Insurance is a different kind of product. You need it to get a mortgage and you're supposed to have it to drive a car. That's why the industry is highly regulated.
You might not like the price you pay for your home or auto insurance policy, but by law those premiums must be based on actuarial risk—the expected cost to provide you that coverage.
Some insurance companies now use sophisticated software to help them set their rates. The industry says the process, called "price optimization," is simply a way to be more efficient. Consumer advocates believe it's being used to get around risk-based pricing.
Robert Hunter, CFA's director of insurance, says price optimization is a data mining tool that lets insurance companies figure out which groups of customers are more likely to accept a price increase and which are more likely to shop around for a new policy.
Hunter, a former Texas insurance commissioner, claims this allows insurers to predict if they could get away with higher rates on low-income customers who have fewer market choices because of factors such as where they live, their socioeconomic status or their financial literacy.
"What we're seeing here is a way to take advantage of the fact that some people don't shop for insurance and that's wrong." Hunter said. "It produces unfairly discriminatory rates which are illegal."
If you have two people with the exact same risk factors, Hunter explained, they should be charged the same rate. But using price optimization, the customer who is tagged as the one least likely to switch carriers in the face of a rate hike would be charged more.
"It's wrong, because it unfairly discriminates," he said.
Birny Birnbaum, executive director of the Center for Economic Justice, calls price optimization "a euphemism for price gouging."
"It's unfair because it has nothing to do with your cost to the system—your likelihood of a claim—and everything to do with your market power or lack of market power," Birnbaum said.
The insurance industry insists there is nothing nefarious about price optimization.