Price Optimization Prohibited in Ohio Insurance

Ohio is now prohibiting price optimization in the calculation of insurance premiums.  Ohio recently became the second state, after Maryland, to explicitly prohibit the use of “price optimization” in the rating of property and casualty insurance policies.

Price Optimization Used to Increase Premiums

Price optimization considers certain factors–such as the amount or percentage of past premium increases without the insured switching insurers, or whether the policyholder has complained about a past premium increase –to determine a policyholder’s “price elasticity of demand.”  In other words, it measures how much of a premium increase a policyholder will tolerate before switching companies, and then increases the premium on those policyholders who are likely to tolerate an increase in cost.

Price Optimization Used to Decrease Premiums
“Price optimization” analyzed patterns of behavior of policyholders to try to predict whether a policyholder is likely to switch to another insurer if the insurer increases premiums. This may involve the use of a “retention model.” If an insurer’s analysis indicates that a policyholder is likely to switch to another insurer, that policyholder will be charged a lower premium than a policyholder who is considered unlikely to switch to another insurer.

Ohio Prohibits Price Optimization

Ohio has taken the position that price optimization is not related to the risk of loss, and therefore to increase premium on that basis constitutes unfair discrimination based on factors other than risk of loss (see Ohio Bulletin 2015-01, eff. 1/29/2015).  Ohio requires that rates be based upon risk, and requires differences among risks to have demonstrable probable effect on losses or expenses.

Maryland Prohibits Price Optimization

Similar to the Ohio action, in October of 2014, the Maryland Insurance Administration issued Bulletin 14-23 alerting insurers that the use of “price optimization” in Maryland is unfair discrimination and in violation of §27-212(e)(1) of the state’s Insurance Article.  It was noted that this prohibited practice was being used in personal auto, homeowners, and some commercial lines of business.

Emerging Message to Insurers

These bulletins mark an emerging message from insurance regulators to the insurance industry that they will not be allowed to charge policyholders a higher premium simply because the policyholder has not complained to the insurer about past premium increases, or charge a higher because the insurer determines that the policyholder is not likely to switch insurers when they get a notice of increased premium.  This practice has been labeled as “unfair discrimination,” the same as the practice of giving insureds a reduction in premium solely because the predictive model indicates the policyholder is likely to switch insurers if they receive a premium increase.