If you haven’t had a car accident or made an insurance claim recently, you probably only think about your car insurance policy for a brief moment once a month, when you send in your check—or even less, with auto payment. But not carefully considering your policy, and its costs, may be costing you a substantial amount of money.

We all know that car insurance companies use a variety of information to determine our premiums—our zip code, age, driving record, even our marital status—but these days companies have the ability to search our online and social media histories too, via a practice called data mining, to determine what kind of people we are and what choices we will, theoretically anyway, make. Your insurer can take the information they know about you, plug it into an algorithm, and determine how you are most likely to behave, scientifically speaking. Though the details of price-optimization algorithms are industry secrets, USA Today reports that stability may be a factor that works against customers.

So, for example, if you haven’t moved recently, you haven’t changed jobs, you’re married or have children—your insurer knows that you are also statistically unlikely to change insurance companies. With this knowledge, they also know that they can hike your premium by small amounts each year—just enough that searching for a new carrier isn’t likely to seem worth it to you. Compound these hikes over five years, or ten, and USA Today reports you could be paying an average of $426 too much per year, based on nothing more than your predicted loyalty.

This practice has a name: price optimization, or “PO,” in the business, and it is important consumers understand how it works so that they don’t become unwitting victims.

P.O. In the News

Just last week, the state of California declared the process of price optimization, which it defined as “any method of taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes,” as illegal. This means California joins ranks with Ohio and Maryland, where the practice is also illegal. How it’s illegal, according to the Sunshine State: “Price Optimization does not seek to arrive at an actuarially sound estimate of the risk of loss and other future costs of a risk transfer. Therefore, any use of Price Optimization in the ratemaking/pricing process or in a rating plan is unfairly discriminatory in violation of California law.”

In plain English? Cali thinks PO has zilch to do with a customer’s actual risk to a company and amounts to discrimination. Still scratching your head? We’ve got background.

A Little P.O. History

CBS News reports that insurance companies began the practice of price optimization about five years ago, when a New York-based consulting firm offered insurers a new way to increase profits by testing “the elasticity of demand.” That is, many insurance companies began to bet on inertia: If they raised customer’s rates by small amounts over time, most wouldn’t leave. According to CBS News, about half of large insurance companies, and many small companies, use price optimization to increase rates based not on risk, but on consumer complacency.

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If you’ve been loyal to your insurance company, the truth is they might not be rewarding you as much as you think. Sure, you may get a loyalty discount of five or ten percent, and they may make a big deal about it, but if they are also using price optimization to calculate your policy, chances are, you’re still over-paying.

If corporations are data-mining and using algorithms, consumers must be equally savvy. It’s no longer an option to let things like how your insurance policy is determined remain a mystery.

The Experts Weigh In

Quoted spoke with Bob Hartwig, president and economist for the Insurance Information Institute—the public speaking arm of the insurance industry. We asked Hartwig to explain what reasons insurance companies have for charging customers who don’t shop around more than someone who does shop around, all else being equal. His reply: “Insurance rates are fundamentally based on risk.” Hartwig continued, “Risk based pricing remains critical and at the same time insurers employ various analytical techniques to achieve certain marketing and growth objectives.” When pressed to discuss the practice of price optimization specifically, Hartwig said: “Price optimization is not an actuarial term.” According to Hartwig, then, actuaries (people who tell insurance companies what to charge their customers, based on risk) don’t use the term price optimization. However, many consumer groups and reporters have found evidence that the practice of PO is widespread.

Insurance rates are fundamentally based on risk.

In a statement from March of last year, Bob Hunter, the director of insurance for the Consumer Federation of America, stated that price optimization is “nothing less than an end-around critical consumer protection laws that are needed to ensure fair pricing of insurance products.” Quoted asked Hunter how PO is allowed to continue if it’s a way for insurance companies to subvert consumer protection laws. Hunter did not mince words: “Since the practice results in illegal prices—unfair discrimination and excessive prices—the states must act to stop it. But many states are reluctant to take on the insurers, so it will be a slog.”

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Hunter told CBS News that an estimated 25 percent of insurance consumers are getting PO’ed by their carrier. Unfortunately, Hunter told Quoted, commissioners didn’t really know about price optimization until recently. He told us a couple of states (like California, Maryland and Ohio) have already taken action and banned the practice, and other states are considering action. When asked how consumers can protect themselves (and their wallets) from price optimization, Hunter said, “Shopping is the only sure cure,” though he also encourages consumers to write to their commissioner and state representatives asking for action. “It will help,” he promised. Quoted asked Hunter for the low-down: Will firmer consumer protection laws really be enacted in the future, or is price optimization just the cost of doing business in the digital world? “I expect action by the states, but it will take time. Ultimately,” Hunter said, “illegal practices will be ended.”

Shopping around for insurance is the only way to protect yourself from PO.

What can consumers do now?

Many experts recommend reviewing your car insurance policy once a year. That entails making some phone calls to competitors, or using an online comparison app like The Zebra to compare rates. You can also visit your state’s insurance department and use their shopping tool. No matter which option you choose, keep a copy of your existing policy close by to make sure you’re finding quotes from companies that would offer the same coverage you already have, including coverage limits and optional coverage. Hunter recommends you also look up each company’s complaint history on your state’s insurance site.

Your insurance company will likely know if you’re doing your research based on your online activity—all fair game and readily available to them (unless your browsing session is specifically set to private). Your company will even know if you talk about searching for other policies on social media (again, unless your account is set to private). But we say, let them! It actually works in your favor for your insurance company to know you’re shopping around; if you are, they’ll be less likely to count on inertia to keep you sending them your check each month. And to really hammer the point home, give them a call, discuss other rates and use the names of other companies. Ask them if they can match prices, discounts, and services. Price isn’t everything, and it might be worth it to you to pay more to a company that offers you better service, but be assured: The agent is entering your query into their system and that information will help keep you from being overcharged due to price optimization. It’ll likely take you more than fifteen minutes, but you could save much more than that famous fifteen percent, with the added assurance that you aren’t being taken for a ride.

About The Author

Julia is a writer living in New York City. She's written hundreds of articles about the auto industry, from demystifying car insurance to exploring the latest vehicle technologies."