Insurance companies have been gathering data for a long time. This allows the company to assess the risk of insuring a certain individual. However, in the age of big data, things have gotten a bit out of control according to some critics.
We have long seen insurance companies employing software to evaluate the settlement value of an injury claim. There are certain data points, sometimes referred to as "value drivers" that insurance companies feed into a computer program. Out the other end comes a range of "settlement value." The problem with these programs is that they do not account for that fact that every person, and the injury they suffer is unique. This mechanical approach can and does backfire on the insurance company.
A recent news story exposed insurance companies using algorithms to determine how far they can drive up premiums based on a customer loyalty. In other words, the more loyal the customer is, the more the insurance company can charge for coverage. This is known as "price optimization." Under this system, insurance carriers look at their customers' buying habits, including everything from what you by at the grocery store to your monthly mortgage payment. From this data, an insurance company can determine how loyal you are with your consumer spending. The more you are willing to stay with a particular service provider, the more likely the insurance company is to raise your premium. Some reports show an insurance company raising rates up to 25%, but then applying a "loyal customer" discount after the fact.
Generally, state government agencies regulate the auto insurance industry, and require that rate increases must be tied to increased risk. For example, an insurance company may raise rates for somebody that causes an auto collision, or finds themselves getting lots of speeding tickets. It only makes sense that a bad driver is a greater risk, which justifies a premium hike.
However, insurance regulators frown on insurance companies raising rate simply because its insured will stay on board with the company. Some states have issued notices to insurers asking that they stop using price optimization. Some of the larger insurance companies deny engaging in price optimization, and others have waffled on whether or not they optimize premium rates, and if so, to what extent.
Two class action lawsuits have been filed against insurance carriers, and a national association of state insurance regulators will be meeting to craft a strategy to address "price optimization."
Consumer advocate groups and insurance company trade organizations agree on one thing: if a customer is not happy with his or her auto insurance, they should shop around.