Wednesday, August 26, 2015

Consumer Reports on auto insurance, part III

(This is part III.  Part I is here; part II is here.)


As part of its auto insurance research, Consumer Reports says they "analyzed more than 2 billion car insurance price quotes."  

That number seems reasonable. CR looked at all 33,419 general US ZIP codes. Multiply that by the 20 demographic groups they considered, then up to 19 different insurance companies per state, and you're up to about 10 million. That leaves around 200 different combinations of variations for each (credit rating, accident history, speeding tickets, etc).

In practical terms, how do you arrange to get two billion quotes? Even if you can get 20 at a time from a website, typing in all that information would take forever. Even at one quote per second, two billion quotes would take 63 years. Or, just one year, if CR had 63 staffers doing the work.

Well, it's much easier than that. CR reports that in most states, insurers have to file their mathematical pricing formulas -- their actuarial trade secrets, by the sound of it -- with state regulators. A private company, Quadrant Information Services, has access to all those formulas, somehow, and sells its services to clients like CR. So, two billion quotes was probably just a matter of contracting with Quadrant, who would just query its database and send along the results.

I always wondered how Progressive was able to get competitors' quotes, in real time, to compare alongside their own. Now I know.


CR says those quotes are the real deal, the actual prices policyholders pay:

"Under the state laws that regulate automobile insurance, carriers are required to adhere to the prices generated by their public rate filings. So the premiums we obtained from Quadrant are what each company legally obligates itself to charge consumers."

But ... I'm skeptical. If those quotes are really the actual premiums paid, that would have to contradict some of the issues CR raises elsewhere in the article.

For instance, one thing they're upset about is that some companies practice "price optimization." That's a euphemism for, jacking up the price for certain customers, the ones the company thinks won't complain. For instance, CR says, some insurers might bump your premium if "you're sticking with Verizon FIOS when DirectTV [sic] might be cheaper."

Except ... how can that be possible, if it's all done by formula? When you ask Progressive for quotes, they don't ask you who your TV provider is (or how many iPhones or beers you've purchased, which are other criteria CR mentions). 

Second, CR mentions that each insurer creates their own proprietary credit score, "very different from the FICO score you might be familiar with."  But, again, the formulas can't be taking that into account, can they? CR requested premiums for "poor," "good," and "excellent" credit scores ... but how would they know which was which, without knowing each insurer's proprietary formula?

Third, and also in the context of price optimization, they advise,

"... don't be shy about complaining a little more [to show you're not a pushover for next time]."

But if those formula prices are fixed and non-negotiable, how will complaining help? Unless "number of times having complained" is in the formulas filed with regulators.  


So, it doesn't make sense that the entire pricing system is encapsulated in the online (or Quantum) pricing formulas.

So, what's actually going on? 

Maybe what's happening is that the companies aren't obligated to charge EXACTLY those formula prices -- maybe they're obligated to charge those prices OR LESS. 

Kind of like those prices you see on the back of your hotel room door, the maximum that room would ever go for, like (I imagine) Cooperstown on induction weekend. Or, they're like the MSRP on cars, where you can negotiate down from there. Or, maybe they're like car repair estimates, where, if they don't know for sure how much it will cost, they give you the worst-case scenario, because they can lower their estimate much easier than they can raise it.

If that's what's going on, that would easily and plausibly explain the pricing anomalies that CR found.

Take, for instance, the one that surprised me most -- the finding that some companies discriminate against long-term customers. As CR puts it, "some insurers salute your allegiance with a price hike." 

In the state of Washington, the article says, almost half the insurers surveyed didn't offer any discount at all to customers who had been with them for at least 15 years. That doesn't sound right, but, get this: not only did Geico not offer a discount, they actually charged their loyal customers MORE: almost $700 more, according to the article.

That smells a bit fishy to me.  But here's one that smells ... well, I don't have a good metaphor.  Maybe, like a rotting pile of fish carcasses in your driveway?

"Geico Casualty gave us whiplash with its $3,267 loyalty penalty in New Jersey and its $888 discount just across the state line in New York for longtime customers."

Well, that's just not possible, right? Overcharging loyal New Jersey customers THREE THOUSAND DOLLARS A YEAR? That would triple the typical price, wouldn't it? 

When CR came up with that result, didn't any of their staff think, "WTF, can that really be true?" At Consumer Reports, they must have some weird priors. I know they think insurance companies are out to gouge consumers for everything they can, but ... this is too big to make any sense at all, even under CR's own assumptions. 


I'd wager that those particular automated quotes aren't at all representative of what those particular customers actually pay. 

Insurance companies don't ask their long-term policyholders to go online and renew anonymously. They send renewal quotes directly. Which they have to, if premiums are tailored for characteristics that aren't used in online applications, like those details from the customer's credit record, like beer purchases.

What CR found could just be a Geico company practice, of not bothering to produce competitive "formula" quotes for established customers who won't be using them anyway. 

I don't know if that's actually the right answer, but, whatever the true explanation is ... well, I'd bet a lot of money that if the magazine surveyed real long-term Geico policyholders in New Jersey, and asked about their premiums, CR would find that "loyalty penalty" doesn't actually exist.  Or at least, not at anything within an order of magnitude of $3,267.

I might be wrong. Feel free to tell me what I'm missing.

(to be continued)

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At Thursday, August 27, 2015 12:03:00 AM, Anonymous Tangotiger said...

I happen to be a long-time Geico customer, and I happen to live in NJ. We've also had the same two cars for the last six years, living in the same house, and working for the same company. The only thing that has changed is that the value of my cars would naturally go down.

My premiums have gone up... I'll guess... about 3% per year.

I don't know how much it should go down for depreciation of car. I don't know how much it should go up based on inflation. I don't know the effect of competition.

I *think* it should go down 5% per year based on the data above. So, it's possible that Geico charges me an 8% penalty for being too lazy to shop around.

At Thursday, August 27, 2015 12:28:00 AM, Blogger Phil Birnbaum said...

Sure, 8% is plausible. Your annual premium isn't $40,000, is it? :)

I'm with the Co-Operators. I've been with them 20 years. My premium seems to jump around a bit, but stays roughly level.

They break down the price by coverage. My collision portion has gone from $113 in 2011, to $107, to $111, to $118. (That's for six months.) Of course, my car is depreciating over time (it's a 2008). But, it doesn't seem unreasonable -- most claims don't wind up totalling the car, and repair costs rise with inflation.

Liability has gone from $119 to $137.

Last week, after I started writing this stuff, I went online to look for quotes. They're all around the price I'm paying ... my actual premium is close to the lowest, I think. Except that my company is telling me my price includes a (six month) discount of $184, without which it would be the highest!

At Thursday, August 27, 2015 12:42:00 AM, Blogger Phil Birnbaum said...


Have you considered going to Geico (or others) to get a quote and compare?

At Thursday, August 27, 2015 11:55:00 AM, Blogger Willy Wonka said...


Love the site - is there an RSS feed?


At Thursday, August 27, 2015 12:04:00 PM, Blogger Phil Birnbaum said...

Jeff, does this work?

At Thursday, August 27, 2015 1:44:00 PM, Blogger Willy Wonka said...

Awesome - thx so much!

At Sunday, August 30, 2015 3:54:00 AM, Anonymous Anonymous said...


> "Except that my company is telling me my price includes a (six month) discount of $184, without which it would be the highest!"

6-month discount, as in you pay 6 months at a time? I wouldn't be surprised if every other quote you got included that as well.


Your vehicle's value has a lot less to do with your premiums than most people think- it's basically negligible in my experience as a broker. Medical bills (costs are raising a ton), repairs (price of labor and especially materials in some areas are going up), inflation, labor costs, crime rates, etc. are some other factors. Maybe hurricane Katrina wiped out enough of their cash supply that they had to raise prices across the entire US to keep afloat. Or they raised rates on people with red cars and you just happen to have a red car. Or they don't want to do business in your state anymore (EG Kemper pulled out of Arizona recently, they couldn't turn a profit in that state). Etc. etc. etc.

Personally I expect my insurance bill to go up every year, like any other bill. 3% a year sounds pretty good- mine went up ~13% last year, and I turned 26 in the meantime (young driver cutoff is 25)!


I've noticed lots of people complain about a huge rate hike after their first year with a new company- they always forget that they had a "switch to us and get 10% off your first year!" discount that, well, ends after a year.


At Tuesday, December 22, 2015 4:22:00 AM, Blogger ericaclayton said...

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At Friday, April 08, 2016 1:54:00 AM, Blogger Van said...

I'm glad I cam across your blog. I find this your articles very fascinating.

I did want to comment, however, on the way that loyal consumers *are* treated. I recently was auto-charge for a renewal of my anti-virus software by a very recognizable company. I was very angry that they charged my credit card without my permission. They suggested that it was in the (small print?) agreement I made when I accepted it. (I don't believe that to be true.) I insisted that they removed the $75.00 charge immediately, which they agreed to do --but they did offer me a price of about $50 to get the same protection. I declined, because I was still fuming over there charging me for a renewal I hadn't authorized.

So then I went ahead and began my search for a replacement. Guess what...I ended up purchasing a new replacement from the same company for $25.00. So I didn't even need to change companies.

I could keep you board for weeks (weel, at least days) with examples of how companies do not treat their loyal customers the same as new ones. I believe that is there prerogative; they may be selling to their new customers at a loss in order to get new (renewal) business. But I also believe in my prerogative to vote with my feet. This is how competition works.

Thanks for a good series of articles!

At Wednesday, May 04, 2016 3:12:00 AM, Blogger Unknown said...

Interesting explanations here - basically it is the company saying that they don't mind taking a smaller cut in comparison to other companies? And if that's the case, then what's stopping us from buying car insurance with them?


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