Consumer Groups Applaud NV Insurance Commissioner for Banning Price Optimization and Closing the “Underwriting” Loophole

Nevada Becomes 20th State to Take on New Price Gouging Techniques of Some Insurance Companies

Washington, D.C. – Nevada Insurance Commissioner Barbara Richardson has issued an official bulletin to insurance companies “reiterating” the state’s requirement that companies disclose and receive approval for underwriting rules and predictive models that affect premiums charged to consumers. The Consumer Federation of America (CFA) and the Center for Economic Justice (CEJ) welcome the bulletin as a critical tool for ensuring that consumers are protected from unfair pricing by insurance companies.

With the bulletin, Commissioner Richardson makes clear that insurance companies cannot hide new rating techniques and models from the Department:

By definition, any underwriting rule or model used in underwriting that affects the premium that any insured would pay is a “rule of underwriting relating to rates.” Calling a model an underwriting model rather than a rating model does not affect the applicability of this requirement.

The bulletin also specifically identifies efforts by some insurance companies to use complex algorithms that develop consumer prices based on customers’ shopping habits rather than their actual risk, a practice called “price optimization.”  The bulletin includes as “supplementary rate information” subject to the prior approval of the Commissioner:

*Models that determine the extent to which an insurer relies on an actuarially indicated change to a base rate or relativity

These would include any “price optimization” models that an insurer might use to determine the extent to which a selected relativity moves toward the indicated relativity. Such models may not utilize any non-risk-based attributes such as price elasticity of demand or consumer tendency to complain or shop for insurance. All risk-based attributes that such models use must be fully disclosed to the Division along with the specific quantitative treatments of each of those attributes.

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 price optimization and other forms of price gouging, and we applaud Commissioner Richardson for her 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 Commissioner Richardson and 19 other Insurance Commissioners are the first steps in returning insurance practices to the foundation of pricing insurance based on risk of loss.”

The groups also pointed out that over the past 20 years, insurers have blurred the line between underwriting (accepting or rejecting an applicant) and pricing in an effort to avoid regulatory and public scrutiny over rating practices. CFA and CEJ have communicated with insurance regulators that effective consumer protection requires stopping the use of price optimization for rating and underwriting since both are part of the pricing calculation for insurers.  The groups have shown regulators 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.  Commissioner Richardson’s bulletin acknowledges the threat to consumer protections posed by these strategies and has disallowed them in Nevada.

“Commissioner Richardson clearly closed the loophole that some insurers have tried to create to avoid scrutiny of their illegal pricing practices, and Nevadans will be better off because of it,” said Hunter of CFA.

Nevada is the 20th jurisdiction to notify insurers that price optimization violates state insurance statutes that require cost-based pricing and prohibit unfair discrimination in setting insurance premiums. Maryland, California, Ohio, Florida, Vermont, Washington, Indiana, Pennsylvania, Maine, Washington, D.C., Rhode Island, Montana, Delaware, Minnesota, Colorado, Connecticut, Alaska, Missouri, and Virginia have previously issued notices to insurers with the same basic message as the Nevada bulletin: utilizing non-risk related consumer characteristics to set insurance prices is illegal.

Contact: Robert Hunter, CFA, 703-528-0062; Birny Birnbaum, CEJ, 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.