The term “price optimization” in insurance ratemaking can reference a number of ratemaking variables in order for an insurer to charge an insured an “optimal price.” In its most objectionable form, it refers to the use of consumer demand data to charge a policyholder the greatest amount without causing him to move to another insurer. The National Association of Insurance Commissioners (NAIC) Casualty Actuarial and Statistical (C) Task Force (CAS Task Force) first began examining the use of price optimization at the request of the NAIC Auto Insurance (C/D) Study Group in 2013, in response to numerous objections opposing the practice because it arguably results in unfairly discriminatory rates, i.e., policyholders with the same loss history and risk profile being charged different rates.
Under unfair insurance practices laws, rates that are “excessive, inadequate or unfairly discriminatory” are prohibited. In setting rates, insurers are required to treat similarly situated risks similarly, and the rates charged must be based on the costs associated with the risk. During the NAIC’s most recent national meeting, the CAS Task Force voted on Nov. 21, 2015, to adopt the Price Optimization White Paper dated Nov. 19, 2015 establishing guidelines on the use of price optimization. A copy of the adopted White Paper may be accessed here.
Several regulators had taken some action on the issue prior to the CAS Task Force’s adoption of the final White Paper, and several others followed the adoption. The current list of jurisdictions specifically weighing in on the issue follows.
- Connecticut: Dec. 4, 2015 Bulletin PC-81 direct property and casualty insurers to remove price optimization practices that cannot be shown to be cost-based from personal lines policies.
- Minnesota: Nov. 16, 2015 Administrative Bulletin 2015-3 directs insurers to cease the practice immediately and instructs insurers using price optimization to submit a revised filing and corrective action plan.
- Colorado: Oct. 29, 2015 Bulletin No. B-5.36 advises that the Division interprets the law as requiring risks to be classified in accordance with expected losses and expenses and directs insurers using price optimization to submit a filing in accordance with law.
- Delaware: Oct. 1, 2015 Bulletin No. 78 instructs insurers that price optimization may not be used to the extent that it is unrelated to risk of loss or expense, consistent with the Task Force’s draft model bulletin.
- Montana: Sept. 18, 2015 Advisory Memorandum advises all property and casualty insurers that price optimization violates Montana rating laws as unfairly discriminatory and directs insurers to cease using price optimization.
- Rhode Island: Sept. 18, 2015 Bulletin 2015-8 reminds personal lines insurers that classifications must be based strictly on risk of loss and not “elasticity of demand,” consistent with the Task Force’s draft model bulletin, and instructs filers to disclose the use of such factors.
- District of Columbia: Aug. 25, 2015 Bulletin 15-1B-06-8/15 bans price optimization in all property and casualty rate filings.
- Maine: Aug. 25, 2015 Bulletin 405 instructs insurers that price optimization runs a high risk of violating Maine insurance law and directs insurers using price optimization in their filings to disclose such factors.
- Pennsylvania: Aug. 22, 2015 Notice 2015-06 instructs insurers that price optimization techniques may not be used as the practice is violative of Commonwealth insurance law.
- Indiana: July 20, 2015 Bulletin 219 advises insurers that rate factors or methodology based on considerations other than risk are “at high risk” of violating insurance laws and companies using the practice should submit a new filing in accordance with the bulletin.
- Washington: July 9, 2015 Technical Assistance Advisory 2015-01 instructs insurers that rates must be based on the costs associated with the risk and that price optimization likely violates insurance laws.
- Vermont: June 24, 2015 Insurance Bulletin No. 186 reminds insurers that rate factors must be specifically related to an insurer’s expected losses and expenses and directs insurers to disclose the use of price optimization.
- Virginia: The June 2015 edition of the Property & Casualty Filing Guidelines Handbook advises filers that “[s]etting rates or modifying rates based on characteristics unrelated to expected losses or expenses” violates Virginia law and is not permitted. See scc.virginia.gov/boi/co/pc/files/pc_handbook.pdf
- Florida: May 14, 2015 Informational Memorandum OIR-15-04M instructs property and casualty insurers that they should not use price optimization in any manner and insurers using the practice should submit a filing to eliminate it.
- New York: The Department of Financial Services’ March 18, 2015 letter to property and casualty insurers declares price optimization practices as inconsistent with cost based rating approaches and potentially in violation of New York insurance law as unfairly discriminatory.
- California: Feb. 18, 2015 Notice to Property and Casualty Insurers deems “any use of price optimization as unfairly discriminatory” and directs insurers to remove any such factors in their next filing.
- Ohio: Jan. 29, 2015 Bulletin 2015-01 advises insurers that the use of price optimization results in unfairly discriminatory rates and directs insurers to end the practice and resubmit rates in accordance with the bulletin.
- Maryland: Oct. 31, 2014 Bulletin 14-23 bans price optimization to rate policies as unfairly discriminatory under state law and requires insurers to end using such techniques.
Copies of the referenced regulatory bulletins, notices and advisory memoranda may be accessed here. For more information, contact Susan Stryker.