Connecticut Warns Carriers Not to Use Price Optimization

Connecticut has joined the growing number of states that have banned or restricted the practice of “price optimization” in insurance pricing.

Connecticut Insurance Commissioner Katharine L. Wade announced that the state’s Insurance Department has officially warned property/casualty insurers against using a controversial pricing method that relies more on consumer buying habits than sound actuarial and risk-based principles.

Termed “price optimization” or “elasticity of demand,” the practice gives insurance companies the ability to use a wide variety of non-cost based factors to increase premiums to the highest amount before a consumer would seek to shop around with other carriers, the department said.

The department’s Dec. 4 bulletin states that carriers that use this methodology to rate personal lines policies delivered or issued for delivery in Connecticut will need to submit revised filings that remove such factors within 60 days after the date of the bulletin. Insurers must also disclose in the System for Electronic Rate and Form Filing (SERFF) whether the company uses such non-risk related factors.

“Insurers that fail to do so and are later determined to have used price optimization or elasticity of demand or failed to disclose such use to the commissioner may be subject to disciplinary action,” the bulletin stated.

Wade said the department views price optimization as “a discriminatory practice and therefore a violation of state insurance law.” It can result in two policyholders who have the same loss history and risk profile receiving two different premium increases, she said.

“A consumer’s propensity to shop for insurance or complain about rates are some examples of price optimization data points being used around the country,” Wade added. “These are not acceptable rating factors in determining premiums and will not be permitted in Connecticut.”

The department said its action is consistent with research and recommendations included in a recent National Association of Insurance Commissioners’ white paper on price optimization.

Connecticut is the 16th jurisdiction to prohibit or restrict the practice of price optimization that utilizes non-risk based factors in insurance pricing. Others include: California, Colorado, Delaware, District of Columbia, Florida, Indiana, Maine, Maryland, Minnesota, Montana, Ohio, Pennsylvania, Rhode Island, Vermont and Washington.