District of Columbia, Maine, Pennsylvania Nix Price Optimization
The District of Columbia, Maine and Pennsylvania have recently joined a growing number of states and jurisdictions that issued directives prohibiting the use of price optimization.
In Washington, D.C., the Department of Insurance, Securities and Banking’s (DISB) Acting Commissioner Stephen C. Taylor issued “Bulletin 15-IB-06-8/15” on Aug. 25 that directs any property/casualty insurer using price optimization to rate policies in the District to cease such practice.
“Price optimization refers to an insurer’s practice of charging the maximum premium that it expects an individual or class of individuals to bear, based upon factors that are neither risk of loss nor estimated expense-related,” said Taylor.
For example, an insurer may charge a non-price sensitive individual a higher premium than it would charge a price sensitive individual, despite their risk characteristics being equal, Taylor said. “This practice is discriminatory and it violates the District’s anti-discrimination insurance laws codified at D.C. Official Code §§ 31-2231.13(c), 31-2703(a) and 31-2703(b),” he warned insurers.
“The Department hereby issues a ban on the inclusion of price optimization in all future rate filings,” Taylor told insurers.
Any insurer currently using price optimization to rate policies in the District must submit a SERFF (System for Electronic Rate and Form Filing) filing that is compliant with the acting commissioner’s directive no later than Nov. 30, 2015, with proposed effective dates no later than March 31, 2016.
In Maine, Insurance Superintendent Eric A. Cioppa issued “Bulletin 405: Price Optimization and Elasticity of Demand” on Aug. 24. In the bulletin, Cioppa directed personal lines P/C insurers using price optimization to submit revised rate filings that remove such factors within 60 days.
The bulletin noted that “it has come to the Superintendent’s attention that some insurers’ rates include factors, unrelated to underwriting, that consider the point at which a policyholder will look for coverage elsewhere because of increases in the premium charged.”
Cioppa said these ratemaking methodologies make use of data analysis techniques that have been developed to test the willingness of individual customers to pay higher rates for coverage than other customers with similar underwriting characteristics. “Common terms used in describing this practice are ‘price optimization’ and ‘elasticity of demand,'” he said.
Cioppa said statutes “evidence a clear purpose in Maine that insurers classify risks according to actuarially supported considerations grounded in insurance loss and expense and disclose those considerations fully in their rate filings,” said Cioppa. “Failure to do so puts insurers at high risk of violating Maine rating law.”
The superintendent also explained that his department “does not intend to prohibit or restrict such practices as capping or transitional pricing if applied on a group basis.”
“The use of sophisticated data analysis to develop finely tuned methodologies with a multiplicity of possible rating cells is not, in and of itself, necessarily a violation of Maine’s rating laws as long as the classifications are based strictly on risk of loss and not on willingness to pay or elasticity of demand,” Cioppa noted.
In Pennsylvania, Insurance Commissioner Teresa Miller published a notice in the Aug. 22 issue of the Pennsylvania Bulletin, warning the state’s insurers that they are prohibited from using the price optimization techniques in P/C rates.
“The practice is not legal in Pennsylvania and the Insurance Department will continue to ensure consumers are protected,” a Pennsylvania Insurance Department spokesperson told Insurance Journal.
“Recently, the question of whether price optimization techniques may be used by insurance companies has been raised to the Insurance Department,” said Miller. “The answer is no and the Department issues this notice to remind insurers about the Department’s longstanding prohibition against the use of price optimization techniques in property/casualty insurance rates.”
It is well-settled that P/C insurance rates cannot be excessive, inadequate or unfairly discriminatory, Miller noted.
“With the advent of sophisticated pricing tools, including computer software and rating models referred to as price optimization, insurers, rating organizations and advisory organizations are reminded that policyholders and applicants with identical risk classification profiles – that is, risks of the same class and essentially the same hazard – must be charged the same premium,” Pennsylvania’s Miller said.
So far, other states that have issued directives prohibiting the use of price optimization by P/C insurers include California, Florida, Indiana, Maryland and Ohio.