“Price optimization,” a practice that uses predictive modeling and data analytics in pricing insurance products, continues to draw the attention of state regulators, consumer advocates, and class action plaintiffs. Last week, Indiana and Florida issued statements questioning certain “price optimization” practices, while the National Association of Insurance Commissioners’ (NAIC) Casualty Actuarial and Statistical (C) Task Force has posted an updated draft of its white paper on price optimization. More regulatory actions are expected this week.
The issue of price optimization was first taken up in December 2013 by the NAIC’s Auto Insurance (C/D) Study Group, which referred the issue to the Task Force in November 2014. The Study Group made the referral because “the topic of price optimization goes beyond auto insurance and requires a great deal of actuarial expertise.” On March 24, 2015, the Task Force issued its first draft of a white paper on price optimization. The Task Force received numerous comment letters from regulators, consumer groups, and industry trade groups. On May 7, 2015, the Task Force issued the most recent draft of the white paper.

The May 7 draft white paper provides helpful background on price optimization, including a comparison of various definitions of “price optimization” used by actuaries, state insurance departments, vendors, and consumer groups. It identifies the concerns raised and potential benefits of using price optimization. Importantly, the May 7 draft identifies several alternative regulatory responses that state regulators can take, which include constraining price optimization in such a way that it “can only be applied to specific class sizes, not class sizes so small that price optimization could be applied at the individual insured level or to small groups of insureds”; constraining the variables that can be used; developing additional regulatory guidance; and changing filing requirements to require insurers to disclose their use of price optimization. The draft white paper left blank the section entitled “Recommendations and Next Steps.”

The Task Force is scheduled to hold its next call on Tuesday, May 19, 2015, to discuss the draft price optimization white paper.

Individual state regulators continue to address price optimization. Most recently, Florida’s Office of Insurance Regulation (OIR) issued Informational Memorandum OIR-15-04M, which bans certain price optimization practices, on May 14, 2015. Recognizing that price optimization “does not have a universally recognized definition,” the OIR memorandum defines it for purposes of the memorandum as “a process for modifying the insurance premium that would otherwise be charged to an insured or class of insureds in order to maximize insurer retention, profitability, written premium, market share, or any combination of these while remaining within real world constraints.” The memorandum outlines the relevant state statutes and discusses risk classification generally. It concludes that price optimization involves analysis and incorporation of data that is not related to expected cost for risk characteristics, and therefore its use leads to unfairly discriminatory rates. The OIR directs property and casualty insurers that have used price optimization in determining rates filed and currently in effect to “submit a filing to eliminate that use” and further directs that future filings “do not utilize price optimization in any manner.”

The Indiana Department of Insurance also recently issued a draft price optimization bulletin and is seeking comments from the industry. The draft bulletin defines price optimization as “using data collection and analysis to predict which consumers will accept higher rates without changing insurers.” It notes the Department’s concern about use of price sensitivity in insurers’ rating methodologies. The draft bulletin identifies existing insurance laws that may apply to the use of price optimization, and states that the Department “views a rating factor or rating methodology that adapts rates based on considerations other than risk, such as market competitiveness, to be at high risk of violating” those laws. It would require companies using price optimization to notify the Department within 30 days of the bulletin, and would also require that all future filing submissions “clearly disclose the use of price optimization and be accompanied by supporting documentation to demonstrate compliance with Indiana insurance laws.”

As noted in a previous Legal Alert, the insurance commissioners of Maryland, Ohio, and California have all rejected the use of price optimization in those states. In addition, the New York Department of Financial Services (DFS) issued a Section 308 inquiry letter on March 18, 2015 requesting information about the use of price optimization by insurers doing business in that state. The New York DFS was “concerned that insurers are charging higher premiums based on whether a consumer is less likely to notice, shop around, or object,” which could violate the state’s insurance laws.