The Price of Price Optimization in Insurance

By | November 17, 2015

  • November 17, 2015 at 11:41 am
    Observor says:
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    Regulators and politicians apply price optimization for their own benefit. One example in California is the Proposition 103 regulations on Private Passenger Auto insurance which has drivers in rural areas subsidize drivers in urban areas. A logger in Humboldt County subsidizes a powerful attorney living in Brentwood or Beverly Hills. Also the prior insurance discount restrictions as well as the restrictions on credit in rating and underwriting has more responsible citizens subsidizing those who do not pay their bills.

    • November 17, 2015 at 2:41 pm
      Agent says:
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      The article correctly points out that Actuary’s do these schemes to maximize price when the traditional methods of risk assessment is not enough for them. Allstate has been a bad offender trying to optimize price and see what the customer will bear before leaving. I have a feeling they run a lot of good customers off. Most people will just not accept a $200-500 premium increase when they have good credit, no losses of any kind and were fine before they were optimized.

      • November 17, 2015 at 4:41 pm
        UW says:
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        Just to be clear, making this illegal is a from of government regulation, which interferes with the prices the company and the consumer both agree to provide and pay. So don’t whine about his, as you do in almost every post, whether it is related to this or not, and then whine about government interfering in other areas on the market.

        On top of that, regulating this means there will be a tax increase, as tax dollars will be spent on enforcement to deal with companies that violate any laws that may be passed outlawing this practice, so in effect people with competent agents who search for different quotes are subsidizing the people with agents who do not do this, or who spend more time whining online about it than working on alternative quotes for their customers.

        • November 17, 2015 at 4:52 pm
          Mr. Solvent says:
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          You are partially correct. This is government regulation. If insurance weren’t mandatory this practice may be perfectly acceptable (like the airlines and travel agencies). Since you’re required to buy insurance charging the same individual 2 different rates just based on whether they’ll leave isn’t acceptable.

          • December 4, 2015 at 6:27 pm
            Dion says:
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            But insurance is not mandatory. You aren’t required by law to drive and own a car. Doing so is a personal choice, and even if you do, you aren’t required to maintain insurance, you are only required to demonstrate financial responsibility, with insurance being one way (albeit the most common) to to achieve this.

            The main problem with banning price optimization is that it politicizes what should be a fairly routine and non-controversial commercial decision. Optimization is a fairly universally accepted insurance business practice overseas, but ‘American exceptionalism’ basically forbids looking outside US borders to see how things could operate.

            The banning of it is often touted under the guise ‘consumer protection’ (the affected consumers being disproportionately lower socioeconomic groups and racial minorities). Hence, the barring of optimization (and associated subsidization) is a stealth form of affirmative action and wealth re-distribtion. Where there are social and inequality issues these should be more directly dealt with via the taxation system and social policy. Using the insurance industry to dispense these subsidies is a grossly inefficent way to achieve social outcomes. Unfortunately the power of the GOP prevents a more direct approach to solving America’s social ills through a more progressive tax system, so it falls back on insurance pricing regulation to do this in a really indirect, ineffecient way. Quite a bizarre spot the US has gotten itself into.

          • December 7, 2015 at 11:25 am
            Dion says:
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            Insurance is not mandatory. Its not mandatory to own a motor vehicle. And even if you do own one it’s not mandatory to have insurance. It is only mandatory to demonstrate financial responsibility, of which insurance happens to be the most common method.

        • November 17, 2015 at 5:14 pm
          SWFL Agent says:
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          There’s probably an easy way to enforce this. The states’ OIR’s can start requiring companies to provide a specific break down on all policies, in terms of %’s and $’s, on every factor that affects the rate. For example: Base rate + age surcharge + credit score surcharge – homeowner disc – multicar disc + long time customer surcharge who doesn’t shop = final rate. That would pretty much fix the rate optimization problem.

          • November 18, 2015 at 7:55 am
            CL PM says:
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            Your idea is not bad but please realize that rates then need to go up to pay for the expense of all the additional regulatory reporting. Insurance companies should not be expected to do that extra work for free.

          • November 20, 2015 at 8:21 am
            KY jw says:
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            CL PM says: rates then need to go up to pay for the expense of all the additional regulatory reporting.

            Rates already have to be filed. There would be no “additional” reporting necessary.

          • November 23, 2015 at 1:06 pm
            InsGuy says:
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            Actually, most states do require rate filings on most personal lines. So, they are already doing this.

      • November 17, 2015 at 8:18 pm
        Don't Call Me Shirley says:
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        There’s your free market.

  • November 17, 2015 at 3:34 pm
    Milner says:
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    If a company is running too many good customers off, by definition it is not optimized.

    • November 17, 2015 at 4:10 pm
      Agent says:
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      Many of them are gambling that good customers who just don’t like changes will continue to pay them the ever increasing premiums. They figure that the increased pricing will offset the ones who leave for a better price on Home & Auto. Travelers did versions of taking rate and optimization some years ago and paid the price with agents book rolling their business. They finally woke up from their slumber last year and are doing better on pricing.

  • November 17, 2015 at 3:59 pm
    inusrance_guy says:
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    I haaate price optimization because insurance companies find it profitable to take away loyalty discounts from long term clients and they reward lower premiums to customers that hop around.

    • November 18, 2015 at 7:58 am
      CL PM says:
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      Loyalty discounts have always been a bad idea. The only way a company can offer such discounts is to charge a higher price to new customers than may be necessary. A book is going to have a certain amount of losses. If you give premium back in one place, you have to make it back in others. The best way for a company to be “loyal” to their renewal policyholders is to be disciplined to only raise rates each year at the rate lf loss cost inflation. If a company can keep their price increases small and steady, retention will be high and new business pricing will be competitive and that allows agents and companies to both grow.

      • November 18, 2015 at 8:33 am
        Practical PM says:
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        Small and steady increases would be splendid, if we can achieve adequate rate for risk at new business.
        Explain how we achieve that, and not lose market share to our competitors :)

        • November 18, 2015 at 9:18 am
          CL PM says:
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          I recommend the small and steady approach. That’s not the same as saying I’ve always been able to achieve that. Very difficult to do. The adequacy of rates on new business is similar to Hartwig’s example on youthful drivers. The approach I have tried to take in pricing new business is trying to understand the lifetime value of each risk class and price to that value.

      • November 18, 2015 at 11:03 am
        Agent says:
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        CL, we review our retention rates with all our carriers. The ones with the highest retention rates are the ones with small increases due to valuation increases on property and small increases on Auto. We can sell that to a customer, but if the company gives the customer a big undeserved whammy, we have no choice but to move it or lose it.

  • November 17, 2015 at 4:37 pm
    Terry Carson says:
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    Price optimization is a danger to the entire industry. Price optimization leads to distrust because loyal clients find out that new clients get lower prices. This creates churn which is very expensive for agents and time consuming for clients. Price optimization destroyed the health insurance industry and lead Congress to enact Obamacare. Price optimization is the chief reasons our agency abandoned health insurance sales activity 15 years ago.

    • November 17, 2015 at 4:43 pm
      UW says:
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      What you describe fist is also known as the free market. What you describe as leading to Obamacare is silly, and completely wrong. What led to that was an aging population and an inability to negotiate on prices because of regulations protecting health insurance companies, as well as an aging population. The US private health care system is a failure, and was already in a death spiral, but not because of price optimization or Obamacare.

    • November 17, 2015 at 6:08 pm
      Agent says:
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      Terry, we didn’t abandon Health Insurance sales until after Obamacare was passed and we could “see what was in it” as our beloved Nancy proclaimed. We used to write a fair amount of Group and Individual policies when people had a choice of what they wanted to buy. People that couldn’t get a policy in the regular market due to health conditions were put in the Health Pool. That is the way it should have come down and the Pools could have been subsidized for a whole lot less than what we have going on now.

    • November 19, 2015 at 11:14 am
      Agent says:
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      Hot of the Press Terry. United Healthcare, one of the largest writers of Health Insurance is contemplating withdrawing from the Obama exchange policies. They cited lower than expected enrollment on the Individual plans and much higher claim payments from the chronically sick. Where have we heard that before?

  • November 18, 2015 at 8:06 am
    CL PM says:
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    I have worked in product management / pricing in insurance for 25+ years, primarily for smaller companies where the amount of internal data available for pricing lacks statistical credibility. In that situation, one brings in competitor pricing data to see where our prices line up against the market. In some risk segments, our data may signal us to charge X when the market is charging X+100 or X-100. In that case, we move our rates to be closer to the market, thus “optimizing” our price. Regulators never have a problem with this if you show them the competitive data and that is a reasonable response from them. When posters to this article recommend staying within the “actuarial model” I hope they understand that prices in this industry have always been optimized in some manner through competitive analysis or simply the judgment of the company. My wish is that the focus stays on regulating “unfair” price optimization, however the industry finally decides what is “unfair.”

  • November 18, 2015 at 9:51 am
    Dennis Jay says:
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    Very well written article, Mark. This pricing model potentially is a PR nightmare for insurers. They need not give consumers another reason to despise the industry. http://www.insurancefraud.org/blog/?p=3044

    PS – Big I needs to get a backbone.

    • November 18, 2015 at 11:08 am
      Agent says:
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      Dennis, I agree 100% about the Big I needs to get a backbone. I emailed to my Big I rep about this situation and he will be bringing it up as an issue with the Big I and hopefully something can be done. Price Optimization is a nightmare and is causing a lot of grief to agents who have to try to explain what is going on to a customer.

    • November 19, 2015 at 6:04 pm
      NotAnAgent says:
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      I think Big I is taking a wait and see approach because price optimization could prove to actually BENEFIT agents in the long term. The concept generates maximum revenue while counterbalancing the customer’s price elasticity which means two things: 1) more revenue for agents and 2) improved customer retention.

      • November 20, 2015 at 9:37 am
        Agent says:
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        Well, it is clear you are NotAnAgent so that must mean you are a company employee who is pushing the Price Optimization scheme we are seeing every day. I would love to see any of you non Agents try to explain the concept to an angry customer with no losses, good credit score and an excellent risk why they are getting a 10,15 or 20% increase in premiums so the company can maximize their revenue. The only thing this scheme maximizes for the agent is work load, re-marketing the account and hoping the customer is not so mad that they stay with the agency.

  • November 18, 2015 at 10:00 am
    Agent says:
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    CL, you make some good points. Every company has to make choices based on what their competition is doing. Some of the big boys try to set pricing trends and take rate hoping the others will follow. Some have had poor results with that tactic when the market didn’t follow their lead on price increases. I have had product managers sit in my office asking for our input on how they are doing and why we aren’t placing more business with them. We then showed them quotes from several markets we represent on the same risk, same information. Their eyes got pretty big when they saw they were coming in 4th or 5th on very good business.

    For the most part, the Price Optimization schemes we see are out of line and I have yet to see a reduction of premium for any customer as a result of their adjustments to premium. It is no wonder that several states are cracking down on this practice and Consumer groups are jumping up and down. It also puts Agents in a bad light because we can’t explain to a customer why the company is raising their rate when nothing is going on with claims and their credit is strong. That is why we stay busy playing musical chairs with customers. It is a lot of work and expensive to keep re-marketing all the time.

    • November 18, 2015 at 1:25 pm
      Jadefox says:
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      LOL. I remember a meeting during which the product manager related almost the same story. We were either 4 or 5 on numerous examples. His comment was “we shouldn’t be upset, because that’s where we want to be, in the middle”. Then came agency review and his first question was ” Why aren’t we on budget? What are your agents doing” Don’t they understand they agreed to their production goals?”

      This thinking is still with the industry.

      • November 18, 2015 at 3:33 pm
        Agent says:
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        Jadefox, I agree with you 100%. Companies tell us they want growth and then do everything they can to not be competitive with the Captives or Online companies. They wonder why their retention rates are suffering and we tell them they would have better retention if they didn’t keep running business off with their Price Optimization increases.

        True story: We had a regional marketing manager send us one of those wonderful marketing letters and tell us that they were now happy with their property rate in the state after taking a 15% rate increase in 2014. A month later, we get notice of them taking another 7% rate increase. We just can’t predict what the market will do anymore. The key is to roll with the punches and move business if the increase is too much. Move it or lose it. The economy is too bad for the average customer and they are watching their expenses closer and insurance is one thing they can change if the Agent is not looking out for them.

  • November 18, 2015 at 10:09 am
    Zzyzx says:
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    Like beauty, price optimization is in the eye of the beholder. One insurance company actuary’s removal of a distorting discount is another regulatory actuary’s intrusion of price optimization.

    States’ pronouncements about and prohibitions of price optimization will simply become part of the landscape of rate making. As big data’s impact increases, more nooks and crannies will exist for actuarially stashing factors that reflect a consumer’s sensitivity to price.

    It’s a cat and mouse game in the regulated market of insurance pricing.

  • November 18, 2015 at 11:18 pm
    DTA says:
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    A lot of this is around customers and agents. If you take agents out of the equation and push customers to online direct to consumer models, then all this hand wringing over “industry distrust” goes away. If you can easily shop your insurance online every renewal term with no hassle and always get the lowest price, then why would you want to pay an agent who can’t act in the consumer’s best interests?

    There is a paradigm shift coming and those who embrace the data and the value and convenience it provides will be the winners.

    • November 19, 2015 at 10:01 am
      Agent says:
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      DTA, I recommend that you keep on hopping around, changing carriers every year for a dollar and just hoping you will be covered if you have a loss. All you are is a number in a computer and obviously don’t have any real assets to protect.

      • November 19, 2015 at 10:50 am
        Rosenblatt says:
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        pretty sure you completely missed the point DTA was making. while i’m at it…

        agent – “free advice: get facts straight…develop thick skin, drop childish insults.”

    • November 20, 2015 at 3:42 pm
      InsGuy says:
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      DTA – The problem with that is that those products may vary widely in the coverage that they offer. Now, if you are talking MVFR minimum limits auto for yourself as a millenial might be, or a contents-only renters policy, your probably just fine.

      Throw in more assets to protect, multiple vehicles, a couple of kids, maybe a live-in parent or two then you’re really leaving the realm of the cookie cutter auto policies on the web. You need an agent help assist you in deciding what risk to retain, what risk to transfer and to help find a market that fits your coverage needs while making sure it’s cost is justified.

      Throw most of that out with Homeowners. Those policies can really vary widely (auto policies can to, but don’t usually at min limits).

      • November 20, 2015 at 4:58 pm
        Agent says:
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        Good one InsGuy. Do we really want someone like DTA who would leave us in an instant to shop online to save a dollar? He isn’t looking for advice, has no assets to protect, lives in an apartment with no Renters coverage. All he has is a one Auto minimum limits policy and thinks he is doing good shopping every year online. Let him.

  • November 19, 2015 at 6:00 pm
    NotAnAgent says:
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    Food for thought…

    Insurance companies are not the only ones in the sales process that optimizes prices. Independent agents employ similar tactics to maximize their OWN income.

    How many IAs have not sold the lowest priced product to a customer not because they think the higher priced product is better, but rather because the product pays a better commission or there are sales incentives in place?

    Think about the customer who is paying $1000 and has been with their current carrier several years and are perceived to be loyal. Do some independent agents sell them an $900 policy with one company instead of a $700 policy with a different but comparable company because it means more money for the agent?

    On another note. price optimization actually BENEFITS agents in the long run. By it’s very nature, price optimization allows companies to offer a more competitive premium on new business (since existing business is allowed to subsidize it more) and the renewal to renewal increases balance maximizing premium potential AND retention which leads to greater renewal to renewal premium stability. This means a steadily increasing stream of income for the agent.

  • November 20, 2015 at 10:02 am
    Agent says:
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    Hey Not, here is some food for thought for you. Your character assassination of IA’s won’t fly on this forum. You are either a company man or a Captive who is jealous that they have only one market to sell to the company. When a captive practices Price Optimization like Allstate has been doing, you lose the business because there is no where else to go.

    Your idiotic assumption that IA’s don’t sell the lower priced product because they want sales incentives on a higher priced product is hogwash. We sell what is best for the customer, PERIOD. We show them at least the top 3 markets for their business, explain the difference in coverage, deductibles and cost and let them make an informed decision.

    By the way, we have book rolled business from carriers who were consistently high on their offerings and were clearly practicing Price Optimization schemes. Other carriers have grown with us because they are more reasonable and had better underwriters and offered more stability in pricing. We do look out for our customers and I really don’t like getting angry calls from customers regarding their renewal. It is not fun and my agency tries our utmost to prevent that from happening.

    • November 20, 2015 at 1:39 pm
      confused says:
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      “Your character assassination of IA’s won’t fly on this forum” – but that doesn’t apply to you, right agent? you can still attack the character of millennials, democrats, people living in the north-east USA and muslims, right?



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