The Missouri Department of Insurance has issued a bulletin to Missouri 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.
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 are able to collect and analyze “Big Data” to predict these consumer behaviors.
Missouri law requires that rates are based on insurer’s expected claims, cost of doing business, and policyholder risk – not on what an insurer believes a consumer is willing to pay.
Source: Missouri Department of Insurance, Financial Institutions and Professional Registration (DIFP)