Insurers find new ways to rate you

ST. PAUL, Minn. — Each day as Adam Gordon drives from his St. Paul home to his daughter's school or his Bloomington, Minn., job, a small device underneath the dashboard of his Acura Integra tracks every move.

The gadget, smaller than a deck of cards, records when, how fast and how far he drives. His wife, Meghan, has the same in her car. If the Gordons drive at consistent levels without incident, they can save up to 20 percent on their auto insurance with the Progressive Group. They pay $676 every six months to insure two 6-year-old cars, down from $799.

"It works," Adam Gordon, 42, said. "We've realized a 15 to 20 percent discount from what we were paying before, and that's not insignificant."

The program is one way auto insurers across the country are changing how they set prices. Using sophisticated databases and statistical formulas that slice and dice consumers into zillions of categories, insurers assess risk, adjust prices and tailor discounts to different groups of low-risk customers. The bottom line is: If you're a good driver, you may be rewarded with lower insurance premiums; if not, you could pay more.

Progressive's TripSense program is aimed at good drivers with relatively low annual mileage. Adam Gordon, for instance, drives 10,000 miles or less a year. Progressive says its research shows a strong link between low mileage and low accident rates, which is why it has tested TripSense in Minnesota for two years.

Gordon said the idea of having a device monitor his driving doesn't bother him.

"No one's watching what I'm doing. It's not GPS [global positioning system]," Gordon said. "They're keeping data that is relatively harmless. I believe the data that they collect on me will, at the end of the day, help me."

Programs like TripSense help differentiate auto insurers in a cookie-cutter business.

"Let's face it, auto insurance is not top-of-the-mind for most consumers unless their premiums go up or they buy a new vehicle," said Brad Granger, a product manager for Progressive in Minnesota. "We have a pool of customers, and we're always trying to find a way that helps us separate the good ones from the riskier ones."

Insurers say so-called tiered pricing, or pricing segmentation, helps them attract customers and boost potential profits amid increased competition. It also allows them to take on more high-risk customers or enter more urban areas than before.

Critics say these massive databases contain information that has nothing to do with how a person drives.

Bob Hartwig, chief economist for the Insurance Information Institute, an industry group, calls it "a technology arms race." The motivator, he said, is that insurers gain a competitive edge if they can "more accurately assess risk and price better" than rivals.

Nationally, the average premium was about $930 last year. This year, average premiums are expected to remain flat to up 2 percent.

To set prices, insurers look at traditional driver characteristics, such as age, gender, accident history and type of car, along with newer factors like credit scores, coverage limits and other information so secret that some insurers won't disclose it.

Ohio-based Progressive is considered the leader in tiered pricing.

It separates consumers into nearly 100 "price points," Granger said. Progressive estimates that 1.1 billion possible combinations of customer data can go into a premium.

Insurers are using these new analytical powers to offer all sorts of new discounts to their lower-risk drivers.

Insurers say their statistics show correlations between high risk factors and driving assumptions.

For example, someone with a higher credit score is less likely to file claims, they say.

Consumer advocates are alarmed by the increased use of nondriving-related factors, especially credit scores, on prices. Minnesota legislators this year plan to introduce a bill to ban the use of credit scores in setting auto and home insurance rates.

"I don't believe there's any evidence that credit scoring is a risk factor," said Robert Hunter, director of insurance for the Consumer Federation of America.

"What is it about someone having a worse credit score that makes them a worse driver? [Insurers] can't answer that."

Norma Garcia, senior attorney for Consumers Union, also is concerned about the misuse and accuracy of data such as credit information.

One in four consumer credit reports contain errors, she said.

"Keep in mind that one person's discount is another person's surcharge," she said.