Washington, D.C. – Minnesota Commerce Commissioner Mike Rothman issued an official bulletin to insurance companies on Monday that prohibits insurance companies from using “price optimization” techniques in rating customers, emphasizing that it is illegal and unfair discrimination to use non-risk factors when setting rates. According to the bulletin:
Price optimization is not an actuarial estimate based on expected losses, expenses, and the degree of risk. Accordingly, any use of price optimization in the ratemaking or pricing process or in a rating plan is unfairly discriminatory and in violation of Minnesota law. While insurers may employ judgment in setting their rates, judgmental adjustments to a rate may not be based on non-risk related factors, such as an individual’s “price elasticity of demand,” which seek to predict how much of a price increase a policyholder will tolerate before switching to a different insurer.
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Any insurer that uses price optimization in Minnesota shall immediately cease this practice, and within 60 days from the date of this bulletin submit revised filings to remove the rating practice as well as a corrective action plan.
In addition to the clear prohibition of the use of price optimization, CFA urges Commissioner Rothman and all state insurance commissioners to explicitly bar the use of price optimization in underwriting as well. CFA has noted that third party vendors of price optimization software have begun promoting the use of these unfairly discriminatory techniques for underwriting purposes as well as in the rating and pricing of insurance policies.
Minnesota is the 14th jurisdiction to notify insurers that price optimization violates state insurance statutes that require cost-based pricing and prohibit unfair discrimination in setting insurance premiums. Delaware, Montana, Rhode Island, Washington, D.C., Maine, Indiana, Washington, Florida, Maryland, Ohio, California, Vermont and Pennsylvania have previously issued notices to insurers with the same message as the Delaware bulletin: utilizing non-risk related consumer characteristics to set insurance prices is illegal.
In recent years, insurance companies 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. Price optimization aims to determine how much insurers can increase rates for each individual customer beyond what is appropriate based on his or her risk profile.
“Most Americans are required by law to buy auto insurance and by their mortgage company to buy homeowners insurance, and it is terribly unfair and entirely illegal for insurance companies to vary premiums based on whether or not they are statistically likely to shop around,” said J. Robert Hunter, Director of Insurance for CFA and former Texas Insurance Commissioner. “It is the obligation of Insurance Commissioners to protect consumers from this kind of price gouging, and we applaud Commissioner Rothman for his action.”
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. The purpose of price optimization is to extract as much profit as possible from policyholders who are often required to purchase insurance policies.
“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. “The state actions by 14 Insurance Commissioners are the first steps in returning insurance practices to the foundation of pricing insurance based on risk of loss.”
Contact: Robert Hunter, 703-528-0062; Birny Birnbaum, 512-784-7663
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.
The Center for Economic Justice is a non-profit organization that works to increase the availability, affordability and accessibility of insurance, credit, utilities, and other economic goods and services for low income and minority consumers.