The New York Department of Financial Services (DFS) on March 18 sent out letters to hundreds of property/casualty insurers operating in the state, seeking information concerning price optimization.
New York joins a growing number of states around the country that are examining the practice of price optimization. Maryland, Ohio and California have prohibited the use of price optimization in their states in recent months, and the National Association of Insurance Commissioners’ (NAIC) Casualty Actuarial and Statistical Task Force is currently looking at the practice and plans to issue a report this year.
The letter from the DFS states that price optimization refers to the practice of varying rates based on factors other than those directly related to risk of loss — for example, setting rates or factors based on an insured’s likelihood to renew a policy or on an individual’s or class of individuals’ perceived willingness to pay a higher premium relative to other individuals or classes.
In other words, the letter said, the DFS is concerned that insurers are charging higher premiums based on “whether a consumer is less likely to notice, shop around, or object.” Such practices are inconsistent with traditional cost-based rating approaches and could violate New York’s Insurance Law § 2303, which prohibits the use of rates that are unfairly discriminatory, the letter said.
The DFS said in the letter that it is seeking information from insurers in order to help regulators determine whether insurers use price optimization in New York along all property/casualty insurance lines — and whether corrective actions are needed with regard to insurers’ rating practices.
The letter asks insurers whether they currently use any formalized price optimization models, or less formal price optimization considerations, as part of their pricing, rate filing, or tier placement decisions for any line of insurance in New York.
The letter also inquires whether insurers have a process or tool in place by which either initial tier placement or rating factors are made after giving consideration to policyholder retention or renewal analysis and the likelihood that a particular insured or class of insureds will shop around when faced with a rate increase (known as price elasticity or price elasticity of demand).
Insurers that currently use price optimization models or considerations are directed to respond to more detailed questions such as describing in detail all such price optimization models and considerations used, as well as how the company specifically incorporates the results of price optimization models and considerations into its pricing decisions. Insurers are directed to respond by no later than April 15, 2015.
The following is a copy of the letter from the New York Department of Financial Services: