Car Insurance Quotes: Avoid Discriminatory Pricing Practices

Drivers assume that all insurance companies use industry-approved practices when determining rates. Although this is true to an extent, some insurers also use methods that may not be standard for all companies. The Consumer Federation of America (CFA), a national advocacy organization, has recently accused many insurers of moving away from pricing practices based on solid actuarial standards. The CFA argues that these new practices of "price optimization" are discriminatory in nature and cause certain drivers to pay higher rates.

What Price Optimization Really Means

All businesses engage in price optimization which involves identifying the value of products and services. The purpose of this process is to determine how much to charge consumers so the business realizes a profit. Insurers engage in price optimization each time they sell a policy at rates they determine are not too high for the consumer but high enough to be profitable for the insurer. The insurance industry uses a price optimization formula or algorithm that considers numerous factors that measure risk levels for insurers. It is intended to be a scientific way to determine rates that are most beneficial to consumers and insurers alike.

How Price Optimization Can Be Discriminatory

When insurers set aside standard practices like using actuarial principles for the sole purpose of increasing their profits, the resulting rates are unfair to drivers who end up paying higher premiums. It is the use of different standards that is discriminatory. The CFA maintains that lower-income drivers are less likely to use car insurance quotes to compare prices. You may be the victim of this type of pricing practice if you experience any of the following:

·         Premiums at Least 20% Higher Than Last Policy - if you have switched policies within the past year or so and, all other factors remaining constant, your current policy costs significantly more than your old policy, your insurer may be optimizing rates.

·         Discrepancies in Car Insurance Quotes - when you get quotes from insurers, in most cases the rates will not be substantially different unless one or two insurers artificially inflate rates to improve profitability.

Insurers rely on several factors in addition to consumer-specific considerations such as age, driving history, credit score, and vehicle to be insured when creating pricing strategies. Following are increasingly common elements included in an insurer's strategy:

·         Consumer willingness to pay a certain rate for coverage

·         Likelihood of consumer filing a claim during the term of the policy

·         Comparison of competitors' rates

·         Expected life of policy

In the 2013 North American Auto Insurance Pricing Benchmark Survey published by Earnix in August 2013, nearly 70% of insurers surveyed acknowledged that price strategies changed over the past year with an eye toward profitability.

Role of Regulators

The problem with price elasticity models is that insurers can have different pricing strategies for specific consumer populations. According to the Insurance Information Institute (III), these practices are not widely used if at all as suggested by the CFA. The discord between the CFA and III on this matter makes it difficult for drivers to really know how insurers are setting rates. State insurance departments regulate car insurance and must approve rate hikes. Regulators usually approve rate increases proposed by insurers. However, regulators can prevent insurers from employing price optimization strategies when calculating rates.

Practices that Benefit Drivers

Traditional actuarial standards remain most beneficial for consumers. Resulting formulas consider individual factors to assess each driver's risk to an insurer. You should not have to pay higher rates if you are unlikely to file a claim. Drivers with clean driving records and no claim histories benefit from actuarial-based pricing strategies by getting lower rates. These practices guarantee that drivers with similar characteristics pay comparable rates.

How Online Car Insurance Quotes Help

It is common to use online car insurance quotes to review coverage options before you buy a policy. Since more of the major car insurance companies are using price optimization practices today, you also should get quotes from smaller insurers for comparison. Ask each insurer about their process for calculating rates, especially if you notice any outlier rates. You can determine if you are getting a fair rate by shopping around, waiting a month or so and getting new quotes, and considering quotes from insurers of all sizes.