August 11th, 2014
Are you overpaying for auto insurance? According to a NerdWallet report, probably.
Many drivers find an auto insurance policy and stick with it for many years, but NerdWallet found your premiums may continue to rise to the point where you're overpaying for coverage. In fact, the finance company discovered drivers overpay an average of $368 for auto insurance every year.
How does this happen?
Auto insurance providers use many factors to determine your rates, and charges for the same policy can vary 154 percent within one zip code, according to NerdWallet. You expect certain criteria like your age, accident history and the amount of driving you do each year to affect the rate you're given. But other factors such as data-mining are being used by auto insurers to perform "price optimization" on your rate, according to USA Today.
What is price optimization?
Through sophisticated data analysis, auto insurance providers set rates just high enough that the prices keep customers from shopping around, USA Today stated. Because of this process and because the longer consumers are with a company, the less likely they are to leave, premiums can go up every year.
Is price optimization OK?
Price optimization is legal, but has been frowned upon by some organizations, including the Consumer Federation of America and the Center for Economic Justice, USA Today reported.
"Price optimization is a new strategy to overcharge Americans who have to buy auto and home insurance," said Bob Hunter, director of insurance for the Consumer Federation of America. "The tool is nothing less than an end-around critical consumer protection laws that are needed to ensure fair pricing of insurance products."
You can beat the system
You can't get away from price optimization but that doesn't mean you have to settle for increasing premiums. You can outsmart the auto insurance providers by shopping around. If you've been notified your auto insurance rates are going up or even if you haven't had a rate hike in a while, check out CoverHound to see if there's a better deal out there.
The longer you've been with your provider, the more you're likely to save by switching, USA Today advised. Customers who have stayed with their auto insurance company for 11 years save an average of $426 on their premiums when they move to a new provider.