Car insurance is a legal requirement in almost every state. Premiums are personalized for each driver based on a variety of unique factors, like your location, age, gender, driving record and credit score. However, car insurance companies can also consider other criteria to set rates through a process called price optimization.
In this article, we’ll explain price optimization in more detail and share how it can affect your car insurance premium. We’ll also explain how regularly shopping for new car insurance quotes can help you secure the most affordable premium.
- Price optimization is a strategy that insurers use to set rates based on non-individual risk factors, like customer retention and operating costs.
- Price optimization has been banned in at least 18 states and Washington, D.C.
- For insurers that use price optimization tactics, customer loyalty can lead to higher premiums over time.
- If your insurer uses price optimization, getting new quotes and switching insurance providers can help you lock in a lower car insurance premium.
What is price optimization?
The main goal of price optimization is to maximize profits and the lifetime value of an insurer’s customers. Some insurance companies use price optimization as a factor in pricing.
Price optimization relies on data mining and modeling tools to calculate rates based on factors other than a customer’s likelihood of a loss. It allows insurers to determine the highest rate they can charge a customer before they will likely find a different (cheaper) policy.
“With price optimization, variables such as shopping behavior, other brand loyalty, and income levels impact rates more than traditional risk factors (like age and driving history). This leads to same-risk drivers paying different prices based on their perceived price sensitivity,” says Nick Shrader, owner of Texas General Insurance.
How price optimization can lead to higher premiums for long-term policyholders
Car insurance premiums are largely determined by the amount of risk a driver poses to their insurance company. That’s why teen drivers and people with a history of accidents typically pay higher rates than more experienced drivers and people with a clean record.
However, when price optimization is used, insurers may charge higher rates than a customer would pay based on their personal risk factors alone. Price optimization can have consequences for drivers who stay with their insurance company for an extended period. Small rate increases over time can eventually lead to a major rate increase over several years.
For example, imagine you purchase a new car insurance policy at a reasonable price. You’re a good driver with a clean record, posing little risk to your insurance company. Your premium increases slightly every year despite no changes to your driving record or claim history. After five years, your rate has increased significantly due to price optimization. Now, you consider shopping for another policy to find a lower rate.
The impact of staying loyal to one insurance company
Customer loyalty can be a double-edged sword in the insurance industry. Some insurance carriers offer discounts to customers who remain with the company for a long time. But if your insurance company uses price optimization, being a loyal customer isn’t always rewarded.
When insurance companies use price optimization, your premium increases yearly when your policy renews. This rate increase is based on factors out of your control, like the insurer’s position in the market and customer retention.
“Insurers often charge loyal customers 10% to 20% more over time, assuming they’ll tolerate rate hikes without shopping around. Instead of getting loyalty benefits, the long-term policyholders often get penalized,” Shrader says.
After five years of renewing your policy, your rate could be much higher than it originally was. Comparatively, if you move on from your insurance company after two years, you could pay less elsewhere at the five-year mark.
How state laws are protecting policyholders from price optimization
The practice of price optimization has come under scrutiny by some regulatory agencies. To protect consumers, many states have banned property and casualty insurers from using price optimization.
Currently, price optimization is illegal in these states:
- Maryland
- California
- Ohio
- Florida
- Vermont
- Washington
- Indiana
- Pennsylvania
- Maine
- Washington, D.C.
- Rhode Island
- Montana
- Delaware
- Minnesota
- Colorado
- Connecticut
- Alaska
- Missouri
- Virginia
When to consider switching your car insurance company
Generally, it’s a good idea to consider switching car insurance companies if you’re unsatisfied with your premium. Car insurance companies charge different rates for the same coverage and weigh rating factors (like age and gender) differently. If you think you’re paying too much with your current provider, you can shop around and hopefully find a lower premium.
It’s important to note that switching providers can be a good option whether or not your insurer uses price optimization.
For example, if your premium goes up after an accident, you might find a lower rate from a different company. If you suspect price optimization is responsible for your rate increase, getting new quotes can definitely be beneficial.
If you are unsatisfied with your customer experience, consider switching carriers. For example, switching providers could be a solution if you aren’t happy with the customer service or claim handling practices. You might also switch companies if you want specific endorsements or additional discounts.
Regardless of your reason for switching, you can change car insurance companies at any point during the policy period. And, if you paid your annual premium upfront and in full, you should receive a refund for the unused premiums.
How to save money on insurance by shopping around
Shopping around for auto insurance is an effective way to save money. You can apply for quotes on individual provider websites or use a quote comparison website to get matched with quotes from multiple insurers using a single application.
Make sure to get quotes for the same types of coverage, coverage limits and deductibles for consistency. Once you’ve gotten quotes from a few companies, compare them to see which one can provide the lowest price for the best coverage.
What should I look for when switching insurance providers?
Price isn’t the only thing that matters when choosing a car insurance company. Here are some other things you should look for when switching auto insurance companies:
- Coverage options: Consider the types of coverage you need and ensure the insurer offers them. For example, if you have a new car, you may want new car replacement or gap insurance. You may benefit from accident forgiveness if you have young drivers on your policy.
- Discounts: Most car insurance companies offer discounts, but you should look for carriers that offer discounts you can qualify for. For instance, some insurers offer discounts for military personnel, low mileage, hybrid/electric cars and first responders.
- Customer reviews: Before choosing an insurance company, read customer reviews. Look for consistent complaints about customer service, policy renewals and claims handling.
- Customer satisfaction: Research the insurer’s state-specific customer satisfaction score in J.D. Power’s U.S. Auto Insurance Study. You can also check the National Association of Insurance Commissioners (NAIC) for company complaints.
- Financial strength: Find the insurance company’s financial strength score from AM Best. Companies with an A rating or better have an excellent or superior ability to meet policyholder obligations and pay claims.
Learn more: Beyond price – what sets the best car insurance companies apart
Final thoughts
Understanding price optimization can protect you from rate increases. While some states have banned price optimization, most states still allow it. If your insurer uses price optimization, your premium could increase without a change to your personal risk factors.
One way to combat price optimization rate increases is to shop around and get new quotes regularly. Quote shopping ensures you’re paying the best price for your situation. But before you switch providers, choose a reputable company that meets your needs and preferences.
Frequently asked questions
How can I tell if I’m paying too much for my insurance?
There isn’t a reliable way to tell if you’re paying too much for car insurance. If your car insurance premium is increasing despite no changes to your personal rating factors, or your premium is getting unmanageable for your budget, you should consider getting new quotes and switching providers.
How often should I shop around for better insurance rates?
Shopping around for car insurance once a year is a good idea. Rates increase when your policy renews, usually every six months. You can also think about shopping around after a major life event, like moving to a new city or state, getting into an accident, or adding a teen driver to your policy.
Can I negotiate my insurance rates even if I’ve been with the company for a while?
Car insurance premiums aren’t negotiable, even if you’re a loyal customer. If you want to reduce your rate, consider talking to an agent about ways to save money. Some insurers offer a discount for customer loyalty. Other ways to lower your premium include bundling your policies, paying in full, taking a defensive driving course and multi-car discounts.
Resources & Methodology
Sources
- Casualty Actuarial Society. “Price Optimization Overview.” Accessed March 2025.
- Connecticut General Assembly. “The Use of Price Optimization in Insurance Ratemaking.” Accessed March 2025.
- Consumer Federation of America. “Consumer Groups Applaud NV Insurance Commissioner for Banning Price Optimization and Closing the ‘Underwriting’ Loophole.” Accessed March 2025.
- Insurance Information Institute. “Price Optimization.” Accessed March 2025.
Get advice from an experienced insurance professional. Our experts will help you navigate your insurance questions with clarity and confidence.
Browse all FAQs