you did, you’d be wrong.

Even if you haven’t been in an accident, haven’t added a teen driver, haven’t racked up traffic tickets and didn’t see your credit score plummet or experience a change in any of the factors that influence your riskiness to your insurer, you still could see your insurance bill hiked.

The reason is that many insurance companies are using sophisticated data mining software to enact something called “Price Optimization.” These insurers analyze reams of data to figure out which customers will shop around after a price hike, and which ones won’t. If a computer algorithm predicts that you aren’t likely to be a savvy shopper, your premiums could go up.

And if the computer figures that your neighbor – with the exact same driving history and financial profile – won’t sit still for a sudden, unexplained increase in her premium, her rate remains unchanged.

New technology, old idea

While the idea of charging different consumers different prices for the same thing isn’t a new idea — just look at the airline industry or your nearest auto dealer — the advent of big data and consultants who crunch the numbers and refine the calculations is making it easier.

Forty-five percent of large insurance companies and 26 percent of all insurance companies in North America have been found optimizing prices. That’s according to a 2013 survey by Earnix, a software provider of price optimization products to the insurance industry.

Consumer advocates have been blasting the practice as discriminatory for several years because it doesn’t base rate changes to the driver’s premium on the amount of risk he or she poses to the insurance carrier.

Twenty different insurance commissioners in individual states and the District of Columbia have taken action or issued guidance that limits or prohibits price optimization, according to the Consumer Federation of America, with Nevada becoming the latest in February 2017.

State governments are fighting back

Typically, state regulators notify insurers or clarify rate rules that require cost-based pricing and prohibit unfair discrimination in setting insurance premiums. Nineteen states have issued earlier notices to insurers along the same lines. And by that, I mean applying consumer characteristics unrelated to the risk those consumers pose is illegalThose states are the following…

  • Maryland
  • California
  • Ohio
  • Florida
  • Vermont
  • Washington
  • Indiana
  • Pennsylvania
  • Maine
  • Washington, D.C.
  • Rhode Island
  • Montana
  • Delaware
  • Minnesota
  • Colorado
  • Connecticut
  • Alaska
  • Missouri
  • Virginia

The Consumer Federation of America maintains that price optimization violates state insurance laws that prohibit unfairly discriminatory rates.

“Most Americans are required by law to buy auto insurance and by their mortgage company to buy homeowners insurance, and it is terribly unfair and entirely illegal for insurance companies to vary premiums based on whether or not they are statistically likely to shop around,”  J. Robert Hunter, director of insurance for the federation and a former Texas Insurance Commissioner, said in a statement.  “It is the obligation of Insurance Commissioners to protect consumers from price optimization and other forms of price gouging.”

The Center for Economic Justice also encourages state insurance regulators to push back against price optimization practices.

“Price optimization by insurers is Big Data run amok and simply price gouging by a fancy name,” Birny Birnbaum, executive director of the center, said in a statement. “Consumers are being punished for activities and circumstances unrelated to risk and without any disclosure or transparency by insurers.”

Don’t wait, just shop around

In the meantime, consumers don’t have to wait for their state insurance commission to take action. Instead, just start shopping around. According to Hunter of the Consumer Federation, with just a couple of phone calls or visits to a few websites, one hour of insurance shopping can cut as much as $125 per car off your bill.

An even easier approach might be to make just one phone call — to your agent. Ask why your rate has gone up and what you can do to lower it. Also, review your coverage to make sure you’re not paying for unwanted extras. And check that you’re taking advantage of discounts, such as good driver and good student deductions, or savings from bundling home and auto policies into one package.

Brian J. O’Connor is the author of the award-winning budgeting book, “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government


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Meet the Author

Brian O'Connor

Brian O'Connor


Brian O'Connor is a contributing writer for O'Connor is a journalist, writer and consultant. He's a syndicated personal finance columnist and author of "The $1,000 Challenge."

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