Many auto insurance companies are raising rates on loyal customers who don’t shop around for better rates, even if they have a perfect driving record.
Inertia, it turns out, can be expensive.
That’s the conclusion of the Consumer Federation of America, which recently issued a warning against what it calls a “new auto insurer pricing scheme.” Insurance companies are using a practice called “price optimization,” or “PO,” to use personal consumer data and statistical models to measure how likely each customer is to shop around and how much of a price increase they’ll tolerate.
People who may be vulnerable to price increases do such things as staying with one insurer for many years, never calling the company with complaints, or buying insurance through an agent rather than online. A customer who doesn’t shop online for auto insurance, for example, can see their rates rise higher than the 5-10% discount they’ll get for being a loyal customer.
“If two people have the same risk and have different prices — that is the classic definition of unfair discrimination and is illegal in every state,” says Robert Hunter, director of insurance at CFA.
Point of no return
The PO software can measure the expected payment amount when a customer is likely to leave, and how unlikely they are to leave if they’ve been a longtime customer, Hunter says. Using PO can add a 35% profit from a customer, he says.
Many insurance companies, including about half of the larger ones, raise a driver’s premium if they conclude the driver isn’t likely to leave their company, according to the CFA. Millions of drivers are possibly being charge a premium that’s higher than the amount considered appropriate and fair for their risk profile, the CFA says.
Most customers are tolerant, to a degree, says Tim Glowa, co-founder of Bug Insights and a marketing analytics and human resources consultant. “But there is a limit to price changes,” Glowa says.
“One of the biggest mistakes any organization can make is to think of customers as being captive and loyal, especially in the absence of price as a contributing factor,” he says. “They might be inert, but that is not the same as being loyal.”
Even if you consider yourself a loyal user of a product, there’s always something that could be done to get you to switch to a competitor, Glowa says. It can be a mistake — such as raising prices, dropping product features or lowering customer service standards. Or it can be something that a competing company does, such as lowering prices, improving product features or improving customer service.
“But this is an overlooked, universal truth — customer loyalty is a fallacy,” he says. “There is always something that could be done to get a sticky customer to move.”
An airline, for example, could attract customers from a competitor by improving service and offering fares that are 50% lower.
To raise fees on inert customers, insurance companies can do better than studying how much of a price increase will get them to move, Glowa says. Instead, optimize the entire product.
His company’s research suggests that 10-20% of a product’s costs are “wasted” by giving customers things they don’t value or appreciate. Few product features have a perceived value that’s equal to the cost of delivering. A better method, Glowa says, is to identify features that are relatively inexpensive to deliver, yet produce a disproportionate amount of value to customers. Then, a price increase is easier to swallow when product value is increased.
What consumers can do
Shopping around is the first, and possibly the best, thing that consumers can do to avoid being PO’d. Twenty-four percent of drivers never shop for auto insurance, 34% rarely shop and 16% only shop every few years, the CFA found. That adds up to about three-quarters of policyholders being “sitting ducks” for PO.
CFA found one policyholder who shopped recently after having some large premium increases over several years, with the 2012 renewal offer for about $700 for six months of coverage. The person shopped around and got an offer from another insurer for just under $550. The quote was shared with the original insurer and the $700 quote was dropped to under $500.
While shopping online is good idea, shoppers should be aware that online price quotes can lead to high commissions, and not all of the good insurance companies may offer quotes online, Hunter says.
Longtime customers should also call their insurer and ask if they’re being PO’d, or at least tell them of lower prices they’ve found elsewhere.
“The better way to get a straight answer is to tell them you’ve shopped around and see what happens,” Hunter says.