Auto Insurance

Consumer Group Calls on NAIC to Recommend Prohibition on the Use of Price Optimization in Insurance

Consumer Federation of America Says New Data Mining Scheme Necessarily Results in Unfair Discrimination

Washington, D.C. – The National Association of Insurance Commissioners (NAIC) must recommend that states prohibit the use of the data mining pricing practice known as Price Optimization, said the Consumer Federation of America (CFA) in a letter to the NAIC Task Force that has issued a draft White Paper on the practice.  Price Optimization is a relatively new premium setting technique that analyzes customers’ shopping habits to determine how much insurance companies might be able to increase premiums for individual customers.

In its letter CFA wrote:

“[N]early every state prohibits unfairly discriminatory rates. Price optimization is a method that uses non-risk-related information to systematically move insurance premiums away from their cost-based level. No one denies this. Systematically moving prices around to reflect non-risk information such as price elasticity of demand per se causes rates to be unfairly discriminatory and illegal in virtually every state.

“It is our view that the only conclusion that can be drawn from a review of price optimization techniques is that price optimization is illegal and must be prohibited.”

The draft NAIC white paper aims to explain price optimization and provide guidance to state regulators on how best to address the use of these techniques by insurance companies.  CFA notes that the draft contains proposals offering varying degrees of limitation on the practice, when, instead, the NAIC should take the clear position that price optimization cannot be squared with consumer protections against unfair discrimination and must be banned.

According to CFA, price optimization marks a radical departure from the actuarial practice of pricing insurance premiums according to the risk of loss posed by the policyholder. The purpose of price optimization is to extract as much profit as possible from policyholders who are often required to purchase insurance policies.

During the past year, ten insurance commissioners – from Maine, Indiana, Washington, Florida, Maryland, Ohio, California, Vermont, Pennsylvania, and Washington, D.C. – have issued bulletins to insurers clarifying that price optimization leads to unfair discrimination, which is illegal. CFA is urging all commissioners and the NAIC to follow suit and provide the singular direction to insurance companies to end the practice in setting rates, underwriting and all other aspects of insurance ratemaking.

“The NAIC should clearly and straightforwardly present only one recommendation to the states: ban this illegal practice,” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner.  “Any other recommendations would not only undermine the credibility of the White Paper but fly in the face of the action already taken by ten of the NAIC’s member states.”

Contact: J. Robert Hunter, 703-528-0062; Doug Heller, 310-480-4170


The Consumer Federation of America is a national organization of more than 250 nonprofit consumer groups that was founded in 1968 to advance the consumer interest through research, advocacy, and education.