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More Data, More Reason to Shop Around for Car Insurance

Ashley Kane

Yikes. You expect your car insurance company to determine premiums based on factors like speeding tickets, location, and driving history – right? What you probably don’t expect is for carriers to determine your rate based on your education level and occupation.

Yet that’s what some auto insurance providers appear to be doing, according to the Consumer Federation of America (CFA). A recent report states that price optimization is very real and that it needs to stop. The CFA and the CEJ (Center for Economic Justice) said that “price optimization violates state laws that prohibit insurance companies from unfairly discriminating against customers even though they have the same risk profile as others who are charged lower premiums.” 

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Who Is This Hurting?

A lot of people, specifically low-income consumers, which makes this matter even more worrisome. Low-income, low-educated consumers are being targeted, as they are the market that has less time to shop around, fewer options due to location, and sometimes less financial literacy. Essentially, they are the ones that are least likely file a claim or switch carriers, giving car insurance companies the go-ahead to raise their rates without the risk of losing customers.

Basically, this practice is hurting those who are already struggling. Furthermore, it doesn’t make a lot of sense that a low-income individual with a good driving record may pay a higher premium that a wealthy individual with a poor driving history.

All of this is done through data mining, and many of the software companies selling to insurers have since changed the description of their products from “profit maximization tools” to simply “improving management judgment for competitive purposes.”

Help! What Should I Do?

Most states can legally use gender and marital status, along with car make, model, location, age, and driving history to make rate decisions. However, many feel that data mining and price optimization is crossing the line due to the fact that car insurance is mandatory in all but two states.

Fortunately, the Federal Insurance Office (part of the Treasury as part of the Dodd-Frank Act) announced that they plan to evaluate and monitor the prices of insurance for low and moderate-income consumers. Regulatory action is likely to occur in the future to deal with this matter, but until then, here’s what you can do:

  • Some states have already banned the use of certain discriminatory factors. For example, credit scores can’t be used to price premiums in California, Massachusetts, and Hawaii. California has also banned the use of education level as a determining rate factor, which illustrates that it is possible for auto insurance providers to be competitive without being unfair. Read up on your state laws to be better informed about what to look out for.
  • Business is business. As a consumer, you’ve probably experienced practices like this in a multitude of ways. Usually, if one company starts using specific tactics, others will follow suit to remain competitive. However, that doesn’t mean you just have to accept it. Be aware. Share this information with friends, and remain in conversation with your car insurance company. Make sure they know that you aren’t necessarily going to stay.
  • Shop around. Look for alternatives and speak with other auto insurance providers. Check your quotes online to compare premiums as often as necessary to be sure you that you aren’t a victim of price optimization. 

Photo credit (top image): r2hox, Wikimedia, 401(K) 2012

Photo credit (in-line): Jorge Franganillo, Freestockphotos