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An auto insurance loyalty tax?

By Jay MacDonald ·
Friday, May 16, 2014
Posted: 6 am ET

Auto insurance companies were quick to recognize the marketing advantages of offering a rate discount to drivers who agree to let them take a remote peek at their driving habits via onboard wireless monitoring gadg© Syda Productions/Shutterstock.comets.

But it turns out that some insurers may be steering rates the other way on certain customers by using a high-tech data-mining tool to identify policyholders who are disinclined to switch carriers, then charging them more.

The practice is called "price optimization," and the Consumer Federation of America (CFA) and other consumer groups want it stopped.

Sneaky discrimination?

Price optimization became the cause célèbre at the National Association of Insurance Commissioners' annual conference in Orlando, Florida, recently after CFA and the Center for Economic Justice notified the insurance commissioners' auto study group that insurers were engaging in the practice behind the regulators' backs.

The letter was in response to a St. Patrick's Day presentation to the auto study group by Earnix, the data-mining company at the center of the price optimization kerfuffle. CFA claims Earnix deliberately misled the regulators by implying that its services fell within the parameters of acceptable underwriting practices.

CFA calls price optimization discriminatory because it can result in drivers with the same risk profile being charged different rates -- a violation of insurance practices in all states. It also tends to penalize policyholders based on where they live, the insurance options available to them, and their perceived financial literacy.

Advocates see 'strategy to overcharge'

"(Price optimization) is a new strategy to overcharge Americans who have to buy auto and home insurance policies," says Bob Hunter, CFA insurance director and former Texas insurance commissioner.

"Despite the feigned innocence of the software developers and insurance executives behind these products, the tool is nothing less than an end-run around critical consumer protection rules that are needed to ensure fair pricing of insurance products," Hunter says.

Birny Birnbaum, executive director of the Center for Economic Justice, concurs. He calls price optimization "the latest effort by insurers to mine personal consumer information and to evade state consumer protection laws prohibiting unfair discrimination in insurance pricing."

'Nothing nefarious,' say insurers

Poppycock, counters Robert Hartwig, president of the Insurance Information Institute, an industry trade group.

He says when setting rates, auto insurers are given leeway to consider any number of factors besides driving history, including but not limited to bill-payment history. The Earnix tool simply provides additional food for thought, as Hartwig sees it. And besides, market competition is quick to punish insurers who raise rates capriciously.

"There's nothing nefarious about it," he told The Palm Beach Post in Florida.

What's your take? Should price optimization be given a red or green light?

Here's how Progressive's Snapshot driver monitoring program hit some rough road.

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