Pennsylvania Says Insurers Are Prohibited From Using Price Optimization

August 24, 2015

Pennsylvania Insurance Commissioner Teresa Miller has issued an official notice warning the state’s insurers that they are prohibited from using the price optimization techniques in property/casualty insurance rates.

“The practice is not legal in Pennsylvania and the Insurance Department will continue to ensure consumers are protected,” a Pennsylvania Insurance Department spokesperson told Insurance Journal.

The Pennsylvania Insurance Department’s official notice, titled “Price Optimization; Notice 2015-06,” was published in the Aug. 22 issue of the Pennsylvania Bulletin, the state’s official publication for information and rulemaking.

“Recently, the question of whether price optimization techniques may be used by insurance companies has been raised to the Insurance Department,” Miller said in the notice. “The answer is no and the Department issues this notice to remind insurers about the Department’s longstanding prohibition against the use of price optimization techniques in property and casualty insurance rates.”

It is well-settled that P/C insurance rates cannot be excessive, inadequate or unfairly discriminatory, Miller noted. She explained that these prohibitions can be found in Pennsylvania’s P/C rate regulatory acts and the Unfair Insurance Practices Act.

“With the advent of sophisticated pricing tools, including computer software and rating models referred to as price optimization, insurers, rating organizations and advisory organizations are reminded that policyholders and applicants with identical risk classification profiles — that is, risks of the same class and essentially the same hazard — must be charged the same premium,” Miller said in the notice.

The commissioner warned insurers that rates that fail to reflect differences in expected losses and expenses with reasonable accuracy are unfairly discriminatory under the Pennsylvania law and will not be approved by the Insurance Department.

“The Department’s Property and Casualty Bureau reviews thousands of rate filings each year to ensure compliance with these standards, and the actuaries that review these filings often identify and object to filings that fail to meet these statutory requirements,” said Miller.

So far, a number of states, including Maryland, Ohio, California, Florida and Indiana, have issued a formal prohibition on the use of price optimization in P/C insurance rates.

According to the latest draft of the price optimization white paper from the National Association of Insurance Commissioners’ Casualty Actuarial and Statistical (C) Task Force, “Price optimization may use non-insurance databases to gather personal consumer information or detailed information about competitors’ pricing to model consumer demand and predict the response of consumers to price changes.”

“Some argue that price optimization has been developed to increase insurers’ profits by raising premiums on individuals who are less likely to shop around for a better price. It is asserted that many of these people are low-income consumers,” according to the white paper.

Commissioner Miller’s announcement was applauded by the Consumer Federation of America (CFA) and the Center for Economic Justice (CEJ), consumer advocacy groups that have been urging regulators around the country to stop insurers from using price optimization.

The consumer groups said that in recent years, insurers have begun to use price optimization to raise customers’ premiums based on individual shopping habits and perceived “price elasticity of demand,” which is a measurement of a consumer’s tolerance for price changes and can also reflect their level of access to other choices.

According to the consumer groups, price optimization marks a radical departure from the actuarial practice of pricing insurance premiums according to the risk of loss posed by the policyholder. “Price optimization by insurers is Big Data run amok and simply price gouging by a fancy name. Consumers are being punished for activities and circumstances unrelated to risk and without any disclosure or transparency by insurers,” said Birny Birnbaum, executive director of CEJ.

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