How Insurers Secretly Target Lazy Shoppers for Higher Prices

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By Gerri Detweiler

Have your auto or homeowner insurance rates been creeping up? If so, you may have been "POed."

According to 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 the federation.

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, director of insurance for the federation, which unites nearly 300 nonprofit consumer organizations. 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. When insurers use a price optimization tool, "if you are in a group that shops less, you are going to pay more," he says.

The federation 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 many 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. "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 the 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.

The federation recommends 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. 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.

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