Rate hikes and the “loyalty discount” myth
Allstate quietly announced that auto insurance rates are going up, starting in June 2015. The company claims the price hike is due to an increase in car accidents and resulting accident claims.
In other words, people paying for a service – insurance – are punished when they actually use it.
Meanwhile, Allstate Corp. reported a net income of $2.85 billion dollars in 2014, and a 13% increase in profits for first-quarter 2015.
GEICO, which holds about 10% of the car insurance market, will also reportedly be raising rates this summer.
When insurance prices rise, some consumers are forced to reduce coverage to pay for (legally required) car insurance.
Reducing your insurance bill often means “opting out” of provisions like UM/UIM coverage. Opting out is almost always a bad idea. It may save a few dollars a month, but the minimum insurance policies will rarely cover all your costs from an injury accident.
The rate increase could also hurt anyone who has to make a claim for a car crash in 2015. Even if there are no serious injuries, and minimal property damage, making a claim for just one accident will cost you.
Are you a loyal customer with no accident claims? Your insurance cost could still go up – or you could already be paying more.
How insurance company loyalty could cost you
Your insurance rate is determined by your risk factors. The insurance company uses your age, address, driving history and other things to calculate how likely you are to make a claim on your insurance.
Some insurance companies are also calculating how likely you are to switch to another company.
If you are likely to stay loyal to your insurance company, your rate goes up.
That’s called “price optimization.” It means that two people with the same risk factors – same age, location, driving record– would pay different prices for the same policy.
A long-time policyholder could pay more than a new customer for the exact same policy.
This is classic unfair discrimination and is illegal in every state.”
Consumer Federation of America (CFA) Director of Insurance, J. Robert Hunter
Price optimization is complicated, and it’s very hard to tell if insurance companies are using it. According to NPR, State Farm and Progressive representatives state they do not use price optimization. In December 2014, Nationwide admitted to using this tactic. And Allstate claimed to use price optimization in a federal report.
This illegal practice could affect 60% of auto insurance policyholders. The other 40% are considered likely to switch carriers or at least comparison-shop in any given year.
While your carrier should notify you if your insurance rate goes up, it would be very hard to find out if price optimization affected your policy. Consumer groups recommend comparison-shopping before renewing an automobile insurance policy.