Virginia Reminds Insurers: Rates Must Be Cost-Based

Virginia Insurance Commissioner Jacqueline Cunningham has issued an administrative letter reminding insurers to review the rate standards outlined in Virginia Code §38.2-1904 to ensure compliance.

Cunningham also noted that certain “price optimization” techniques — ratings techniques where insurers raise rates on policyholders who are deemed unlikely to search for a better deal — have not been permitted in Virginia.

Virginia is the 19th U.S. jurisdiction to notify insurers of the restrictions on non-cost based price optimization techniques. Other jurisdictions include Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Indiana, Maine, Maryland, Minnesota, Missouri, Montana, Ohio, Pennsylvania, Rhode Island, Vermont and Washington.

Cunningham’s April administrative letter (Re: Compliance with Statutory Rate Standards in File-and-Use Lines of Insurance) was addressed to all insurers and rate service organizations licensed to write property/casualty insurance in Virginia.

“The primary focus of the letter is to remind insurers of the rate standards in Virginia and that rates and rating rules must be cost-based,” said Katha Treanor, a spokesperson for the Virginia Bureau of Insurance.

In Virginia, insurers’ filings are reviewed to determine that they comply with the statutory requirements before the Bureau of Insurance acknowledges them.

Cunningham said that in recent years, Virginia has gotten rates and supplementary information in filings that incorporate increasingly complex pricing mechanisms, such as predictive models. Some have included pricing mechanisms that are inconsistent with the standards outlined in the state’s rating laws.

The commissioner stressed that any rate differentials for the same coverage must be based on differences between expected losses and/or expenses.

She said examples of practices that are inconsistent with rating laws include the use of:

• Characteristics specific to a particular policyholder to predict and assign pricing components unrelated to losses or expenses incurred during the policy period;
• Pricing components related to an insured’s predicted long-term profitability over time, based on an insured’s likelihood to renew; and
• Price optimization techniques intended to maximize overall retention, profitability, written premium or market share based on how much of a rate increase an individual policyholder is likely to tolerate.

The Consumer Federation of America (CFA), a consumer advocacy group, welcomed the commissioner’s announcement.

“We applaud Commissioner Cunningham for her strong and clear stance in favor of protecting consumers from the unfair practice of price optimization,” said J. Robert Hunter, director of insurance for CFA.

Topics Carriers Virginia