By: Morgan Gaynor

Anyone who watches television has seen them: cute or quirky car insurance ads with colorful characters bragging about saving you money. The ads may be amusing, but they don’t tell us how insurance is priced or which policies provide the best value.

The cover story in the September 2015 issue of Consumer Reports is called “The Truth About Auto Insurance.” It attempts to take us past the hype and explain how insurance premiums are really calculated. The authors deserve great credit for wading into a complex subject and trying to make sense of it for the public.

They faced a big hurdle, because auto insurance is generally regulated state-by-state. Because different states require different forms and amounts of insurance, it was difficult to make apples-to-apples comparisons. But after analyzing more than 2 billion quotes, according to their article, the authors came up with some interesting and unpleasant conclusions.

First of all, the article explains that two of the biggest advertisers, Geico and Progressive, don’t really have the cheapest rates. Although rates vary from state to state, Geico and Progressive were generally not the cheapest. USAA, Amica, and State Farm often had the best rates.

Second, insurance companies charge for insurance using factors that have nothing to do with your risk of causing an accident. Many insurers use credit scores. In fact, they may raise your premium just for using certain types of credit, such as department store credit cards. Insurance companies apparently believe credit does not affect your risk of being in an accident, but does predict whether you’ll make a claim after an accident.

One might expect state insurance regulators to prohibit the practice of basing premiums on credit. After all, it doesn’t tell us whether you’re likely to be in an accident. Unfortunately, only California, Hawaii, and Massachusetts ban this practice.

There is even more depressing news. Some insurers use a devious process called “price optimization.” They actually look at your buying patterns to see whether you’re likely to shop around. Your insurance company may even try to figure out how much of a price increase you’ll tolerate. In other words, if they think they can raise your premium by $100 without getting dumped, they’ll do it. If they think they can get away with $200, they’ll do that instead.

On the positive side, Florida and several other states forbid premium pricing based on credit optimization. But many states, including large ones like New York and Texas, don’t explicitly prohibit it. And while some insurers, like State Farm and Amica, say they don’t use it to set premiums, others – including Allstate, Geico, Progressive, and USAA – refused to discuss it with Consumer Reports.

In the long run, insurance pricing needs to be reformed because it has strayed so far from actual accident risk. In the meantime, you shouldn’t be shy about shopping around for your auto insurance, and you should pay attention to your credit score too.

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