Delaware Bans Price Optimization in Insurance Pricing

Delaware has issued a bulletin prohibiting the use of price optimization in insurance pricing.

The Delaware Department of Insurance said in its Bulletin No. 78 on Oct. 1 that “while price optimization has no universally accepted definition, it generally refers to an insurer’s practice of varying rates based on factors other than the risk of loss” in order to charge each insured the highest price that they will tolerate without shopping for alternative coverage.

These non-risk factors would include the likelihood that policyholders will renew their policies and the willingness of certain policyholders to pay higher premiums than other policyholders. The bulletin was addressed to all property/casualty insurers writing personal lines policies in Delaware, rating organizations, and the Delaware Insurance Guaranty Association.

The bulletin said that insurers use sophisticated analytics that cover not only risk of loss, but such things as how happy an individual is with their insurer. The practice can result in two policyholders receiving different premium increases even though they have the same loss history and risk profile.

Delaware law prohibits charging unfairly discriminatory rates, requires that the rates be based upon risk, and requires differences among risks to have “a demonstrable probable effect” on losses or expenses. “To the extent that price optimization involves gathering and analyzing data related to numerous characteristics specific to a particular policyholder and unrelated to risk of loss or expense, insurers may not use price optimization to rate policies in Delaware,” the bulletin advised.

Delaware regulators said any insurer utilizing price optimization in a manner described in the bulletin to rate policies in Delaware must submit a SERFF filing that is compliant with the bulletin no later than Dec. 15, 2015 – with proposed effective dates no later than April 1, 2016, for new business and July 1, 2016, for renewal business.

Delaware joins a growing number of states and jurisdictions including California, District of Columbia, Florida, Maine, Maryland, Ohio, Pennsylvania, Rhode Island, Vermont and Washington that are prohibiting the practice of price optimization based on non-risk factors.