Price optimization is the practice used by insurance companies when they want to raise their customers’ premiums even though they have no history of accidents. Insurance companies use this technique to determine who is less likely to switch insurers and raise their rates, practically punishing them for staying loyal to the company.
Discriminatory Practice
Insurance providers use all sorts of data that have nothing to do with a customer’s risk of accidents, such as what types of products they buy at the grocery store and how often they switch brands, which helps companies determine how likely customers are to jump ship. This is why this practice is considered to be discriminatory, and rightly so.
The practice is quite common among insurance providers, with the Consumer Federation of America claiming that almost 50% of the largest insurers using it.
Illegal in Several States
Most states allow this practice, with California, Ohio, Florida and Maryland being the rare exceptions. A couple of months ago, California made price optimization illegal, with a law stating that price optimization is discriminatory because it has nothing to do with customers risk to insurance companies.
Giving Competitive Advantage to Insurers
They say that they have good reasons for doing it and that it is not discriminatory at all. They justify it by saying that they have to do it to in order to gain competitive advantage, and that the insurance product is not just the rating process that takes into account factors like a driver’s age, gender, vehicle type, ZIP code, but also involves impact analysis and predictive analytic models.
The only legitimate reason to charge different premiums to different customers is if a given customer’s risk profile changes. This means that a policyholder should only get higher premiums if their risk to the company increases, after being involved in too many accidents or filing claims too frequently.
Consumers Should Shop Around and Compare Prices
The main, and pretty much the only thing policyholders can do to avoid this issue is to shop around and compare prices. Statistics show that those who shop around almost always get more favorable rates. Insurance companies are bound to lower the rates to those who announce that they want to switch providers, so that they don’t lose them to their competitors.
That’s why consumers should shop around every couple of years, or the second they notice that their rates have gone up even though they haven’t been involved in new accidents in the meanwhile.
The first thing to consider when shopping around is determining your needs. Consumers have to figure out exactly what type of coverage they actually need, because car owners often purchase policies that include coverages that they will never get any use out of.