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Price optimization: The high cost of being loyal to your own insurance company

July 19, 2016 by Steven M. Gursten

House Bill 5735 proposes banning ‘price optimization’ to stop auto insurers from raising prices on consumers who won’t shop around


Are you a loyal customer to your insurance company? Did you know your loyalty is being abused, and could be costing you money?

Here’s an ugly truth about auto insurance companies. Rather than being rewarded with perks, special offers, discounts or especially reduced auto insurance rates, your auto insurer may be doing the exact opposite and charging you higher prices.

Why? Because your car insurance company believes they’ve “got” you – they believe it’s unlikely you’ll comparison-shop and, thus, it’s unlikely you’ll leave your current insurer for one that might offer you a better rate for car insurance.

This pricing strategy is known within the insurance industry by the misleading euphemism of price optimization.

Thankfully, several Michigan lawmakers have had enough and want to prohibit car insurers in the state from using this scheme to gouge consumers.

Stopping ‘price optimization’ in Michigan – and stopping auto insurers from gouging consumers

In House Bill 5735, these lawmakers propose to extend the Insurance Code’s existing prohibition on “discriminatory” auto insurance prices to specify:

  • “A rate is unfairly discriminatory as to the premium charged to the risk if the rate is established through or impacted by price optimization”; and,
  • “An insurer shall not establish its underwriting rules through price optimization …”

As an insurance attorney who’s done battle with the auto No Fault insurance companies for years over efforts to boost profits on the backs of injured car accident victims with unpaid No Fault medical bills and wage loss and attendant care, I’m sadly not at all surprised by the “price optimization” scam.

HB 5735 is a much-needed consumer-protection bill. I hope that our lawmakers will take it seriously, especially those lawmakers who consistently profess their sympathy for car insurance consumers in exchange for generous campaign contributions while simultaneously promising these insurance companies that they are trying to gut the Michigan No Fault law of its essential PIP benefits and protections for accident victims.

What will a ban on ‘price optimization’ prohibit?

Significantly, HB 5735 defines “price optimization” as “establishing [auto insurance] rates or varying premiums at any time based on factors that are unrelated to risk of loss, including, but not limited to, any of the following”:

  • “[C]harging each insured the highest price that the market will bear”;
  • “[C]onsidering the likelihood that the insured will engage in activities that result in insurance policy turnover” such as “shopping with other insurers for a lower premium,” “canceling a policy before the expiration of the policy term,” “failing to renew a policy at the renewal of the policy term” and/or “complaining to the insurer or the insurer’s agent or representative”;
  • “[E]stimating the willingness of the insured to pay a higher premium compared to other insureds”; and/or,
  • “[U]sing any measure of a consumer’s or group of consumers’ price elasticity of demand.”

In my blog post, “Have you been PO’d by your Michigan auto insurance company?,” I talked about this disgraceful scheme which the Consumer Federation of America (CFA) has described as:

“The name insurers use for this dishonest practice is ‘price optimization,’ referred to as ‘PO’ by the insurers. The industry uses personal consumer data and statistical models to measure how likely each customer is to shop around and how much of a price increase he or she will tolerate. … After determining what economists call the ‘price elasticity of demand,’ insurers push up premiums based on how unlikely it is that a customer will shop around for a better price, even if the driver has never caused an accident or been issued a ticket.”

When will Michigan join other states in prohibiting price gouging of consumers by insurers?

Sadly, as is frequently the case, Michigan is behind the curve when it comes to enacting laws and rules to protect car insurance consumers from price gouging and other forms of misuse and abuse by auto insurers.

In a May 2016, press release, the CFA applauded the fact that there are 19 states that have banned “price optimization” as “violat[ing] state insurance statutes that require cost-based pricing and prohibit unfair discrimination in setting insurance premiums …”

Of course, this begs the question: When is Michigan going to get on board and take the issue of car-insurance consumer protection seriously?

The CFA’s press release goes on to articulate and clarify the reasons why this area of consumer protection needs legislative attention in Michigan:

“Price optimization aims to determine how much insurers can increase rates for each individual customer beyond what is appropriate based on his or her risk profile. … [P]rice optimization marks a radical departure from the actuarial practice of pricing insurance premiums according to the risk of loss posed by the policyholder. The purpose of price optimization is to extract as much profit as possible from policyholders who are often required to purchase insurance policies. … ‘Price optimization by insurers is Big Data run amok and simply price gouging by a fancy name.’”


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