Jeff Gelles: 'Sticky' customers drive auto-insurance rates up

Going with the Flo: Progressive was a leader in nontraditional rate factors.
Going with the Flo: Progressive was a leader in nontraditional rate factors.
Posted: September 16, 2013

Education. Occupation. Credit score. Like it or not, all are factors that at least some auto insurers have come to use in setting premiums, even if they have a questionable role in predicting a driver's performance behind the wheel.

Now, we can add "stickiness" to the list - not the kind that comes from a messy toddler, but the kind businesses covet: a customer's tendency to stick around despite higher prices. And the Consumer Federation of America is crying foul.

In a letter last month to state insurance commissioners, the group's insurance advocate, Bob Hunter, quoted a consultant's report saying that nearly half the largest insurers squeeze higher premiums out of predictably sticky customers through methods known as "price optimization" or "scientific pricing."

In promoting pricing software on its website, the same firm, Earnix Ltd., said that "traditional ratemaking based on risk and cost is no longer sufficient." Earnix says its software can boost insurers' profits by 5 percent.

"This is classic unfair discrimination and is illegal in every state," said Hunter, a former Texas insurance commissioner, who added that less affluent consumers were less likely to shop for alternatives. He said he did not know which insurers used the techniques, but he called them "a rejection of actuarial standards for the sake of increased profits and at the expense of unwitting policyholders."

California's commissioner has labeled the practice "unfairly discriminatory," but it is unclear how other states will respond. A Pennsylvania Insurance Department spokeswoman said regulators had not seen evidence that insurers were using the kinds of techniques Hunter described.

There's no question that auto insurance is increasingly tricky territory for consumers - by all appearances a competitive market, but with prices set by formulas invisible to policyholders. Could cheery spokes-characters like Geico's gecko and Progressive's Flo really have it in for anybody?

Yes, say critics such as Hunter and Eric Poe, chief operating officer of Princeton-based Cure Auto Insurance, which has turned bucking industry trends into a business model - complete with its own mascot, a bouncing, sarcastic blue face.

Whatever you think of their critiques, Hunter and Poe offer useful insights into how auto insurance works, and why varying ratings methods make it crucial for consumers to shop.

Progressive and Geico, for instance, were pioneers in nontraditional rate-setting that veers away from traditional criteria such as age, address, and driving history and toward factors such as credit - one that Hunter said was now used by more than 90 percent of car and home insurers.

Actuarial data are an illustration of the scientific dictum that correlation doesn't equal causation. To insurers, it doesn't matter whether your recent tardiness with bill payments makes you less safe at the wheel. If a factor can be shown to predict insurance losses, it's another way to slice and dice the risk pool, and lure some customers with better deals.

"Any insurance rate, at its core, has to be actuarially justified," says Sam Marshall, president of the Insurance Federation of Pennsylvania, who says new approaches benefit consumers. "Every company doesn't do it the same way - every company doesn't charge the same rates. It's a competitive industry."

Credit Poe's company with helping make it more competitive, by highlighting other insurers' use of non-driving factors and by pushing for more transparency along the way. Cure now counts 50,000 customers in New Jersey and Pennsylvania and can play the same game as other insurers that tout how much new customers save. Last year, Poe said, about 20,350 new customers saved an average of $1,211 by switching to Cure.

The takeaway? It's not that Cure is a better deal for everybody, though it may well be for a careful blue-collar worker with a sterling credit record. It's that it pays for any consumer to shop around. Companies are always looking for an edge, and so should you.

The alternative is being sticky - and being a chump for price optimization.

Contact Jeff Gelles at 215-854-2776,, or @jeffgelles on Twitter. Read his blog at

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