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Insurance companies explore higher prices for loyal customers

Copyright © 2015 Albuquerque Journal

Think your good driving record and years of loyalty to your car insurance company will get you better rates?

Maybe not.

Some insurance companies nationwide have a new method of calculating rates known as “price optimization” that uses statistical modeling to predict how likely a customer is to stick with what they’ve always done and keep renewing their policy, even if the price increases.

New Mexico Insurance Superintendent John Franchini this week said he intended to reject insurer Allstate’s recent rate filing with the state, based on an analysis of the filing.

“We asked them not to underwrite people on the basis that they probably won’t look at another price. There’s a whole bunch of people that they’ve picked out that they know they can raise their rates and they probably won’t be worried,” Franchini said.

Franchini said he is asking the company to change that aspect of the filing and refile.

“They’re not violating state law, or any rules or regulations or statutes,” Franchini said, “They just need to come back and show us how it’s going to work actuarily, and why they want to use it and that it is not going to be a detriment to the policy holder.”

The practice has come under fire from a national consumer group, the Consumer Federation of America, which has written to Franchini and insurance regulators in other states, claiming Allstate is using price optimization to discriminate against long-time customers based on whether they are more or less likely to leave the insurer if the price goes up.

“We are convinced that the filing produces unfairly discriminatory prices,” the Consumer Federation’s April 8 letter to Franchini said.

Franchini said he was aware of the concerns before he received the letter.

Price optimization is now used by 45 percent of large insurance companies in North America, according to a 2013 survey by customer analytics software company Earnix.

Allstate would not directly respond to the consumer group’s allegations or say whether it uses price optimization in calculating rates.

An Allstate spokeswoman provided a statement that said, “Allstate helps our customers get the best product at the right price. Our local agencies know our customers and work with them to get the most for their hard-earned money.”

The statement also said Allstate’s pricing is determined by risk and costs, so lower-risk drivers pay less than higher-risk drivers.

“We use information such as driving safety record, amount and location of driving, type of vehicle and individual behaviors to provide our customers with accurate and competitive rates,” the statement said.

A task force of the National Association of Insurance Commissioners has looked into the pricing practice. It released a report last month that said price optimization has been used in the retail and travel industries for several years, but has only recently been adopted in the insurance industry.

The report said the new mathematical predictive modeling differed from traditional loss-based rate calculation criteria by enabling companies to analyze how customers respond to demand for goods and services in relationship to prices. For example, price optimization software enables a company to take into account data such as a customer’s Internet enquiries and offers they have rejected.

The report said some state insurance regulators were concerned that the shift from “loss-based ratemaking principles” might conflict with state laws that require rates not to be excessive and unfairly discriminatory.

It said regulators in Maryland, Ohio and California have told insurers to stop using price optimization practices.