What Is Insurance Price Optimization, And Why Are People So Upset About It Being Applied To Pittsburgh Renters Insurance?
Wikipedia defines price optimization as “the use of mathematical analysis by a company to determine how customer will respond to different prices for its products and service through different channels.” Sounds entirely innocuous, right? Some would disagree.
It’s becoming a problem in the insurance industry, according to some. It’s mostly done in auto insurance, though it’s also been known to happen to renters insurance as well. Connecticut and Pennsylvania are two of the states that have said they won’t allow it, among many others. Why?
Price optimization of a bag of rice is not a big deal. It’s just how capitalism works in America. If you want to buy it from the store, it will cost you more than if your order it online. Price optimization of insurance insofar as it only relates to sales channels is not even the issue at hand here.
What concerns people about insurance price optimization is that it can be used to charge different renewal prices to two customers with the same risk profiles, based on factors that are not related to risk. The big concern is that it can be used to charge more to someone who is statistically less likely to leave the company and shop around.
Renters insurance is, and should be, priced based on the amount of risk being assumed. Some people have argued that certain underwriting factors such as insurance credit scoring have little enough relevance that they’re not appropriate, but those are still risk-based factors. The chance of you shopping for a better price, however, has nothing whatsoever to do with risk.
When you’re priced based on risk, you’re priced fairly. That may be future risk, or it may be based on past risk shown by claims history and the like. The formulas that go into calculating risk are immeasurably complex to anyone without a degree in actuarial science, but they are in fact based on risk.
If your Pittsburgh Renters Insurance is a different price at renewal than you expected it to be, what is the cause? It could be related to a specific risk factor, such as your claim history or a change in your credit. That would be fair, and is allowed. On the other hand, it could be based on the fact that you’ve been with the company for a length of time and your insurance credit score and loss history show no inquiries from other insurance companies. That means you’re more likely to stay with the company, because you’re not shopping around currently.
Obviously, that’s a vast oversimplification of the factors that go into price optimization when you’re looking at PA Renters Insurance, but it’s a basic overview of how the process works. The reason this is a problem is that, in a nutshell, states generally require that a group of people who are likely to cost the insurer the same amount of money should be priced the same. This ensures that prices are based on risk and not the whims of the insurer or the fact that they can charge more because the insured isn’t likely to go elsewhere.
Price optimization may be a good thing for insurers, but it’s not a good thing for you as an insured. You want to know that you’re getting the right price on your renters insurance, and not paying more than someone else just because you won’t shop to save a few bucks a year. The difference may be only a few dollars a year on a small policy, but it’s still a difference. To learn more, or to get covered with the most affordable renters insurance in Pittsburgh, just call (800)892-4308 or click to get covered - whether you need Pittsburgh renters insurance quotes online or coverage anywhere else!
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