Does It Pay To Be a Loyal Car Insurance Customer?
Last Updated on March 28, 2024
You’ve heard of loyalty programs. Airlines reward customers with free miles when they fly the same airline over and over again. Coffee shops offer a 10-punch card for a free cup of coffee. As a matter of fact, most companies are actively trying to improve customer loyalty and get them to stay with the brand. But what about car insurance companies? What kind of loyalty programs do they offer customers who have stuck with them for years or sometimes even decades? The truth might shock you.
Key Takeaways:
- Insurance companies often raise rates for loyal customers through “price optimization,” prioritizing profit over loyalty.
- Despite access to detailed consumer behavior data, insurers may use this information to justify rate increases rather than rewarding loyalty.
- Legal and regulatory perspectives on these practices vary, with some viewing them as legitimate differentiation based on risk, while others criticize them as unfair.
Insurance Companies Raise Rates for Loyal Customers
Yes, that’s correct. In the car insurance business, raising a customer’s monthly or yearly premium is common because of a little caveat called price optimization. Experts say that this is just one way that insurance companies pad their bottom line—they consider it a good corporate strategy.
A customer might get a good rate from their insurance company. Maybe they got a multi-car discount or some other beneficial price cut that made them go with that particular company. They might happily pay that premium each month or year until they check the mail one day and find out their rates are increasing. These aren’t insignificant increases either. Sometimes, these price optimizations can mean an increase of a hundred dollars a year or more.
Even if a driver has no history of bad driving and no accidents, the rates can still increase without warning. The insurance company tries to offset the sting of the rate increase by offering the customer a discount for “loyalty.” However, the discount might be 5-10% while the rate increase is closer to 25%.
If your insurance company does this to you, your recourse is simple, say financial experts. Find another insurance company that will give you the rate you are used to. If the company you are with doesn’t care about keeping your business, and another company is willing to give you a better deal, you owe the first company no loyalty.
Rob Hunter of the C.F.A. says it’s not price optimization, even though it hides behind that friendlier name. “It’s really profit maximization,” says Hunter. “They have all the information on what you buy at your grocery store. How many apples, how many beers, how many steaks,” he says. “They have all the information on your house. They have incredible amounts of information on are you staying with DirecTV when Verizon is cheaper.”
Do Insurance Companies Offer Loyalty Programs?
Most insurance companies, except for a few like Progressive, do not offer loyalty programs.
Progressive offers a loyalty program with several levels, rewarding customers based on the duration of their continuous insurance coverage, starting from 6 months up to 20 years. Benefits include discounts, accident forgiveness (both small and large), teen driver discounts, VIP customer service, and lifetime insurance renewals at the highest tier. Additionally, Progressive provides other discounts such as multi-policy, multi-car, and good student discounts.
Other major insurers, such as Allstate, State Farm, and GEICO, do not currently offer loyalty programs.
How Are Your Rates Set?
Insurance companies don’t just rely on general information or trends. They actually gather information on you that is available, having been collected by other companies who have sold it. For example, if you have a grocery store rewards card that allows you to buy things at a lower price, everything you buy, how often you buy it, and everything else, all exist in a computer database somewhere.
Insurance companies can buy information and software that can give them information on customers and all kinds of help in deciding whether they can raise rates. That’s why they do it. They have already crunched the numbers and know that they will make more money than they lose by raising the premiums.
Insurance companies have access to complex algorithms that organize and decipher data gathered from a variety of sources to determine how a consumer will react to specific actions. So, insurance companies know how many of their customers will accept the rate hike without question and how many will decide to find another insurance company that will give them a decent rate. If they still make a profit based on the data, they raise the rates.
Is This Legal?
So, is what these insurance companies doing legal? There are a lot of considerations, and some practices are so new officials haven’t had time to evaluate them properly yet. “As regulators, we’re not always on the cutting edge of these changes in modeling and rate-making practices, so we have to catch up sometimes,” Chief Actuary of the Louisiana Department of Insurance, Bob Piazza, explains. However, what that amounts to is that one person might have a 25% increase over another with the same basic risk factors. The only difference is that the insurance company knew they wouldn’t protest if their rates were raised.
But Bob Piazza says that what insurance companies are doing may not be wrong. He says that there are legitimate reasons that insurance companies will raise rates on one person and not another. Each person is different, and they must be evaluated one at a time by insurance companies. “Insurance pricing rating is discriminatory,” Piazza affirms. “It always has been.”
But not everyone takes the same line. Joel Launcher is a deputy commissioner in California in the area of rate regulations. He says while there are legitimate reasons for varied rates, how you shop and how loyal you are to companies that you are already working with shouldn’t be listed among them. Launcher says the companies know what they are doing is wrong because even if they use that information, they aren’t admitting it. “Unlike the other things, which are based on losses — loss data — this one isn’t,” Launcher says.
However, California is taking steps to ensure that insurance companies know that the behavior isn’t right and that regulators have a problem with it. Launcher says that companies will claim they aren’t using that data to set rates. Still, even if they have been, hopefully, they will stop once they see that officials know about the data sources and what the companies do with the information.
So, how do you know if your company will treat you correctly? How do you know when you’re a victim of ‘price optimization’? That could be difficult to figure out, so you’ll have to decide if staying with your company is worth the extra money.
