Auto Insurance Price Optimization: Cost of Being a Loyal Customer

Automobile insurers are getting smarter in the way they gather and use policyholder details. They can also effortlessly consider many factors while setting rates. Some experts believe that they have advanced capabilities to laser target pricing down to per customer. In other words, car insurance companies are capable of premium optimization. This sounds something impressive but you won’t be enjoying being on the receiving end.

Industry experts believe price optimization is real and widely used in the auto insurance industry. Price optimization is a method of deploying complicated algorithms using vast data gathered about consumer behaviours in order to single out the policyholders who aren’t likely to shop around even if their rates are raised. Sole purpose of such predictions is to increase profitability by raising rates where they can.

Consumer advocacy groups point out that car insurance companies are likely to look at education and profession to figure out who is likely to shop around and avoid high rates and they are likely to be educated and savvy customers. On the other hand, low income and less educated customers are likely to have less time, awareness and be more loyal and therefore get caught by the price optimization algorithms charging them higher rates.

watchful driver

Car Insurance Price Optimization is a process of collecting enough information about customers to determine if they can charge higher rates and still keep existing customers. Premiums are about the only source of income for insurers so it is logical to take the steps to increase revenues if it is at all possible. Today it isn’t beyond the realms of possibility to predict which policyholders wouldn’t complain about paying a bit more by using advanced programming capabilities.

Widely accepted view is that insurance companies are already using price optimization to make extra money out of their loyal policyholders. No doubt this practice will be highly profitable since they will be able to earn more while incurring hardly any expense.

Information gathering has been here for years and now in its advanced stage. In addition, carriers can almost factor anything in quote programs with the latest programming skills. So, it isn’t at all far-fetched to think that they can rip the benefits by fastidiously studying and guessing how each person will react. You can read Insurance Information Institute (III) findings here.

Vehicle insurance companies can look at your credit history, buying habits and coverage history. Historical patterns are reliably used to predict customer behavior. All they need to do is to plug this information in their Price Optimizing algorithms and figure out exactly how much more they can charge you without losing the business.

Most state insurance commissioners don’t make a stand against profiling customers and using it in premium calculations. Only Florida, California, Maryland and Ohio made it illegal to engage in any price optimization practices. On the other hand, many experts believe this practice is actually turning into price gouging, which is charging unfairly and unreasonably high prices for goods and services.

Do car insurance companies profile policyholders?

There is no question that they have the capabilities to profile applicants and adjust quotations accordingly. There is no need to be naïve about it. They have millions of customers and if they can charge only a few bucks extra to some of them this would translate into millions of dollars profits.

Why would they go into this much trouble rather than increasing rates across the board for everybody? The simple answer is that many motorists would leave them at the first sign of auto insurance premium increase. There are tens of rivals waiting to grab these drivers who may be looking for cheaper deals. That is why it is worth investing into solutions that help them figure out who would leave and who would stick around after a premium increase.

In other words, vehicle insurance price optimization is an exercise to find unaware or blindly loyal policyholders who won’t shop around for better rates and switch if they need to. They would be happy to get a 5% loyalty discount, all the while remaining oblivious to the fact that they are charged 20% more than a new customer would pay.

What to do if you believe you are targeted?

The whole open market economy is built on the idea that customers will look for the best products and deals. Consumers are expected to be well informed and able to make smart decisions for their wallets. They further stipulate that expensive providers with lower quality products will either have to improve or face extinction as extensively argued by Darwin’s law of natural selection theory.

If you believe that your auto insurer is being smart with you, it may be time to find a better carrier. You are more likely to be the target of price optimization if you are with the same company for a long time. They bank on your loyalty so that they can literally bank their profits. That is why it is important to find the most competitive automobile insurance carrier in your zip code.

Get a few quotes by offering exactly the same particulars to each of them. Then, you know you are comparing apples for apples and it is real when you find a cheaper vehicle insurance provider. If the current renewal term is still one of the cheapest you know your auto insurer is honest with you and doing their best to treat you fairly. In other words, no funny business of profiling and determining that you are one of the few people they feel they can get away with charging more.

It really isn’t important if you are getting a large loyalty discount or other discounts from your existing provider when several other companies can offer you cheaper car insurance quotes that easily beat your renewal quote. So, don’t feel you should stay with your current carrier after learning you are getting a 10% loyalty discount. Instead see how they fair against the competition.