The sneaky way car insurers raise your rates

Car insurance companies charge higher rates if you’re poor, less educated or just plain lazy, two new studies show.

The companies calculate which customers are least likely to shop around after price increases and then slowly bump up their premiums, according to a letter two advocacy organizations sent to insurance commissioners nationwide. And less-educated drivers and those with non-professional, non-managerial jobs, which are often lower-paying, pay almost $1,000 extra in premiums, the New York Public Interest Research Group found.

“It’s clear that some people are being charged more for the exact same coverage, and those people come from low income backgrounds or communities of color. We think that presents a serious problem, possibly a civil rights violation,” says Andrew Morrison, campaigns director at NYPIRG and an author of the study.

Inputting fictional information for a 30-year-old single woman on the websites of four of the five largest auto insurers in New York, the group found that on average, a bank executive with a college degree is quoted at $1,247. A college-educated bank teller is charged $30 more. The rate increases by $200 or more for bank executives, tellers and retail cashiers who only have a high school diploma.

The quotes for this “30-year-old single woman” were taken from January to April, and based on a woman who drives a 2008 Honda Civic 7,500 miles annually and has driven for 14 years. Her home locations were across middle-income areas in New York, including Albany, Queens, Poughkeepsie and Staten Island.

Click to Play

Obamacare: Saving money on your car insurance

Obamacare, the law that could save you 2% or more on car insurance? A study released Wednesday by the Rand Corporation finds that as more people gain health insurance, the costs of other types of insurance could go down. Jonnelle Marte reports. Photo: Getty.

Progressive gave the fictitious high school-educated retail cashier and bank teller quotes of $5,021 annually, $916 more than a woman with the same driving patterns who was a college-educated bank teller. Geico asked the less educated retail cashier to pay an average of 41% more than the college-educated bank executive. Progressive uses “many different rating factors, which sometimes include non-driving factors that have been proven to be predictive of a person’s likelihood of having a claim,” spokesman Jeff Sibel said in an email. Geico did not return requests for comment.

Advocates also say auto insurance companies are creeping up rates for consumers they deem less likely to shop around — a factor that isn’t associated with their level of risk. That makes a customer who has stuck around with the same insurance provider for years, despite rate hikes, more likely to see continued price increases.

“They’re maximizing profit by figuring out, how high can a rate go, prior to too many people leaving to make it not profitable,” says J. Robert Hunter, director of insurance at the Consumer Federation of America.

Sixty-three percent of auto insurance companies in the U.S. and Canada employ the practice called “price optimization” or plan to do so in the future, according to a survey of 73 representatives by Earnix, a company that runs a pricing analytics software.

“You can’t just charge people willy-nilly for certain things just because that’s what the market will bear,” says Birny Birnbaum, executive director of the Austin-based Center for Economic Justice and a former associate commissioner at the Texas Department of Insurance. “Price optimization is really just a fancy term for price gouging.”

The two consumer groups sent a letter to the National Association of Insurance Commissioners, urging them to ban the practice. The NAIC declined to comment for this story.

That letter calls out Earnix, the software company, for helping insurers set rates based on a consumer’s sensitivity to price changes. Meryl Golden, general manager of the company’s North America operations, said in an interview that insurers commonly make judgments on how customers will respond to rate changes and the company’s software offers an analytical, data-based tool to help reach those decisions.

“Every company is responsible for setting their prices and they make the decision of what their business goals are,” she says.

The insurance industry is seeing a “technical evolution” in pricing methods as data mining becomes the norm, and “responsible use of these techniques that imposes higher prices on truly risky behavior should be permitted,” according to a December 2013 report by the Treasury Department’s Federal Insurance Office.

“However, simply because data may be available regarding consumers does not mean that any data is relevant to determining the insurance premium they should pay,” the report reads.