You might think that being a loyal customer of an insurance company would get you a lower price, and that used to be true. But more and more companies have turned that practice on its head and now charge premiums based on their assessment of how likely you are to shop around.
Insurance companies have, in recent years, developed formulas for guessing how individual customers will react to premium changes. If all that data out there about your personal shopping habits leads a company to believe you might jump ship at the sight of a rate hike, they'll hold the line on prices. But if you've stuck with your company for a long time, watch out. You may see your price rise by 20 percent or more for lack of shopping. (This unannounced surcharge for not shopping quickly eclipses the 5 percent "loyalty discount" the company promises you for sticking with them.)
How do they gauge your shopping habits? The insurers use models to measure consumers' propensity to shop — what economists call "price elasticity" — and look at each specific insurance policyholder through what they call "micro-segmentation." This is where it gets really creepy. Insurance companies are compiling a dossier on you to determine exactly how much of a price hike you will accept. They may look at your age, education, gender, social lifestyle, political leanings, affluence and more. Some models use your Twitter or Facebook information to categorize you as "Active" or an "Influencer." They might look at your charitable activity as well as your mobile app usage. Segmentation algorithms can ask: How much is your home worth? What's your net worth? How much do you spend on alcohol, dining, travel?
To be sure, other industries have already been using this data and using similar pricing approaches, but insurance is different.
First, insurance is far more like a public utility than a discretionary item since all states but New Hampshire require drivers to buy auto insurance, and lenders also require auto insurance and homeowners insurance. Secondly, the whole idea of insurance is to spread risk among many policyholders. The way that is supposed to be done is through an assessment of how much risk each policyholder brings to the pool, and then policies are priced accordingly. If you are more likely to cause a loss (say, for example, you've had three accidents in two years) you pay more; if you have a perfect driving record you pay less.
These new insurance rating schemes, which result in people with the same insurance risk profile paying different prices because of their shopping habits, create classic unfair discrimination, which is illegal in every state. Further, these models push the price above the price that would be charged if the models were not applied. The pre-model price is called the risk-based price, since it is based solely on the costs associated with insuring that policy. Prices above that are "excessive," which is also illegal in every state.
These new systems are an attack on all consumers who have a right to expect that the insurance they are required to buy is being priced fairly, and they particularly disadvantage the poor, who, research shows, have fewer opportunities to shop and tend to shop less than other groups for insurance. The only thing standing between the public and this dubious practice is our system of state regulators of insurance.
The good news for Marylanders is that outgoing Insurance Commissioner Therese Goldsmith ordered insurers in Maryland to stop using this practice, called "price optimization" by the data miners and consultants who push this new rating scheme. incoming Commissioner Al Redmer has not weighed in on the issue, but residents can hope (and should demand) that he side with customers on this. Similarly, commissioners around the country should take heed of this disturbing trend in the insurance industry and follow Maryland's lead.
J. Robert Hunter is director of insurance of the Consumer Federation of America, and a former Texas insurance commissioner and federal insurance administrator. His email is loonlakeme@aol.com.