Minnesota Bars Use of Price Optimization in Insurance Rates

Minnesota Commerce Commissioner Mike Rothman has ordered insurers doing business in Minnesota to stop the practice of price optimization in setting rates for auto and homeowners insurance.

Rothman said the anti-consumer practice violates state law because it unfairly discriminates by charging different premiums for consumers who otherwise have similar risk profiles.

Price optimization generally refers to the use of non-insurance consumer data, sophisticated statistical analysis and computer models to set insurance rates, relying on factors other than a consumer’s expected losses, expenses or risk to the insurer.

For example, rates might be manipulated based on calculations that some consumers are more likely than others to accept higher premiums and renew their policies rather than switch to a different insurer.

“Using price optimization in insurance is high-tech price gouging and it’s unfair to insurance consumers,” said Rothman. “People’s insurance premiums are determined by their risks and expected costs to an insurer. For example, it’s okay for an insurance company to charge more because someone has a bad driving record. It’s not okay to charge more because of their shopping habits.”

Rothman noted that certain groups, including seniors and low-income consumers, are more likely to stick with their existing insurer and less likely to move to a different company.

“A business might be expected to reward its faithful customers with some kind of loyalty discount or bonus,” said Rothman. “But insurance companies that use price optimization are secretly and unfairly penalizing customers for their loyalty by charging them higher premiums.”

Rothman said his agency recently objected to a rate filing by an auto insurer that included price optimization techniques.

Because of concerns that price optimization is becoming a more widespread industry practice, Rothman said he issued a bulletin to all property and casualty insurers doing business in Minnesota.

The bulletin directs any insurer that currently uses price optimization to immediately stop the practice and file a corrective action plan with the Commerce Department within 60 days. In addition, insurance companies must certify in all future property and casualty rate filings that they are not using price optimization.