Price Optimization – State Regulation Roundup
I have been asked to provide a roundup of the state developments with respect to “price optimization”. Some states acknowledge that “price optimization” does not have a universally recognized definition. There is a continually growing number of states that have stated that to the extent “price optimization” involves rating that considers non-risk-related factors such as “price elasticity of demand” (in insurance rating, taking into account whether the policyholder will tolerate a premium increase at renewal before engaging in comparison shopping or switching to a different insurer), it will be considered an impermissible discriminatory practice.
California – February 18, 2015 – California’s ban on price optimization states that “price optimization states price optimization is “any method of taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals and classes.” The California Notice Regarding Unfair Discrimination in Rating: Price Optimization defines price optimization as “any method of taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes.”
Florida – May 14, 2015 – Florida’s Insurance Commissioner issued Informational Memorandum OIR-15-04M that recognizes that the term “price optimization” does not have a universally recognized definition. To the extent it is defined as a process for modifying the insurance premium that would otherwise be charged to an insured or a class of insureds, in order to maximize insurer retention, profitability, written premium, market share, or any combination of these (utilizing the economic concept of “price elasticity of demand”) ”, the rates will be found unfairly discriminatory, in violation of Sections 627.062 and 627.0651, Florida Statutes. Specifically, if the rate determination involves factors not related to expected loss and expense experience it will not be permitted.
Indiana – July 20, 2015 – Bulletin 219 from the Indiana Department of Insurance states that “the use of price optimization in establishing rates is not permitted.” The Bulletin refers to “price optimization” as “a rating factor or rating methodology that adapts rates based on considerations other than risk” and states that it is “…at high risk of violating Indiana insurance laws, particularly IC 27-1-22-3, which requires that rates not be excessive, inadequate or unfairly discriminatory.”
Maryland – October 31, 2014 – Maryland Bulletin 14-23 states “price optimization refers to the practice of varying rates based on factors other than the risk of loss, such as the likelihood that policyholders will renew their policies and the willingness of certain policyholders to pay higher premiums than other policyholders.” The MIA has determined that price optimization (thus defined) is unfairly discriminatory in violation of Section 27-212(e)(1) of the Insurance Article.
New York – a letter from the New York Department of Financial Services to insurers defines price optimization as “the practice of varying rates based on factors other than those directly related to risk of loss, such as an insured’s likelihood to renew a policy or on an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes. Their concern is evidenced by an inquiry sent to insurers in April, 2015, asking if the insurer:
- Uses formal or informal price optimization models for rating or tier placement; or
- Considers policyholder retention or the likelihood that a policyholder will shop for coverage in the carrier’s assignment of tiers or rating factors.
Ohio – January 29, 2015 – Ohio’s ban on price optimization, Bulletin 2015-01, states that “price optimization…generally refers to an insurer’s practice of varying premiums based on factors that are unrelated to loss in order to charge each insured the highest price the market will bear.” Ohio law “requires that rates be based upon risk, and requires differences among risks to have a demonstrable probable effect on losses or expenses.”
South Dakota Insurance Department is showing growing concern about price optimization as they surveyed insurer’s use of price optimization in their rating plans in June 2015.
Vermont – June 24, 2015 – The Vermont Dept of Financial Regulation issued Bulletin No. 186 that acknowledges, like New York, that there is no universally-accepted definition of price optimization. However, they note that in some of the applications of price optimization involves the judgmental use of factors not specifically related to a policyholder’s risk profile to help determine or adjust his or her insurance premium (such as whether the policyholder will tolerate a premium increase at renewal before engaging in comparison shopping or switching to a different insurer). The Department, being critical of this practice, reminded insurers that all ratemaking must reflect the differences in expected losses and expenses for different classes of policyholders, and specifically stated that inappropriate to use inappropriate rating factors such as non-risk-related factors such as “price elasticity of demand.” This Bulletin requires disclosure to the Deparment if the company uses as non-risk-related factors.
Washington – July 9, 2015 – Technical Assistance Advisory 2015-01 states that the practice of price optimization involves an insurer’s use of a sophisticated analysis, often using non-insurance data, to predict a policyholder’s likelihood of renewing a policy. Washington State Insurance Commissioner Mike Kreidler warns insurers that “to the extent that insurer’s use…premiums, rates, or rating factors unrelated to cost and risk, it will be considered unfairly discriminatory and in violation of Washington State law.”
This is a summarized compilation of my notes on the state developments regarding “price optimization” and should not be considered legal analysis or advice. Please contact me directly if you wish to discuss actionable advice. Jeff
