The Secret to Getting Cheaper Insurance

Have your auto or homeowner insurance rates been creeping up? If so, you may have been “POed” by your auto insurer. According to new information from the Consumer Federation of America, some insurance companies are secretly “price optimizing” customers; charging them a higher rate for no other reason than they think the customer won’t shop around for a better deal.

“Price optimization is a data mining tool used by insurers to charge higher premiums to those consumers least likely to shop for a new policy in the face of a rate increase,” says CFA.

How do they know whether you are likely to shop around? For now at least, that information isn’t public. “I don’t know what’s in the black box,” says Bob Hunter, CFA’s Director of Insurance. But he notes that insurance companies typically can review credit report data, information provided on applications, and a host of other data available from third-party sources about current and prospective customers.

As an actuary, Hunter says he first heard of this practice when he participated in an industry webinar touting the benefits to insurers of pricing policies this way. He subsequently reviewed industry information that indicated this is not an isolated practice among just a few insurers. When insurers do use a price optimization tool, “if you are in a group that shops less, you are going to pay more,” he says.

CFA and other consumer groups are asking regulators to stop insurance companies from using price optimization techniques when setting rates and premiums.

Julia Angwin, whose book Dragnet Nation: A Quest for Privacy, Security, and Freedom in a World of Relentless Surveillance, revealed the myriad ways companies track consumer information and use it to increase profits, sees this as one example of the way our own information can be used to get us to pay more. “People are worried about the NSA but all the ingredients are there for…charging the prices consumers can bear,” she says.

What Does This Mean for You?

If you’ve been POed, how do you fight back? One way is to call their bluff. If your rate goes up, shop around. Better yet, shop every time your policy comes up for renewal, even if you think you have a good rate.

CFA offers detailed instructions for doing so, recommending that consumers start by using the rate comparison tool available from their state insurance commissioner to identify the six insurance companies with the lowest rates for the sample profile closest to yours. Then use the NAIC complaint database to narrow down your choices to the four companies with the lowest level of complaints. Once you have your list of four, contact each one for a quote.

That’s what I had to do when my auto insurance rates started to climb, even though I had been with the same insurance company for more than two decades and my husband and I had good driving records. We switched to another company. A year later the new insurer raised our rate substantially for no apparent reason. My old insurance company kept sending me letters asking me to come back, and when I responded, they offered me a rate well below the one I was paying before I left.

Was I POed by either company? I’ll never know, but if I hadn’t taken the time to shop I would have paid hundreds of dollars more than I needed to.

Another strategy: Check your credit reports at least once a year and monitor your credit scores, which you can do for free at Credit.com. Most insurance companies review insurance-based credit scores and offer discounts based on that number. Strong credit can earn you a significant discount on your insurance policy.

And although it’s impossible to track all the data companies collect and report about you, you can become more careful about what you share and with whom. “People say, ‘Why do you care about privacy?’” says Angwin. “I say it’s because at 10 p.m. when I am shopping online for my kids clothing, I am not that price sensitive and they are going to charge me the highest price. We are all going to be found at our most vulnerable points and be charged too much.”