RENEE MONTAGNE, HOST:
Anyone traveling by car also has to anticipate accidents. That's why there's insurance. Now in many industries, companies reward their most loyal customers with discounts, but with car insurance the opposite can happen. You can be punished with a higher premium because you stay with your provider. Michigan Radio's Tracy Samilton tells us why.
TRACY SAMILTON, BYLINE: It happens to a lot of us - no accidents, but all of a sudden, boom. Your car insurance goes up.
JUSTIN MULHOLLAND: I'm Justin Mulholland. I live here in here in Whitmore Lake, and I'm a financial adviser. I own University Benefits; it's a company that manages money for people at University of Michigan.
SAMILTON: Mulholland has three cars. He insured them through a company that quoted him a decent rate, but after two years, his premium jumped. You might imagine that a guy who helps people manage their money also pays attention to his own.
MULHOLLAND: I got on the phone with another friend of mine who sells insurance, and he got me a deal with Cincinnati Insurance. That brought it down to what it was before, and it stayed there ever since.
SAMILTON: Mulholland's lack of loyalty in the face of a premium hike means he's less likely to be snared by the practice called price optimization.
BOB HUNTER: Well, it's really profit maximization.
SAMILTON: Bob Hunter is a former Texas insurance commissioner who's with the Consumer Federation of America. Hunter says companies can utilize software that compiles an astonishing amount of data on your behavior.
HUNTER: They have all the information on what you buy at your grocery store. How many apples? How many beers? How many, you know, steaks? They have all the information on your house.
SAMILTON: Hunters says a sophisticated algorithm crunches that data and spits out an index showing just how sensitive you might be to rate hikes, whether you'll shop around for another company instead. He says you'll never see that index, but you could see an appealing loyalty discount on your premium statement.
HUNTER: They'll give you a 10 percent discount for loyalty after they've raised your rate 25 percent.
SAMILTON: Joel Laucher is deputy commissioner of rate regulation for California. He says there are legitimate risk-based reasons for different rates - your driving record, where you drive, if you have a garage - but how you shop, how loyal you are...
JOEL LAUCHER: Unlike the other things, which are based on losses - loss data - this one isn't.
SAMILTON: Laucher says most companies won't admit they're doing it, and it's so complicated even insurance commissioners have trouble understanding if price optimization is at work, so California recently issued a notice to insurers - kind of a firm reminder.
LAUCHER: We're aware of this thing; don't do it. And they may say, oh, no, I wasn't doing it, and hopefully even if they were, they stop.
SAMILTON: Only Progressive and State Farm told us they don't price optimize. Farmers Insurance emailed us, quote, "your questions involve a complex matter in which there continues to be lack of agreement on what it really means." We asked Nationwide about its December 2014 letter to the Maryland Insurance Administration describing its use of price optimization. Nationwide referred us to an insurance trade group.
Allstate initially denied it uses, quote, "any form of the price optimization tool," end quote, described in this story. But in 2011, Allstate filed a report with the SEC saying that it does indeed use price optimization. Eventually after a lot of back and forth emails - Allstate wouldn't talk on tape - a spokesman amended the statement. Quote, "we do not engage in price optimization that seeks to charge the highest rate the market will bear." Robert Hartwig heads the Insurance Information Institute, the trade group we were referred to by Nationwide and Allstate. He says the industry has always tried to estimate how much customers are willing to pay.
ROBERT HARTWIG: Insurance is sort of the original big-data industry. We've been collecting data on certain types of things for centuries, like ships sinking, for example.
SAMILTON: And Hartwig thinks price optimization is OK because it's related to legitimate financial objectives, like making a profit.
HARTWIG: And keeping costs down for such things as churn is a completely reasonable component.
SAMILTON: Churn meaning how many customers might bolt if faced with higher rates. On one point there's complete agreement between the industry and its critics. Here's Robert Hartwig again.
HARTWIG: If an individual is unhappy with their insurer for any reason, they should shop.
SAMILTON: And Bob Hunter of the Consumer Federation of America.
HUNTER: Shopping around will foil price optimization because the insurance company's going to say this guy's going to leave if I raise the price, so let's hold it down.
SAMILTON: For now, there's two class action lawsuits seeking damages for price optimization. New York may soon join Ohio and Maryland in banning it in car insurance. Meanwhile, the National Association of Insurance Commissioners plans to issue recommendations to states on the practice by the fall. For NPR News, I'm Tracy Samilton.
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