Auto Insurance

Consumer Groups Applaud Rhode Island Insurance Superintendent Torti for Demanding Disclosure of Insurance Company “Price Optimization”

Superintendent States Non-Risk Related Factors in Direct Conflict with State Laws

Washington, D.C. – Rhode Island Insurance Superintendent Joesph Torti issued an official bulletin to insurance companies to disclose any use of so-called “price optimization” and highlighted the state’s prohibition on any use of pricing techniques unrelated to risk, such as price elasticity of demand.  According to the bulletin:

Both base rates and rating classes must be based on factors specifically related to an insurer’s expected losses and expenses. 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 “price elasticity of demand” which seek to predict how much of a price increase a policyholder will tolerate before switching to a different insurer. The use of such factors not only unfairly discriminates between policyholders of the same risk profile, but is also directly in conflict with the statutory principles that underlie Rhode Island’s “open and competitive” property and casualty marketplace.

Rhode Island is the eleventh state to notify insurers that price optimization violates state insurance statutes that require cost-based pricing and prohibit unfair discrimination in setting insurance premiums.  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 Rhode Island bulletin:  utilizing non-risk related consumer characteristics to set insurance prices is illegal. The Consumer Federation of America (CFA) and the Center for Economic Justice (CEJ) applauded Superintendent Torti for the action and have asked all state Insurance Commissioners to similarly enforce their state laws which prohibit so-called price optimization.

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 Superintendent Torti 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 eleven Insurance Commissioners are the first steps in returning insurance practices to the foundation of pricing insurance based on risk of loss.”

Contact: J. 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.