As Louisiana drivers continue to grapple with high auto insurance premiums, Consumer Reports has put out a lengthy report detailing attempts by one insurance company to overcharge certain policyholders.
Consumer Reports and The Markup, a nonprofit newsroom that reports on the effects of technology, released the report today, which largely centers on proposed changes from Allstate to its pricing model in Maryland.
In 2013, the company said it discovered it was incorrectly charging nearly all of its 93,000 customers in the state; some were being overcharged by almost double, others were undercharged by hundreds or thousands of dollars. To correct the problem, Allstate asked the Maryland Insurance Administration to allow it to use a new advanced algorithm, labeled a “retention model,” which would adjust each premium individually.
Yet, Consumer Reports concluded the algorithm actually allowed for those with the largest premiums to bear the biggest annual price hikes of up to 20%, while those with cheaper policies saw only 5% increases. It also didn’t lower rates as the company had advertised.
“In this case, Allstate’s model seemed to determine how much a customer was willing to pay—or overpay—without defecting, based on how much he or she was already forking out for car insurance,” the report says.
Complaints have risen about auto insurers trying to set rates based on individual pricing schemes rather than actual risks, also called price optimization or personalized pricing.
Rich Piazza, the Louisiana Department of Insurance’s chief actuary, was quoted in the report, talking about regulators’ limited ability to even know if insurance companies in the state are using this strategy.
In 2015, Louisiana had its own battle with Allstate over the pricing model. When Louisiana regulators asked Allstate whether any other states had rejected the proposed pricing model, Allstate said at the time that it had not been “disapproved in any states.”
Consumer Reports says that was not true, as Maryland had already rejected Allstate’s proposal, labeling it as discriminatory.
Piazza told the magazine that Allstate’s proposal in Louisiana was basically a “flavor of price optimization,” and that his office “did not let them use this.”
“The issue with Allstate wasn’t as much the individual variables as it was that the decision to increase an individual policyholder’s premium was based on the probability of them leaving the company,” he says in the report. “If they were not likely to leave the company, they wanted to charge more. That’s not cost-based.”
Allstate ultimately withdrew the plan. The company has maintained that its algorithm eliminates the discretionary nature of insurance and “applied uniform, mathematical rigor to it,” the report says.
Similar price optimization complaints have been made against other U.S. insurance companies including Farmers Insurance, which was sued in California. Read the full report.