The California Insurance Commissioner issued a notice on February 18, 2015 to more than 750 property and casualty insurers doing business in California, announcing that “any use of Price Optimization in the ratemaking/pricing process or in a rating plan is unfairly discriminatory in violation of California law.”

The notice defines price optimization as “any method of taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes.” The California Insurance Commissioner contends that price optimization “does not use actuarially sound methods to estimate the risk of loss” and “represents a fundamental threat to fairness in rating.” The Commissioner has previously noted in correspondence with the National Association of Insurance Commissioners (NAIC) Casualty Actuarial and Statistical (C) Task Force that in California, “[t]here are no differentials allowed based on whether the applicant or insured is more or less likely to look elsewhere for a lower price.”

The notice directs insurers using price optimization in California to cease the practice, remove the effect of any adjustments based on price optimization from any future filing, and remove any factor based on price optimization from the next filing (which must be submitted within six months of the date of the notice).

In taking this action, California joins insurance regulators in Maryland and Ohio, both of whom also recently issued insurance bulletins addressing price optimization.   The Maryland Insurance Administration issued Bulletin 14-23 on October 31, 2014. The Maryland Bulletin defined price optimization as “varying rates based on factors other than risk of loss, including, but not limited to: (a) the likelihood that a policyholder will engage in activities that result in policy turnover [defined to include shopping with other carriers for a lower premium, cancelling a policy before the expiration of the policy term, or failing to renew a policy at the renewal of the policy term]; and (b) the willingness of a policyholder to pay a higher premium compared to other policyholders.” The Bulletin stated that price optimization, “by its nature,” involves discriminating against policyholders of the same class based on factors other than actuarial risk. The Maryland Insurance Administration required every insurer that then used price optimization in Maryland to file a corrective action plan by January 1, 2015.

The Ohio Department of Insurance followed Maryland’s lead by issuing Bulletin 2015-01 on January 29, 2015. The Ohio Department defined price optimization as the practice of “varying premiums based upon factors that are unrelated to risk of loss in order to charge each insured the highest price that the market will bear.” The Bulletin took the position that price optimization allowed insurers to set premiums based on factors that were unrelated to the risk of loss or expense. It required insurers that use price optimization to rate insurance policies in Ohio to submit a SERFF filing compliant with the Bulletin by March 31, 2015, with proposed effective dates no later than May 31, 2015 for new business and June 30, 2015 for renewal business.

The NAIC Casualty Actuarial and Statistical (C) Task Force is conducting research on the use of price optimization, including the regulatory implications, and is expected to issue a white paper documenting the relevant issues sometime this year. We will continue to monitor and report on price optimization developments in the states and at the NAIC.