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Auto Insurance Rates: The New Road Rage

Automobile-insurance companies instituted new methods to get more money from policyholders. Critics say a new pricing tactic is illegal. You also might encounter fees that are related to the use of vehicle-monitoring devices.

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Imagine if an automobile-insurance company increased the premium on your existing policy simply because you never bothered to shop for a policy from another company. That sounds ridiculous and possibly illegal to us, but it’s precisely what some insurance companies are doing in 2014, experts tell Consumers Digest. The insurance industry calls this tactic price optimization, and although state insurance commissioners are aware of the issue, it’s unclear what can be done to protect consumers.

Price optimization is just one of the problems that you might encounter in 2014 when it comes to automobile insurance. Although the vehicle-monitoring devices that most companies offer come with at least a 5 percent discount on your policy, they also give insurers an opportunity to sock you with service fees and the capability to compile information that could come back to haunt you in the long run, experts say. In the future, insurers will offer mobile applications that will tell them where you’re driving, measure your acceleration and braking and assess your commute schedule, all of which could affect your premium. Furthermore, insurance companies don’t give discounts to drivers whose vehicles have newer features that are designed to make the vehicle safer to drive, such as adaptive cruise control.

In other words, in 2014, plenty of evidence exists to suggest that automobile-insurance companies—like most insurance companies—remain determined to do what’s best for them rather than what’s best for you.

PRICE POINTS. The details about the use of price optimization are murky, largely because it’s unclear which automobile insurers use it and precisely when the practice started. However, two independent experts whom we interviewed insist that some U.S. automobile-insurance companies use price optimization and that others are likely to follow in 2014 and beyond.

Price optimization works like this, according to Robert Hunter, who is the director of insurance for Consumer Federation of America: Instead of basing your premium solely on your risk potential, insurers further adjust rates based on the likelihood that you’ll switch insurers if your rates increase. How can insurers predict whether you’re the type of customer who won’t flinch if you experience a rate increase? Insurers look at market analysis and put consumers in different segments based on data, such as where each consumer resides or his/her income level, Hunter says.

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For instance, actuarial standards that are set by each insurer and Insurance Services Offices, which provides statistics, data and policy language to insurance companies, cite that two 30-year-old men who live in the same neighborhood and who drive the same number of miles in similar vehicles should have nearly identical automobile-insurance rates. However, when insurers apply price optimization, one person might pay, say, $700 per year and the other might pay $750 per year if the insurer determined that the second man was in a market segment that didn’t shop for insurance as much as the other did. Such an approach is illegal, Hunter says, because even though two customers have the same risk factors, one faces unfair discrimination, which violates state laws.

The scope of price optimization is potentially huge, experts say. Hunter estimates that no more than 33 percent of customers shop around for better rates, so at least 67 percent of automobile-insurance policyholders—that covers 52 million vehicles—have the potential to see their premiums increase because of price optimization. It’s unclear by how much that your premium would increase if price optimization were to be applied. However, in Europe, where insurers use price optimization, insurance-company profit increased by an average of 4 percent each year since insurers implemented price optimization 10 years ago, according to a September 2012 report by Earnix, which is an insurance-industry consulting company that sells price-optimization software. Hunter believes that the percentage increase on those who are victims of price optimization could be as much as 8 percent to account for an overall profit increase of 4 percent.

In August 2013, Earnix reported that 48 percent of U.S insurers that make at least $1 billion in gross written premiums use price optimization. The Earnix report didn’t cite particular insurance companies, and Earnix didn’t respond to the 13 phone calls and three emails that we sent in pursuit of clarification.

DATA DRIVEN. All of the largest automobile-insurance companies offer free vehicle-monitoring devices that plug into your vehicle’s telematics system. However, insurers charge fees for you to access certain features.

DATA DRIVEN. All of the largest automobile-insurance companies offer free vehicle-monitoring devices that plug into your vehicle’s telematics system. However, insurers charge fees for you to access certain features.

Progressive Casualty Insurance

Consumers Digest contacted the 10 U.S. automobile-insurance companies that sell the most premiums annually, and only one—American Family Insurance—gave us any indication that it uses price optimization. Progressive and State Farm say they don’t use price optimization. Allstate says it doesn’t share pricing methodology. Liberty Mutual and Nationwide declined to speak with us about price optimization. At press time, Berkshire Hathaway (the parent company of Geico), Farmers, Travelers and USAA hadn’t responded to our request. Chad Covelli of American Family says the company uses multiple factors to define price optimization, including “consumer price elasticity,” which, experts tell us, is another way of saying the company will increase premiums for people who are the least likely to shop for a better rate.

At press time, state insurance regulators from only one state, California, had written to Casualty Actuarial Society (CAS), which helps to set rate-making guidelines for insurers, to oppose the use of price optimization. The state regulators believe that the practice is illegal. Hunter says CAS told him that it’s “rethinking” its plan of allowing price optimization. CAS tells us that it will make a decision in 2014 but wouldn’t be more specific. Nevertheless, no guarantee exists that insurance companies will stop using price optimization.

Hunter believes that low-income people in particular are at risk for price optimization, because shopping-behavior studies show that low-income people shop less often and less effectively than do people who earn more money. However, it’s difficult for anyone to determine whether his/her rate increase is the result of price optimization or another factor, says Harvey Rosenfield, who is the founder of Consumer Watchdog. That’s because even when you ask, insurers are likely to provide a vague explanation that doesn’t indicate necessarily that price optimization is to blame, Hunter says. The best way to avoid price optimization is call your insurer every 2 years to let them know that you’re shopping for a better rate. Even if your insurer or any other insurer can’t give you a better deal, such shopping will prevent your insurer from using price optimization to jack up your rate, Hunter says.

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PLUG-IN POLICY. Unlike price optimization, insurers are eager to tell you about their vehicle-monitoring devices. The free devices plug into your vehicle’s telematics system and allow insurers to determine whether you qualify for safe-driver discounts that are based on your driving habits. The average discount is 10 percent. Seventy percent of automobile-insurance companies in North America use vehicle-monitoring devices, according to the latest data that we found at press time—a 2012 study by Strategy Meets Action, which is a research company that works with insurers.

Why are insurers so eager to implement vehicle-monitoring devices that have the potential to reduce premiums? For starters, insurers believe that it’s a way to attract low-risk drivers, which is appealing to insurers, because such drivers are likely to decrease the amount that an insurer pays out in claims. However, you should know that insurers also are eager to sell to customers add-on programs that work with vehicle-monitoring devices and help insurers to recoup the money that they lose on discounts that they give to the drivers who use the devices.

For example, State Farm offers an In-Drive Co-Pilot program for $9.99 per month that has features that can give you real-time checks of where your teenage child is when he/she takes your vehicle and how fast that he/she drives. State Farm’s In-Drive Connect program (free for the first year, $6.99 each year after) provides stolen-vehicle assistance and vehicle diagnostics, so if, say, your check-engine light comes on, the insurance company can identify and share repair codes. As a result, In-Drive Connect has the potential to save you a costly trip to the repair shop to have repair codes read, but we also found at least three automobile-parts chain retailers that offer the same repair-code service free.

Independent experts believe that insurers will begin to charge higher premiums to drivers whose vehicle-monitoring device indicates that they’re more likely to have an accident based on collected data. In the September 2013 issue of Forbes magazine, Progressive said that as soon as 2014, it would increase premiums by as much as 10 percent for customers who have vehicle-monitoring devices that report unsafe driving behaviors, such as braking too abruptly, accelerating too quickly or driving during off-peak hours. When we asked Progressive about this, it acknowledged that the company is “evaluating options to charge a fairer price to the small percentage of drivers whose data suggest they represent a higher risk.” We asked Progressive to be more specific, such as what it means by “small percentage,” but the company wouldn’t share additional information. In other words, you’d better watch out.

KEEPING SCORE. In the future, insurers likely will use driving scores to help to determine how much that you’ll pay for an automobile policy.

KEEPING SCORE. In the future, insurers likely will use driving scores to help to determine how much that you’ll pay for an automobile policy.

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In the years ahead, the information that insurers gather via vehicle-monitoring devices could lead to the creation of a so-called driving score that insurers will use to help to predict which drivers present the highest risk, according to Deloitte, which provides insurance-industry consulting as a part of its audit, consulting, financial-advisory, risk-management and tax services. Deloitte says the use of driving scores could happen in as soon as 3 years, and insurers could use the scores to help to determine how much that a driver pays for insurance. It’s apparent to us that drivers who have the best scores will pay the lowest premiums; those who have the worst scores will pay the highest.

“It’s a completely unregulated area,” Rosenfield says. “Once you install the box, you lose control of how the insurance company uses the data. Look at it with trepidation.”

If you feel confident about your ability to drive safely, you could try out the device to make sure that your driving will, in fact, earn you that discount. For example, you can try Progressive’s Snapshot program free for a month and get feedback on your driving habits. If you decide to sign up, all of our experts agree: You should be sure to get in writing precisely what information insurers collect via the device. Such a list will allow you to determine whether the insurer shares your information with third parties for marketing purposes or whether the insurer tracks your location via GPS (the consequences of which we’ll explain later).

GOING MOBILE. Deloitte also says that in 2014, insurers will begin to use apps rather than plug-in devices to monitor your vehicles. The apps are appealing to insurance companies, because they won’t have to spend the $80–$100 each for the monitoring device that plugs into a vehicle, which is a cost savings that likely will trickle down to consumers in the form of decreased premiums, says Deloitte spokesperson John Lucker. Independent analysts couldn’t confirm whether consumers would experience cost savings, because they weren’t familiar with the costs that are associated with such technology.

However, apps that monitor drivers will include accelerometers, GPS capability and movement tracking. Electronic Frontier Foundation lawyer Nate Cardozo cautions against approving these features. His concern is that law enforcement could try to access your location data without a warrant, because you already permitted such data to be collected. Furthermore, insurers hope that you’ll turn on the app and allow it to run all day so they’ll know your location no matter whether you’re in your car, taking the bus or riding your bike, which could be a privacy concern to consumers. Furthermore, an app-based driver monitor would allow insurers to determine which user that they’re measuring, so they’ll know whether it’s you or your teenage child who is more inclined to break the speed limit. As a result, your premium won’t be hiked for your teen’s driving habits, but you likely will pay more for your teen’s policy.

Separately, the 10 largest insurers already offer smartphone apps that help you to file a claim. Most of these apps allow you to store your insurance information, such as your policy number and deductible, start a claim, or submit pictures, video and voice recordings from a crash. However, you should know that even if you use an app to initiate a claim, you still have to take your vehicle to a vehicle repair shop or a claims adjuster to get a full damage assessment.

NO DISCOUNTS. Meanwhile, it’s unclear why insurers appear to be reluctant to give discounts to drivers whose vehicles have features that let the vehicles drive themselves and are designed to make the vehicle safer to drive. Such features include smart cruise control, which adapts the speed of your vehicle so it conforms with the speed of the vehicle that’s in front of you, and sensors that help to warn if you depart your lane inadvertently.

Amy Danise of Insure.com, which is an independent consumer insurance website that publishes news and other information, says insurers are notoriously slow to react to technology. For example, insurers still reduce premiums if you drive a vehicle that has anti-lock brakes, which in 2012 became mandatory on vehicles. When we asked insurers why they don’t provide discounts to drivers whose vehicles have features that let vehicles drive or navigate themselves, none of them gave a specific reason.

Insurers tell us that if you purchase a new or used vehicle that’s shown to be associated with fewer accident claims than are other vehicles, and the vehicle happens to have a feature that lets it drive or navigate itself, then you likely will pay a lower premium. However, independent insurance experts believe that such features play no role in the rate reduction.

Insurers refused to speculate on when they’d begin to provide such discounts. Danise believes that insurers are waiting for data that link the newer features to accident reduction, but it’s unclear when such information might become available. If anti-lock brakes are any indication, it could be a while before insurers give discounts to vehicles that have features that help the vehicle to drive itself. Anti-lock brakes became common by 1985, but it wasn’t until 1994 that states believed that enough data existed to show that ABS could reduce the likelihood of a crash.

Of course, if driverless vehicles come to market—automakers’ earliest projection for such models is 2020—insurers would encounter a new dilemma in which the vehicle might be more liable for a claim than the driver is, Danise says. None of the insurers whom we interviewed is willing to speculate when it might implement plans that account for driverless vehicles. (Consumers Digest will dig deeper into the matter in its May/June 2014 issue in an article that specifically will scrutinize vehicles that drive themselves.)

Nonetheless, we’re quite certain that no matter who’s in the driver’s seat, automobile insurers will want to maintain control.

Freelance writer Jennie Dorris has been a journalist for 11 years. Her stories have appeared in Boston, Entrepreneur and Real Simple magazines.

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