The good hands people might not be that good after all. The Consumer Federation of America, or CFA, is alleging that Allstate (NYSE: ALL) used a complex “price optimization” scheme to jack up prices for those unwilling to shop for insurance.
The CFA alleges that documents filed with the Wisconsin Department of Insurance detailed the scheme. It worked like this:
- Customers were evaluated by a new factor called marketplace considerations. That’s a fancy term for measuring the customers’ likelihood of switching insurance providers; those not likely to shop around got charged more.
- The insurance giant allegedly created tables dividing 100,000 Allstate customers in Wisconsin into microsegments that enabled it to tailor insurance rates for each customer. That allowed it to offer discounts of as much as 90% to those thinking of dumping Allstate and jacking up rates for loyal customers by as much as 800%.
- Microsegment criteria included customers’ birth dates. The CFA estimated that under the criteria it uncovered, a man born on Jan. 12, 1968, would pay 29.5% more than a man born on April 9, 1968, even though they had identical driving records and lived in the same town.
- Other documents showed that 99% of Allstate’s customers in Pennsylvania were actually analyzed to see how likely they would be to pay excessive rates for insurance.
“Allstate’s insurance pricing has become untethered from the rules of risk-based premiums and from the rule of law,” J. Robert Hunter, the CFA’s Director of Insurance charged in a press release. Hunter thinks that price optimization is illegal but that Allstate is using the practice.
Colorado, Arizona, Illinois, Idaho, Nebraska, Oregon, Oklahoma, Pennsylvania, Utah, Tennessee, Virginia, Iowa, Louisiana, and Maryland are among the states where the practice could be in use. The practice could violate laws that prohibit insurance companies from using non-risk factors to set insurance rates.
Once again it looks like that that are not willing to shop for auto insurance are getting penalized and perhaps taken to the cleaners by insurance companies. Perhaps the worst part about this scheme is that average people could easily avoid it by shopping for auto insurance.
The bottom line is don’t believe what your insurance company or insurance agent says about car insurance. Do your own research and shop around to see what you should really be paying, and don’t settle until an insurance company offers you a realistic price.
The CFA is also alleging that other insurance companies have adopted “price optimization” for auto insurance but did not name any companies. It is likely that this practice is more widespread than we thought and that Allstate was the first company caught doing it.
Hopefully the CFA’s investigation will put pressure on regulators to crack down on this practice and order auto insurance companies not to use price optimization. If regulators are not willing to act, then drivers need to be willing to send insurers a message with their money. If customers stop doing business with insurers that use price optimization, the insurance industry will get the message and end this despicable practice.