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I have just received a new auto insurance bill for the next six months for my comprehensive insurance. It is about 8% higher than the previous six months whereas I have had no new moving infractions and the vehicle is the same as before, meaning older, meaning costing less to replace.

What actuarial reasoning could explain this increase?

NL - Apologize to Monica
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amphibient
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    Anecdotally - I had this happen 2 years ago. I called my insurance agent and her response was "Our company lifted rates statewide. You've done nothing wrong, our base rates have just gone up". They then signed me up for the vehicle tracker thing that plugs into the ODBII port, and that got a bigger percentage lowered. – BobbyScon Jan 24 '17 at 20:06
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    "vehicle tracker thing that plugs into the ODBII port" -- that sounds creepy. BTW, it is OBDII – amphibient Jan 24 '17 at 20:08
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    @amphibient they specifically track how many times you do things such as "brake hard" to see whether you are a lower than average risk for accidents. – NL - Apologize to Monica Jan 24 '17 at 20:10
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    @amphibient Haha, sorry. That wasn't a very scientific way to describe it. Nathan is correct. It measures driving distance, acceleration speed, deceleration speed, and average time spent driving. They then calculate how risky a driver you are based on your driving habits. I believe the device is typically installed for 90 days. I ended up getting a 17% reduction in my rate because the device showed I was a pretty safe driver. You know, at least when big brother is watching. – BobbyScon Jan 24 '17 at 20:55
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    If your vehicle is old enough, your insurance premium is likely dominated by the liability component, rather than the loss-of-vehicle component. – Mark Jan 24 '17 at 23:42
  • @BobbyScon - 90 days sounds like it could be gamed, if you had sufficient willpower ... or on second thought ... maybe 90 days is a bit long ... – davidbak Jan 25 '17 at 00:39
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    @davidbak Maybe they know that and by the time you're done gaming the system for 90 days you've now established the habit and now are always safe. https://xkcd.com/810/ – corsiKa Jan 25 '17 at 02:22
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    Your risk is not just your personal driving, but how likely accidents are to occur in your area. If accidents take an upswing in your area you are a greater risk even if you are personally a safe driver. You can always be hit by someone else, who may or may not have sufficient insurance. – Jared Smith Jan 25 '17 at 13:52
  • I had that happen to me a few years ago in Florida... They told me it was due to all the hurricanes we were having lately... During a period where we didn't have any in 2-3 years – Taegost Jan 25 '17 at 17:01
  • Depending on how old is old, your premium can actually increase. – Lexi Jan 25 '17 at 17:47
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    One piece of information you leave out: is this comprehensive insurance, or liability-only? – Joe Jan 25 '17 at 18:21
  • comprehensive but i called last night and changed it to eliminate collision (my truck is 10 yrs old), which lowered the premium significantly – amphibient Jan 25 '17 at 18:48
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    Please read about Price Optimization directly from the NAIC. That is likely what is occurring here. The answer by @TTT sums up the best strategy for combating it. – do-the-thing-please Jan 26 '17 at 00:19
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    There are lots of things besides rating variables that contribute to a rate indication. Even if your rating characteristics haven't changed, your indicated rate can change because of considerations external to you. – MPW Jan 26 '17 at 17:30
  • @NathanL I used to have MetroMile which used a tracker too but it was only driving distance (or so they said). it was kind of cool because you could open their app and see where your car was at all times. – Brad Jan 26 '17 at 23:55

6 Answers6

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I assume this happens to everyone in the US, and I believe the reason is simply due to competition. Here are my data points:

I was with Allstate for 17 years, and the rates were pretty consistent for a long time, then about 6 years ago every 6 months my rate would go up slightly. After 2-3 years of that I called and I asked why? I was told it was due to the average rates in my area increasing, etc. I pointed out how loyal of a customer I was, and nothing helped. So I got a quote from Geico which was $130 lower per 6 months. I called AllState and asked them to match it or I'm leaving. They wouldn't. So I switched to Geico. 1 month later my Allstate agent called me and told me she could match (or beat) the rate I had with Geico if I came back. I said no.

2 years with Geico and my rates started inching up. After 18 months of increases I went through the shockingly identical process, and ended up switching to StateFarm. Now I've been with StateFarm for coming up on 2 years and it's happening again.

Note I have never had a claim or a ticket in over 15 years.

My conclusion is that (all?) car insurance companies in the US lose money on new customers, and they are willing to do that just to get the customer. Slowly they raise rates to price them to where they should be. The only way to get the lower rate is to switch companies every few years.

TTT
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    It's the metaphor of the frog in boiling water. – user662852 Jan 24 '17 at 22:46
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    @user662852 - exactly! For $20 increase I don't want to spend the time to shop around and switch... – TTT Jan 24 '17 at 23:08
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    I have heard this referred to as the lazy tax, or a tax paid by people who are too lazy to shop around (I don't mean this in a pejorative way, as I'm in the same boat!. – LeopardSkinPillBoxHat Jan 25 '17 at 03:04
  • These companies have goals to meet and sometimes the assessed value added (not equal to profit) justifies these goals, even if they get less cash influx. Poaching customers from another company is one of them. These insurance companies are taking customer fidelity for granted if they are acting like that. Not unheard of. – Mindwin Remember Monica Jan 25 '17 at 12:21
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    This isn't just the insurance industry, it's true of Banking, Telecoms, etc. .... Basically any industry where the average consumer is overwhelmingly likely to stay on whatever contract/product they are currently on, rather than jump from one product to another to get the best rates. The businesses have huge incentives to acquire you as a customer, and then 'get rich' off you being "too lazy" (c.f. LeopardSkin) to move, or not noticing that you're substantially off the current market rate (c.f. TTT/user662852) – Brondahl Jan 25 '17 at 14:41
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    The average rate in your area went up, because they raised the rate of everyone in your area. – Bradley Uffner Jan 25 '17 at 18:07
  • @BradleyUffner - The insurance companies say that, but it is not the true reason they have to raise the rates. Two different companies raised my rates and gave that excuse, and both offered to significantly lower my rates after I canceled and went somewhere else. My point is that even if the average rates actually went down in my area, they would still need to raise my rate because they brought me in with a lowball price to secure me as a customer. – TTT Jan 25 '17 at 19:29
  • Note - that based on key identifiers from your profile at the company, many large companies have sales software that will identify how likely you are based on your being m/f, age, race, status, tickets, whatever to shop around. Yes this is part lazy tax but it is also a strategy the company has set up. They don't want 25 million policy holder, they want 15 million willing to pay on average 10% more. There is a fixed cost for each policy holder and they want to make money based on something well over that. This is nothing but an algorithm about human behavior. – blankip Jan 25 '17 at 21:44
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Part of auto insurance is your potential liability cost. I'm personally in the same boat as you, no infractions, same car, and my insurance went up (though less than yours). I live in California, in an area where I'm likely to hit a Mercedes (or some other luxury thing) if I hit anything. Lots of people in my area buy expensive cars and as a result I pay significantly more for the same liability coverage as I would in a lot of other zip codes.

Add to that normal inflationary pressure on auto-body repair shops and you have increases even if you, personally, don't present any new risk.

In response to the discussion below I'm revising this point.

There are loads of factors insurers consider beyond your claims history, driving record and good student status. Maybe a lot of people in your neighborhood are buying Mercedes or some other expensive vehicles. Maybe your newly attained age triggers a different risk evaluation in their models. Any number of criteria related to you could have changed apart from your personal driving record. The carrier has a pool of people and the ability to price certain criteria related to you. The insurer's overall pool needs to be profitable and sometimes that means higher risk people are subsidizing the cost of lower-risk people, and sometimes the opposite can be true. Every part of the risk spectrum will generate claims, claim expenses aren't exclusive to the high risk segment of the pool.

When an insurer increases it's prices that means that relative to the expected claims of the pool, or some piece of your specific underwriting classification, it's not generating enough top-line revenue. Maybe this price increase hits everyone in the pool, maybe it's only the higher-risk or the lower-risk people, maybe it's only the folks with big limit coverage, maybe the student discount gets smaller. No matter the adjustment, the carrier has determined that it either can or should generate more revenue and/or shed some individuals from some facet of its pool.

No matter your personal driving record and perceived risk category, if you get an 8% increase you should go shopping. It's likely that some other carrier wants someone in your underwriting category more than your current carrier does. An 8% increase from your current carrier indicates they expect some number of people like you to leave.

quid
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    why does my presence prevent them from underwriting more risky drivers? – amphibient Jan 24 '17 at 19:47
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    @amphibient Insurance underwriting is an art. When my driving record was particularly bad I was reshopping my coverage every month, and changing carriers every three to six months. The risk appetites of carriers changes, sometimes they need more risk and will price coverage to attract that risk. Sometimes they're overloaded on safe drivers and can afford to lose a few, then they price it accordingly to encourage some to leave. Your carrier just nudged people in your risk category to go shopping. – quid Jan 24 '17 at 20:17
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    @quid You're saying it makes sense for carriers to sometimes drive customers away even though taking their money would carry relatively less risk than the customers they're trying to attract? That would seem to either mean that the safe drivers weren't priced correctly in the first place (their premiums were too low) or that carriers that do this are missing out on (statistically) free money. – Jay Jan 24 '17 at 23:21
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    The blend of risk represented in the pool will fluctuate as folks shop for insurance or as people get licensed to drive or whatever. The only way to adjust the blend is to change the premiums. Each specific risk category doesn't need to be individually profitable, the entire pool does. The carrier may think, that it could be equally or more profitable while expending the same effort if it took on more risk or that it needs to collect more from its low risk drivers (or everyone in the pool) because of attrition or a string of bad claims (mis-pricing as you put it). It's an art, not a science. – quid Jan 24 '17 at 23:43
  • @Jay, Additionally, it may be that a risk category is underpriced relative to the market alternatives. In order to attract or deter potential insureds the pricing just needs to be high or low compared to alternatives. – quid Jan 24 '17 at 23:49
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    I'm with Jay on this one, and I disagree with your last paragraph. In a risk based business, even if the low risk customers have a lower profit margin than the high risk customers, there would be no reason to purge the profitable low risk customers from your pool, unless for some reason your pool size was maxed or there are laws dictating price spreads. (e.g. A law saying you can only have 1M customers, or the max you can charge a high risk person is 5X what you charge a low risk person for the same level coverage. Though I have no idea if either of those exist.) – TTT Jan 25 '17 at 04:44
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    You and Jay are both assuming profitability. And again, you need to look to the market, if you're too low relative to your competition you can raise the price. – quid Jan 25 '17 at 16:54
  • @quid - I agree with that, just not that the reason to raise premiums is that they want you to leave. – TTT Jan 25 '17 at 19:11
  • If you raise the premium, some people will leave. They'll be able to leave because some other carrier's pool will be light low-risk and priced to attract them. This is no different than rebalancing an investment portfolio. – quid Jan 25 '17 at 22:18
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    @TTT Low risk isn't an attribute of the customer so much as it's an attribute of the customer and the rate. Customers who are inherently low risk due to their properties (age, driving record, zip code, number of accidents, etcetera) may result in a higher than expected number of claims, creating a high risk that they will stop being profitable. This may lead a company to raise their rates, both to ensure they remain profitable and to encourage them to take their business elsewhere. Likely others similar to him cost his insurance company more than they expected, so they fear he might. – David Schwartz Jan 26 '17 at 03:38
  • @quid - I'm still not getting it. I don't think it's the same as rebalancing an investment portfolio. With a portfolio, you have a finite amount of funds to invest. The insurance companies can always take more low risk customers. If the low risk person costs $30/mon and they charge $40/mon, why would they want to lose that customer? That customer is not preventing them from taking on more risky (profitable) customers. If you had reversed your statement I would have agreed (replacing high risk with low risk) but there shouldn't be a reason to replace low risk with high. – TTT Jan 26 '17 at 05:19
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    @TTT Because in aggregate, that customer and all the others like him might wind up costing them more than $40/mon/customer. If the risk pool he is in is underperforming, a logical thing to do is to shrink that risk pool before it goes negative. You may be confusing two concepts of "low risk". A customer that has a perfect driving record and lives in a good area is not necessarily low risk -- the risk is that he will become unprofitable. First, you're charging him less. Second, even if he has no accidents, your assessment of his risk is based on what others like him cost you. – David Schwartz Jan 26 '17 at 11:42
  • @DavidSchwartz - remember, I'm only questioning the reason for raising the price. In the case you described, the reason for raising the price is because the "low risk" customer's price is currently too low, and you need to raise it so you can become profitable. You're not raising it because you want the customer to leave you. – TTT Jan 26 '17 at 13:36
  • You might have a bone to pick about my wording, maybe I'm being a little too flippant. But, it's possible for a pool to have too much or not enough of something; and a top line revenue number needs to be generated from the pool in order to pay expenses and expected claims. Both the $30/month and the $200/month customers can generate $20,000 (or more) claims. You may need to shed customers from a risk category because they still generate claims and you may have too many of them at a given price relative to expected claims in the pool. And when you raise the price some people will leave. – quid Jan 26 '17 at 18:24
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    @TTT If the expected payouts from the pool are higher than expected, you raise the price. Generally, you want to raise it at least enough such that you're indifferent to whether people stay in the pool or leave the pool. You're asking why don't they raise the price so much that they really want customers to stay? Sure, they could raise the price a lot then they'd love for people to stay. But raising it so that people leave is sufficient, they don't have to raise it any more than that. Raising the price enough to discourage some customers and minimize unprofitability in the rest is adequate. – David Schwartz Jan 26 '17 at 19:47
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    @quid - that, I agree with. :D You raise the price because you have to, and if they leave, they leave... – TTT Jan 26 '17 at 19:59
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Because it's profitable

Insurance companies have found that if you raise peoples' premiums by 5%, a few of them will switch, but most of them either won't notice, or won't want to deal with the hassle and admin of switching in order to save a few %.

Net Result? They have (a few) fewer customers = fewer payouts, and more revenue.

Hence more profits. So they keep doing it. If they lost more in revenue than they gained in higher premiums, they would stop doing it overnight. But they don't, so they don't.

The same dynamics happen in (almost all) recurring-subscription service industries where people expect the prices to vary: Car insurance (in fact, most insurance), mobile phone contracts, rent, leases etc.

The only way to avoid it is to keep an eye on your bills and shop around as soon as they start going up.

Kaz
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Depending on where you live local regulations allow insurers to rate you based on many factors besides the type of car and how many accidents/tickets you've had historically.

Your rates might go up if you have recently moved, if your credit score has taken a hit, if you've become divorced, or if they have concluded that they have to raise all of their policies in your area by a fixed percentage due to a higher number of claims from your neighbors.

NL - Apologize to Monica
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As with many other industries, they are betting you will not consider the cost increase is worth the hassle of switching. Loyal customers and well off customers are easy targets. If they try to increase too high, you may be willing to switch. If they increase too low, then they miss out on potential profits. They probably have tested various amount increases and found a happy medium.

James Lawruk
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If you live in New York, and you took a driver safety course over three years ago, you can expect to lose the 10% mandatory car insurance discount that you would have been receiving.

Other states may have other discounts, I don't know all the details.

zzzzBov
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