The Insurance Pricing Game: How I Learned the Hard Way to Shop Smarter

I admit it—I missed something important.

I’m frustrated with myself for not seeing it sooner. But if a banker and personal finance professor like me can fall for this, there’s a good chance others are unknowingly in the same situation. So I’m sharing my story.

I live in the Commonwealth of Virginia. Like every state, Virginia has a government agency responsible for regulating insurance. In Virginia, it's called the State Corporation Commission’s Bureau of Insurance. Among other things, it’s tasked with reviewing and approving insurance rate filings to ensure they’re not excessive, inadequate, or unfairly discriminatory.

That sounds good on paper. So, for years, I assumed that as long as my policies were approved by the state, I was probably getting a fair deal.

I believed the government had my back—so I didn’t shop around. But I’ve since learned that “fair” is not a universal standard—it’s a function of interpretation and incentives. How Virginia defines and regulates fairness in insurance pricing doesn’t necessarily align with how I, as a consumer and educator, think about fairness. And that disconnect cost me. When I eventually checked the cost of my insurance, I discovered I was significantly overpaying for the same coverage!

My fairness assumption turned out to be a tremendous head fake. Read on to learn more...

What Is Consumer P&C Insurance?

Consumer property and casualty (P&C) insurance includes policies that protect individuals and families against financial loss related to property damage (like homes, cars, and belongings) and personal liability (like accidents or lawsuits). Common products include homeowners, auto, renters, and umbrella liability insurance.

If you've seen ads during the Super Bowl or heard catchy jingles, you've probably come across some of the biggest names in the industry—State Farm, GEICO, Progressive, Allstate, Liberty Mutual, Farmers, and USAA. These companies insure millions of Americans and compete fiercely on price, service, and marketing.

Concepts Covered

This article explores a range of insurance, economic, and behavioral science concepts, and offers practical steps you can take to protect yourself from overpriced coverage:

• Price Optimization and its regulation across U.S. states

• First- and Third-Degree Price Discrimination in insurance pricing

• Competitive Strategy and ZIP-level market segmentation

• Cross-Subsidization of high-risk states through national pricing strategies

• Behavioral Pricing Tactics (e.g., loyalty penalties and inertia traps)

• Regulatory Incentives and Constraints in consumer financial protection

• Game Theory and the dynamics of insurer profit optimization under constraint

• Experiential Learning and Personal Financial Responsibility

About the Author:  Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.

Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.

How Price Optimization and Competitive Strategy Quietly Cost Me Thousands

In some states—insurance companies are allowed to engage in a practice known as price optimization.

While it sounds technical, here’s what it really means: insurers can legally raise your rates not based on changes to your actual risk, but based on how unlikely you are to switch providers.

This is what economists call first-degree price discrimination—charging different prices to different consumers for the same product, based on what each is willing to pay. In this case, you may be penalized simply for being loyal, passive, or less price-sensitive.

It’s also what behavioral scientists refer to as the “boil the frog” approach: small, regular premium increases that happen slowly enough that you may not notice—until the water’s boiling and you’re paying 40% more than your neighbor.

To be clear, economic price discrimination is not inherently illegal. In many cases, it’s a rational business practice based on consumer behavior. However, when pricing strategies like price optimization disproportionately affect individuals in protected classes, they may trigger concerns related to disparate impact—a concept addressed under the Civil Rights Act and related anti-discrimination laws. As a result of education and lobbying from consumer watchdog groups like the Consumer Federation of America, some states have banned price optimization.

Virginia is a state that prohibits price optimization. So what happened in my case likely wasn’t that. Instead, the more likely explanation lies in competitive pricing strategy—what economists refer to as third-degree price discrimination. This approach segments the market by group-level attributes like ZIP code, home type, or credit tier, and assigns prices accordingly.

Here’s where it gets nuanced: some of the same attributes actuaries use to model insurance risk are also useful to marketers to segment insurance customer behavior. For example, living in an upscale, low-complaint ZIP code may correlate with both lower claims frequency (good for risk) and higher tolerance for premium increases (good for revenue).

This creates a paradox: you could be objectively low-risk, yet still be charged more—not because of your risk profile, but because your market segment isn’t a strategic priority for the insurer. For instance, if a P&C insurer already saturates a ZIP code like mine and isn’t actively trying to expand share there, they may offer less competitive pricing—even if the risk is low.

While insurers in Virginia aren’t allowed to price optimize at the individual level, group-based pricing strategies—like ZIP code segmentation—can still produce similar outcomes. It’s a less surgical but entirely legal way to approximate the effects of price optimization through competitive strategy.

And while we display a map of states that restrict or allow price optimization as a clean binary, the reality is far more complex. How regulations are written, interpreted, and enforced varies by state. Two “restrictive” states may have very different thresholds for what qualifies as optimization, and how closely pricing variables are scrutinized. And as they say—the devil is in the details. Especially when those details live in the fine print of state filings and the unwritten norms of regulatory enforcement.

The bottom line? Legal frameworks matter—but so does vigilance. Even in regulated environments, strategic pricing can create large differences in what you’re charged. And in my case, it did—until I shopped around.

P&C Insurance Pricing Framework

After accounting for the risk of that being insured

Environmental Risk and the Double Whammy

As environmental risks rise—think wildfires, floods, and wind damage—insurers face mounting cost pressures. Consider the 2025 California wildfires, which are estimated to cost between $28 billion and $54 billion, with a significant portion falling on P&C insurers.

Most large insurance companies operate across all 50 states. Their shareholders don’t evaluate performance by ZIP code—they look at company-wide profitability and growth.

Here’s the challenge: in states that restrict price optimization—like California, New York, and Florida—insurers face regulatory limits on premium increases. In states that do not restrict price optimization, certain strategic segments may limit premium increases.

So what happens?

Think of rising insurance costs like squeezing a balloon. If you compress one side—through regulatory pressure—the air (or in this case, the price increases necessary to maintain profit targets) must go somewhere. It bulges outward in the path of least resistance.

In the insurance world, that pressure escapes into non-restrictive states or market segments that fall outside an insurer’s strategic focus. These states and segments end up absorbing a disproportionate share of cost—not because they’re riskier, but because the rules permit it, or the strategy deprioritizes them.

In economic terms, cross-subsidization occurs when customers in low-risk, less-constrained environments effectively “pay the tax” for policyholders in high-risk, tightly regulated states.

That’s a double whammy for consumers in places where price optimization is still allowed, or where competitive strategy shifts pricing upward despite consistently low risk:

• You’re more likely to face non-risk-based premium hikes.

• And you may end up subsidizing losses in other regions your insurer can’t fully price for.

States in high environmental risk areas have an incentive to regulate. Their regulation pushes their risk to lower environmental risk states via the P&C insurance cross-subsidy behavior. In effect, your loyalty—or your ZIP code—becomes a pressure valve for your insurer’s profit targets and high risk states.

My Story: How I Got Caught

I had been with ShieldSure Insurance for 10 years. (“ShieldSure” is a fictional name of a major P&C insurer. It anonymizes the insurance company referenced in this article.) My agent is a trusted member of my local community and someone I genuinely respect. While he’s not a direct employee of the company, he operates as a captive agent—exclusively offering ShieldSure’s products within their systems and branding. Like most agents in the P&C industry, he earns commissions on both new policies and renewals, creating a strong financial incentive to retain long-term clients.

This structure creates a behavioral tension between the trust consumers place in their agent and the agent’s incentive to maintain that trust—even in environments where pricing can gradually increase without raising concern.

I also believed that Virginia’s insurance commission was protecting me from unfair pricing—specifically, pricing that wasn’t aligned with my actual risk factors.

Oops.

When I finally shopped around, I discovered I was paying 40% more than necessary—thousands of dollars each year—for my full P&C bundle: homeowners, auto, and umbrella liability. Naturally, I switched. As a side note, I moved to a competing insurer—also represented by a local agent. The service model was virtually identical: same agent-based support, same types of coverage—just at a significantly lower cost than what I had been paying with ShieldSure.

While Virginia prohibits price optimization, I now believe that wasn’t the issue. Instead, it’s more likely that I fell out of favor with ShieldSure’s competitive strategy. Whether due to market segmentation, ZIP code targeting, or underwriting priorities, ShieldSure's may have deprioritized my profile—while other insurers saw me as a high-value customer worth pricing aggressively to acquire.

And here's a possible reason why: ShieldSure continues to write significant business in California, a state with escalating wildfire risks and strict regulatory constraints that limit premium increases. In contrast, other major insurers have actively reduced their exposure in California, pausing new policies or limiting their book to manage volatility.

This means ShieldSure may face greater cost pressure from high-risk, high-regulation states—and could be using lower environmental-risk markets like Virginia to recover margin. That’s how cross-subsidization works: even if you’re low-risk, your premiums might reflect someone else’s fire zone.

This is where game theory in economics comes into play. Each insurer is engaged in a repeated, competitive game, and survival depends not just on pricing to risk, but on maximizing profit within the constraints of regulation and competition. When individual-level optimization is off the table, the equilibrium shifts to group-level pricing strategies—what economists call third-degree price discrimination.

It’s not personal—but it is strategic. And sometimes, that means you lose the pricing game without ever knowing it was being played.

A Behavioral Economist and Personal Finance Professor’s Takeaway

As a point of emphasis: I’m not advocating for more government regulation. This is where I differ with some consumer advocates who encourage regulation as the answer. My focus is on education, accountability, and self-reliance.

Ironically, if there had not been a government agency responsible for approving insurance rates, I might have been more vigilant. I assumed the system had my back—and that assumption led me to lower my guard. It never occurred to me that Virginia's definition of "fair" could be so different than mine and most people that I know.

People often interpret unexpected outcomes as a call for more government oversight. But the reality is more nuanced. Government institutions operate under their own set of incentives and constraints, which don’t always align with those of individual consumers or taxpayers.

Take insurance regulation, for example. Most state regulators are tasked with a dual—and sometimes conflicting—mandate: they must promote “fair” pricing for consumers, while also ensuring the financial solvency of insurers. And at the end of the day, regulators are faced with making a choice:

• A lower rate that feels fairer for the consumer

- OR -

• Resolving risk by allowing a higher rate to improve an insurer's likelihood of staying solvent.

Regulators will almost always lean toward the latter choice. After all, expensive insurance is still better than no insurance at all. Plus, there is an employment risk bias for the regulator decision-maker. A few consumers complaining about higher rates is greatly preferred to a failed insurer. The former is a manageable part of their job, the latter is a fireable offense.

Thus, even a word like "fair" is negotiated between regulators and insurance companies. That doesn’t make government “bad”—it simply means that the system is complex and not always optimized for individual protection. Everyone' definition of fairness is different, everyone's situation is different, and an individual's fairness definition will morph over time. Defining "fairness" is in the eye of the beholder. It is literally impossible for the government to use a single definition of fairness that works for everyone.

Rather than expecting government regulation to substitute for due diligence, I believe in building personal knowledge, using a consistent, repeatable decision process, and exercising accountability in financial decisions—especially those related to insurance. Individuals should own their definition of fair.

And that’s the real lesson.

No one—government included—cares more about your money than you do.

Incentives can diverge. Systems can be gamed. Even legal constraints aren’t always what they appear to be. And yes, even your local agent—someone you trust—may not fully realize they’re participating in a broader pricing system that doesn’t serve your best interest.

That’s why personal responsibility is so central to the work I do with my students and clients.

I love bringing experiential learning into the classroom and client sessions—and this time, I was the case study.

I don’t blame ShieldSure Insurance for price optimizing where legal or exercising their competitive strategy, nor do I blame my agent. I blame myself for not being more proactive.

And truthfully, price is personal. Another policyholder might be perfectly willing to pay more because they value the trust, convenience, or peace of mind their agent provides. These are examples of transaction costs—non-monetary factors like time, hassle, switching effort, or perceived risk—that shape how we interpret value. Some people are happy to pay a premium to avoid those frictions, and that’s completely fair.

But in my case, the numbers didn’t add up—and I should have switched much sooner. I did not make an informed decision that higher costs were ok because of the benefits I received from ShieldSure. I inappropriately believed prices were regulated in a manner consistent with my and many people's definition of fair. Yes, I was duped by my own beliefs about my government. Now I know better. Plus, I am committed to helping my clients and students pay the appropriate price for their P&C insurance.

I was stuck in an illusion of fairness and trust—an "insurance matrix" of sorts—and now I see things clearly. Once you understand how pricing really works, you can’t unsee it. The blinders are off. The Red Pill has been swallowed.

You may ask, "Well, why didn't your agent tell you about price optimization or competitive strategy? It sounds like your trust was ill-placed." Sure - it would have been nice if he had provided the inside scoop on how insurance policy pricing works, but that is not his job. It is my job to educate myself. But at the end of the day, all agents have to live with themselves. They have to balance serving their employer, their own pocketbook, their community, and their clients.

What You Can Do Now

The good news? You’re not powerless. While price optimization, competitive strategy, and regulatory blind spots may be beyond your control, the steps you take as a consumer can dramatically improve your financial outcomes. You still hold the most important lever—your ability to optimize whose pocket your hard-earned money ends up in. Here's what I recommend:

• Re-shop your policies every 12–18 months.  Both agents and brokers want to build a trusting relationship.  But their incentives and constraints suggest leveraging that trust to enable price optimization. It is a balancing act that insurance product consumers need to watch.

• Keep your costs down by choosing higher deductible policies. When faced with a choice between a lower deductible with a higher premium and a higher deductible with a lower premium, you’re usually better off taking the higher deductible—and saving the premium difference. You’re essentially cutting out the middle layer for smaller, manageable claims and keeping more money in your own pocket, while still protecting yourself against life-altering financial risks. It’s a smart way to self-insure where you can—and still lean on coverage when you truly need it.

• Understand how price optimization works in your state. Be aware: a) More price optimization is the direction of the slippery slope, and b) Competitive strategy may substitute for price optimization, even in states that restrict price optimization.

• Never confuse regulatory approval with fair pricing. The word "fair" means different things to different people, including your government.

• And yes—trust, but verify. No one cares more about your money than you do.

Check out the map to see if your state allows price optimization.  Even if you are a price-optimized restricted red state, do not assume the government has your back. I have come to understand that every state has a nuanced approach to managing insurance rates. It is not as simple as the map suggests - red or green. Plus the rules and rule enforcement change. Reddish today and greenish tomorrow. You are better off following these steps regardless of the perceived government protection. I hope my experience helps you avoid the same trap.

Resources for the Curious

1. National Association of Insurance Commissioners (NAIC). Price Optimization White Paper. NAIC, Nov. 2015.

Defines price optimization and summarizes regulatory responses across states.

2. Consumer Federation of America. State Bans on Price Optimization by Auto Insurers. CFA, Jan. 2023.

Confirms the list of states that have formally prohibited price optimization.

3. Birnbaum, Birny. Use of Big Data by Insurers: Algorithmic Bias and Price Optimization. Center for Economic Justice, 2020.

Explores how data science enables non-risk-based pricing practices and their consumer impact.

4. Virginia State Corporation Commission, Bureau of Insurance. Consumer’s Guide to Homeowners Insurance. Virginia SCC, 2023.

Explains how insurance rates are filed and reviewed in Virginia.

5. Klein, Robert. “The Effects of Price Optimization on Insurance Consumers.” Journal of Insurance Regulation, vol. 39, no. 4, 2021, pp. 1–28.

Analyzes the implications of behavioral pricing and regulatory oversight using comparative data.

6.       United Policyholders. “Connecticut Bans Use of Price Optimization for Insurance Rates.” United Policyholders, April 20, 2025.

Confirms that Connecticut is the 16th state to restrict price optimization in insurance. Lists all states that prohibit this practice and references official state bulletins.

7. Consumer Federation of America. Letter to the Federal Trade Commission on Price Optimization in Insurance Markets. CFA, August 2, 2024.

Provides the most up-to-date list of U.S. jurisdictions that formally prohibit price optimization, confirming at least 20 states and D.C. have issued regulatory bans or restrictions on the practice.

8. Insurance Information Institute (III). “2025 California Wildfires Estimated to Cost Up to $54 Billion.” III.org, March 5, 2025.

Reports projected economic losses from the 2025 California wildfires ranging between $28 and $54 billion, with a substantial portion expected to impact property and casualty insurers.

9. Klemperer, Paul. “Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade.” Review of Economic Studies, vol. 62, no. 4, 1995, pp. 515–539.

Offers a foundational look at switching costs as a form of transaction cost that distorts competitive pricing. Frequently cited in studies of insurance, telecom, and financial services, where consumer inertia and loyalty penalties are well-documented.

10.  Sowell, Thomas. Knowledge and Decisions. Basic Books, 1980.

Emphasizes how decisions in complex systems are shaped by incentives and constraints, not intentions. Sowell’s framework helps explain why insurance companies, facing minimal regulatory constraints, behave rationally by price optimizing to meet shareholder demands.

11. Cummins, J. David, and Mary A. Weiss. “Market Frictions and Cross-Subsidization in Property-Casualty Insurance.” Journal of Risk and Insurance, vol. 71, no. 4, 2004, pp. 627–659.

Examines how regulatory constraints and market dynamics lead to cross-subsidization in insurance pricing, where consumers in lower-risk or less-regulated areas may indirectly subsidize losses in high-risk, highly regulated states.