Rhode Island’s Insurance Division issued a bulletin on Sept. 18 for personal lines property/casualty insurers in the state that effectively prohibits the use of non-risk related features of price optimization.
Rhode Island joins a growing number of states and jurisdictions including California, District of Columbia, Florida, Indiana, Maine, Maryland, Montana, Ohio and Pennsylvania that are putting a stop to insurers’ use of such practice.
Rhode Island’s Insurance Superintendent Joseph Torti III noted in the Insurance Bulletin Number 2015-8 (“Price Optimization in Personal Line Ratemaking”) that while there is no universally accepted definition of price optimization, the price optimization practice, in some of its applications, involves the judgmental use of rating factors not specifically related to a policyholder’s risk profile to help determine or adjust his or her insurance premium.
The superintendent said an example would be using an individual policyholder’s response to previous premium increases to determine how much of a premium raise the policyholder would likely tolerate at renewal before switching to a different carrier. Torti said this practice can result in two policyholders receiving different premium increases even though they have the same loss history and risk profile.
Torti reminded P/C insurers doing business in Rhode Island that all ratemaking must conform to the statutory requirements contained in R.I. Gen. Laws §§ 27-6-1, 27-9-1 and 27-44-1. Specifically, he said, insurers are reminded that rates must not be “…excessive, inadequate or unfairly discriminatory…”
Torti said a rate will be considered unfairly discriminatory if price differentials fail to reflect equitably the differences in expected losses and expenses for different classes of policyholders. He said both base rates and rating classes must be based on factors specifically related to an insurer’s expected losses and expenses.
The bulletin advised that any personal lines P/C insurer that currently uses price optimization features to rate policies delivered or issued for delivery in Rhode Island should submit revised filings that remove such factors within 60 days after the date of the bulletin.
Topics Carriers Property Casualty
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