Missouri Joins Other States in Barring Insurers’ Use of Price Optimization

In mid-January, the Missouri Department of Insurance issued a bulletin to insurers reminding them that the rating practice generally known as “price optimization” is prohibited in the state.

“Price optimization” is the practice of measuring and modifying insurance prices based on an individual consumer’s predicted response to rate changes, the department said.

An example of this would be if a policyholder did not complain about a previous rate increase or cancel the policy due to such an increase. An insurer could potentially use this data to justify additional rate increases.

Conversely, the same data could result in a consumer not receiving a rate decrease for which they might otherwise qualify. In either scenario, the consumer may unfairly pay more.

Missouri Department of Insurance Director John M. Huff, who is president of the National Association of Insurance Commissioners (NAIC), said the NAIC has issued a white paper analyzing the practice of price optimization and identifying the following practices and characteristics as potentially violating insurance laws that prohibit unfair discrimination:

• How much a consumer might be willing to pay before they shop around for a better price;
• Whether or not a consumer has a history of shopping around for a better deal;
• Whether or not a consumer is likely to renew; and
• The likelihood of a consumer to ask questions or file complaints.

Insurers collect and analyze “Big Data” to predict these consumer behaviors. But Missouri law requires rates to be based on an insurer’s expected claims, cost of doing business and policyholder risk – not on what an insurer believes a consumer is willing to pay, according to the insurance department’s announcement.

Huff said under the price optimization rating model, seniors are most at risk to pay more because they tend to be more loyal to their insurance companies. He said the insurance department is “particularly sensitive to practices which harm our state’s more vulnerable populations.”

‘High-Tech Price Gouging’

Other Midwest states such as Ohio and Minnesota have banned the practice.

Minnesota Commerce Commissioner Mike Rothman called it an anti-consumer practice that unfairly discriminates by charging different premiums for consumers who otherwise have similar risk profiles.

“Using price optimization in insurance is high-tech price gouging and it’s unfair to insurance consumers,” Rothman said in a November 2015 bulletin.

Lieutenant Governor and Department of Insurance Director Mary Taylor in February 2015 warned Ohio insurers against the use of price optimization.

As in Minnesota and Missouri, Ohio law requires premiums to be based on the risk that the consumer brings to the company and prohibits unfair discrimination, Taylor pointed out.

The Consumer Federation of America has urged all states to bar the use of price optimization both in setting rates and in underwriting.

In a Jan. 13 media release, the CFA praised Huff for issuing the order banning the practice in Missouri. But earlier in the month, the group chastised Acting Illinois Insurance Director Anne Melissa Dowling for what the CFA called her “do-nothing” stance on price optimization.

CFA cited an article in Crain’s Chicago Business in which Dowling allegedly said that while the insurance department is aware that insurers in Illinois are using price optimization to set rates, the department is not prepared to stop the practice.

An email to the Illinois Department of Insurance for a response to CFA’s comments went unanswered.

The CFA has called on Huff and other state regulators to also make it clear the use of price optimization is not allowed in underwriting, as well as pricing.

“Over the past 20 years, insurers have blurred the line between underwriting (accepting or rejecting an applicant) and pricing in an effort to avoid regulatory and public scrutiny over rating practices,” the CFA said in its Jan. 13 statement.

Eighteen jurisdictions have notified insurers that the use of price optimization is against the law. In addition to Missouri, the practice is banned in Alaska, California, Colorado, Connecticut, Delaware, Florida, Indiana, Maine, Maryland, Minnesota, Montana, Ohio, Pennsylvania, Rhode Island, Vermont, Washington and Washington, D.C., according to the CFA.