The dirty little secrets of auto-insurance premiums

My colleague David Hiltbrand traces the history of Flo and the Geico Gecko in an article today about the flood of TV ads for auto insurance over the last decade. As he explains, Geico was a pioneer in bypassing agents and selling directly to consumers. So now we have Progressive's Flo, and Allstate's freaky Mayhem character, and an array of other characters and companies vying for your attention and dollars.

But it's not all just about promoting brand awareness to poach market share. There's another, less-apparent reason for the push: You really may be able to save 15 percent, 20 percent or more - much more - by getting comparison quotes.  The trouble is, most of the companies aren't eager to discuss the reason why.

Auto insurance pricing has always been opaque, even when premiums were largely governed by fairly straightforward factors, such as your age, your driving record, and the frequency of claims in the place where you lived.

But in the 1990s, companies such as Progressive pioneered new ways of slicing and dicing the risk pool, particularly by using factors such as credit scores, education, and occupation to predict who was most likely to cost them in claims.  The result has been a huge variation in rates.

A recent comparison by Consumers Checkbook reported:

For one illustrative couple living in Philadelphia, annual premiums for standard auto insurance coverage would range from $2,256 to $3,949 among area companies, a difference of nearly $1,700 per year. Even with State Farm, Pennsylvania’s largest insurer, the annual rate would be $3,517—$1,261 higher than the lowest rate we found.

If you’ve recently had an accident and have a male, teenage driver on your policy—a nightmare for most insurers (and most parents)—the rate differences loom even larger: from $3,024 to over $8,000 per year.

I haven't done a similar analysis lately, but in a 2003 comparison based on Pennsylvania Insurance Department data, I examined premium variations for a sample driver, using the department's own pricing benchmark for a typical policyholder: a 35-year-old, married driver with a four-door 2002 Ford Taurus SE - someone who was an experienced driver, commuted five miles a day each way, drove 12,000 miles a year, had no accidents or violations, was currently insured by another company, and took limited-tort coverage.

Using that standard, the only pricing variations arose from how a particular insurer subdivided a region into ratings territories, and how it assigned customers to pricing tiers by using factors such as credit history. The differences were stunning - both between companies, and for different drivers within the same company:

In Montgomery County, Progressive would charge that safe and steady Taurus driver from $518 to $4,807 a year. In Philadelphia, the range is even more striking - $969 to $7,430....

Allstate Property & Casualty would charge such a driver from $635 to $2,842 in Montgomery County, and $923 to $5,632 in Philadelphia.

The fact that they rely so heavily on non-driving factors in setting premiums is the dirty little secret of today's auto-insurance market, mentioned in the deluge of ads only by one insurer, Cure Auto Insurance, with a contrarian niche: It eschews the use of credit scores, education, occupation, and home ownership in establishing prices.

But even if Flo and the Gecko don't really explain why you should call for a quote, their underlying message is worth listening to: Shop around for auto insurance, and you really might save a bundle.