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The Science of You

March 29, 2012

Chris Garlasco, Owner & Managing Partner – Founders Insurance Group

Website MSN has used a lot of column space piling on the populist anti-business band wagon. They have been particularly unfair to the insurance industry. MSN chooses to fan the flames of often misunderstood consumer issues related to insurance rather than taking the time to offer objective information surrounding an issue. Even the article headlines are often inflammatory in an effort to garner readers with titles similar to “The things your insurance company doesn’t want you to know.”
I hope to set the record straight about auto insurance pricing with real information as I don’t have a vested interest in garnering more readers. As most of us know, auto insurance prices are based on your driving record, the type of car you drive and your age. More than twenty five years ago, when I began my career in the insurance business, almost all insurance companies had only two or three prices that they could offer a customer. If the customer’s profile didn’t fit into one of those two or three price points, the customer was declined. Many of those customers only option was the state insurance pool.
Today, most state insurance pools are seldom used, if ever. Companies have become infinitely better at predicting loss potential and then setting an accurate price for many risk profiles rather than just two or three. The benefit to consumers has been substantial. Over the past ten years auto insurance pricing has been the most stable in the industry’s history. Along with the good, there has been some bad too. The sophisticated and complex pricing models have left companies and agents with the difficult job of educating customers while trying to overcome misinformation. As a general rule, consumers don’t trust what they don’t understand. Add lazy, agenda oriented “journalism” and it exasperates the situation.
So, how did this all come about? Insurance companies are data companies. The competition in the auto insurance business is so intense that the incentive to stockpile high quality predictive data has never been higher. The competition is so tight that companies play closely to the margins in order to maintain and increase market share. Each company is looking for an edge over their competition.
The importance of understanding and gathering data and then utilizing it to set pricing are at an all time high. Companies quickly learned that there were many factors beyond simply looking at a driver’s motor vehicle report, age, zip code and vehicle type that would lead to better lose prediction. Here is where the problem lies for many consumers. Companies are looking at predictive data that often times appear to have nothing to do with the potential for loss. It is all about the science of you!
A pivotal point and a point of controversy was when companies realized that there was a direct connection to a customer’s credit score and loss potential. I, like many agents, was opposed to this practice when it first came to market. But over time the data crunchers have been proven right. There are those that would like to see this legislated away. If that happens, a major point of risk evaluation will be lost. The end result will mean higher rates for everyone. Insurance companies started to gather more and more information about you. They started to ask questions such as “do you have a college degree?” “Are you married?” “What type of income do you earn?” This is just the tip of the iceberg. Companies have as many as two hundred price points and as many as fifty price tiers verses the two or three we had just twenty years ago. Critics claim discrimination, the thrust of the sensational piece by MSN. The fact is that the only discrimination that is taking place is against those having a greater potential for loss and those that don’t. It all comes down to numbers and math. Math is not discriminatory. It is my opinion that if consumers and legislators wish to do away with some of this mathematical science that is alright by me. But, consumers must also be willing to accept the fact that if a fewer number of data points exist, there will be more rate increases than we currently see today as companies are constrained in their loss prediction process. The reason why we have had unprecedented rate stability in auto insurance is due to the science. There is a trade off.
Please don’t leave this blog with the belief that I want all of this math science pushed on me as a consumer. The fact is that I don’t. I just happen to understand the “whys” of it, and that is what I wish to share with you.
Lastly, rate making and the factors involved are generally done under the scrutiny of each state’s department of insurance. In the vast majority of states, companies cannot arbitrarily use data without demonstrating the significance of the data to the government. This is also true with health insurance rates too! It’s a fact that seems to be often overlooked by critics.
I hope that this helps to broaden your understanding of the rate making process!
Have a great day!
Chris Garlasco

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