A joint investigation by Consumer Reports and The Markup sheds light on how a controversial plan pushed by Allstate in Maryland could be functioning in other states that have allowed the company’s customer “retention model.”  The groups found that Allstate would have saddled Maryland customers paying the most expensive premiums with big increases that it wasn’t willing to pass on to thriftier customers with similar risk profiles.

Maryland and a few other states have rejected these efforts, but ten other states have allowed Allstate to use a customer retention model.  The groups based their joint investigation on a statistical analysis of the documents Allstate submitted on its plan in Maryland.  It offers a rare public window revealing details of Allstate’s pricing plan that have otherwise been kept secret. 

“Despite the purported complexity of Allstate’s price adjustment algorithm, it was actually simple:  It resulted in a suckers list of Maryland customers who were big spenders and would squeeze more money out of them than others,” according to the report by Maddy Varner and Aaron Sankin of The Markup, the data-driven journalism organization launching today focused on the impact of technology on society. 

“These revelations are concerning enough on their own, but they're also an unmistakable harbinger of the new age of consumer threats we're racing headlong into,” said Marta L. Tellado, President & CEO of Consumer Reports. “Like security flaws in our gadgets and invisible toxins in our food, hidden biases in the algorithms that set more and more of the prices we pay pose an insidious threat.”

Seven years ago, when Allstate filed this plan with Maryland, the company said that its new risk analysis showed that it was charging nearly all of its customers outdated premiums.  Rather than apply the new rates all at once, Allstate asked the Maryland Insurance Administration for permission to run each policy through an advanced algorithm containing dozens of variables that would adjust it in the general direction of the new customer “retention” model.

But The Markup and Consumer Reports found that customers who were due a big rate hike may or may not get it based on whether Allstate thought they were likely to shop around:

●      It appears that Allstate assumed drivers with a cheap policy would shop around for a better deal, while those with an expensive policy would not. 

●      Customers who were already paying the highest premiums, of about $1,900 every six months, and were due an increase would have been among those that bore price hikes of up to 20 percent. Customers in this group were more likely to be middle-aged. 

●      Drivers with cheaper policies who were designated to receive price jumps that were just as big, would only be charged a maximum increase of five percent.  

●      Seniors were overrepresented among those who were owed discounts but would not have gotten the full discount they were due.  Some customers were owed thousands of dollars, but discounts were capped at half a percent no matter how much they should have received.

At the time Maryland turned down Allstate’s plan as discriminatory, Geoffrey Cabin, an insurance regulator with the state noted, “Allstate is failing to limit rate increases in a manner that treats all insureds with like insuring or risk characteristics equally.”  In addition to Maryland, regulators in Georgia, Utah, Colorado, and Louisiana have rejected Allstate’s customer retention plan. 

However, regulators in Arizona, Arkansas, Illinois, Iowa, Michigan, Missouri, Nebraska, Oklahoma, Tennessee, and Wisconsin have approved Allstate plans where public records mention using a customer retention model.  Allstate would not tell CR and The Markup whether the customer retention plans allowed in other states work exactly the same way as the Maryland proposal and it is impossible to know from the outside. 

In the past five years, at least 18 states and Washington, D.C. have issued public statements warning insurance companies against setting individual prices based on business goals like customer retention, part of a set of practices labeled in the industry as  “price optimization,” which Allstate executives have publicly said they have used.  In letters sent today, Consumer Reports called on insurance commissioners in the remaining states to specifically condemn the practice. 

“In virtually every state across this country, drivers are required to carry auto insurance,” said Chuck Bell, Programs Director for Consumer Reports. “Insurance should be priced fairly, based on the risk posed by the driver, not on how much they are willing to pay or other factors that have nothing to do with their driving record.”