Maryland Says Insurers Can’t Use ‘Price Optimization’

The Maryland Insurance Administration (MIA) issued a bulletin alerting insurers that the use of “price optimization” in Maryland is in violation of §27-212(e)(1) of the state’s Insurance Article.

MIA said it is requiring insurers that currently utilize price optimization to rate insurance policies in Maryland to file a corrective action plan with MIA by no later than Jan. 1, 2015.

MIA told Insurance Journal that “although the MIA is aware that at least some carriers’ rate filings have incorporated price optimization, we do not yet know the full extent of the practice.”

“Personal auto and homeowners appear to be the lines where the practice is most prevalent,” MIA said in a statement. “The practice also has been noted in some commercial property filings. The MIA will continue to scrutinize rate filings for unfairly discriminatory practices, including the use of price optimization.”

MIA has issued Bulletin 14-23 (Re: Unfair Discrimination in Rating: Price Optimization) on Oct. 31 to all property/casualty insurers in Maryland. “It has come to the attention of the Maryland Insurance Administration that some insurers are using ‘price optimization’ to rate insurance policies in Maryland,” the bulletin stated.

According to the bulletin, 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 the use of price optimization results in rates that are unfairly discriminatory in violation of the §27-212(e)(1) of the Insurance Article,” the bulletin stated. “As a result, insurers may not use price optimization to rate policies in Maryland.”

Price optimization is designed to take advantage of “price elasticity” in the market, by charging the most that the market will bear without losing business.

“One of the ways that insurers use price optimization is to analyze patterns of behavior of policyholders to try to predict whether a policyholder is likely to switch to another insurer if the insurer increases premiums,” the bulletin stated. “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.”

According to the bulletin, one developer of price optimization models indicated that one of the characteristics it considers is “whether a policyholder has complained to the insurer.” If a policyholder has complained, this indicates that the policyholder is unsatisfied and not likely to accept a premium hike. As a result — all other things being equal — this policyholder would be charged a lower premium than a policyholder who has not complained.

The MIA said it is requiring every insurer that utilizes price optimization to rate policies in Maryland to file a corrective action plan with the MIA by no later than Jan. 1, 2015. An insurer should include in the filing the following information:

• the lines of business for which the insurer is using price optimization, a description of the way the insurer is using it, and SERFF filing numbers of any rate and/or rule filings that contain price optimization;
• a description of the company’s proposed corrective action;
• a target date for making corrective rate and/or rule filing; and
• a target date for implementing the corrective rate and /or rule filings.