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.

Be Careful What You Ask Car Insurance Companies

It is not uncommon for drivers to have questions about car insurance. When you do, you either call or send your insurer an email for clarification. There is no harm in that, right? Actually, there may be depending on where you live. Insurers in some states consider the types of questions policyholders ask when calculating car insurance rates.

What You May Not Know

Similar to the way certain credit inquiries impact your credit score, your insurance rates may increase when you pose questions to your insurer. It seems ridiculous to think that a simple question can raise the alarm for an insurer. However, that is exactly what has been happening industry-wide for years. Insurers use all available information during risk assessment, including general questions you ask.

Conversations to Avoid

You can continue to receive affordable car insurance quotes by following a few basic suggestions. Only answer questions posed by the insurance agent. Offering additional information may give them reason to increase your rates. You should also avoid having the conversations about the following:

·         Hypothetical Situations - often the best way to share your concern is by using a "what if" scenario. However, insurers are using these hypothetical questions to determine how much risk you pose to them. Most people tend to give hypothetical examples that either they have already experienced or are likely to experience. Insurers use your hypothetical questions to justify rate increases.

·         Possible Claims - you may not be sure if you should or should not submit a claim for damage or a specific accident. Perhaps you simply want to know what the claim process is before you purchase a policy. Insurers consider your claim questions in context of your likelihood to actually submit a claim. In other words, insurers believe if you ask about claims, you will probably submit one at some point which makes you a higher risk for them.

·         Additional Coverage - if you ask your insurer about the cost to have fire or theft protection included on your existing policy, you can expect a rate increase. Drivers who worry about thefts may live or work in dangerous neighborhoods. Your insurer will happily sell you comprehensive coverage but will charge you higher rates than you would have received if you purchased the coverage without specifically mentioning theft or fire protection.

·         Changing Vehicles - drivers who ask their insurer about costs associated with a different vehicle generally experience rate increases at the time of renewal. Drivers who often change vehicles may be more prone to accidents, either with a stationary object or with another vehicle. These questions are red flags for insurers that you may submit claims more often than drivers who do not change vehicles as frequently.

Knowing what questions to avoid when talking with an insurer keeps your rates lower. You do not want to mention anything that might cause the insurer to question your risk level.

Texas Car Insurers

Drivers who live in Texas may not even know their rates can increase just by asking their insurers questions. While the state passed a law effective September 2013 that prevents insurers from penalizing homeowners with policies for asking questions, the law did not extend to car coverage. It has been perfectly legal in Texas for decades now for insurers to raise premiums based on hypothetical questions posed by policyholders. Unfortunately, it appears this will remain the case for the foreseeable future.

A customer inquiry is any type of communication with an insurer that is not related to a particular claim in process. The inquiry focuses on policy terms and conditions. According to the Texas Insurance Code, even asking about the claim filing process or whether your policy covers a particular loss is consider a customer inquiry. Insurers are permitted to use these inquiries to increase premiums.

Handling Car Insurance Quotes

You can avoid these potential pitfalls by using online car insurance quotes. Use a site like ours that allows you to get quotes from several major insurers for easy comparison. It only takes a few seconds to complete the zip form and receive qualified online car insurance quotes from insurers licensed to serve your community. When you find the policy you want to purchase, complete the application required by the insurer. Visit their website to find answers you may have so your inquiries do not result in higher rates.