Price optimization update


In June 2015, we reported that while four states had issued formal bulletins and memoranda prohibiting the practice of price optimization by property and casualty insurers, and that the issue was receiving scrutiny from other states, the National Association of Insurance Commissioners (NAIC) had yet to finalize its recommendations on the practice. At the NAIC Fall Meeting in November 2015, the Property and Casualty Insurance (C) Committee (Committee) adopted the Casualty Actuarial and Statistical (C) Task Force (Task Force) Price Optimization White Paper. In addition, since our update on June 12, more states and the District of Columbia have issued bulletins and memoranda barring price optimization practices by insurance companies.

NAIC Price Optimization White Paper

The primary focus of the Task Force White Paper, as adopted by the Committee, is on personal lines ratemaking and does not address issues with respect to the use of price optimization in risk selection, marketing or other insurer operations. The White Paper notes that in recent years insurers have started using big data (data mining of insurance and non-insurance databases or personal consumer information where permitted by law) and advanced statistical modeling to select prices that differ from indicated rates at a very granular level. The White Paper further states that only recently companies have been able to measure and use price elasticity of demand to "optimize" prices to charge the greatest price without causing the consumer to switch to another insurer. It is this elasticity of demand that has led to criticisms that price optimization penalizes customers and that it could easily lead to two insureds with similar risk profiles being charged different premiums.

While the White Paper does not specifically define "price optimization," it recommends that, under any definition, state insurance regulators address the requirement in their state rating law that rates shall not be excessive, inadequate or unfairly discriminatory. In addition, it recommends that rating plans should be derived from sound actuarial analysis, be cost-based and that two insurance customers having the same risk profile should be charged the same premium for the same coverage. The White Paper ultimately proposes that states issue bulletins to address insurers' use of methods that may not result in cost-based rates and to notify insurers that use of the following considerations in ratemaking is, at a minimum, inconsistent with statutory requirements that rates not be unfairly discriminatory:  

  1. price elasticity of demand;
  2. propensity to shop for insurance;
  3. retention adjustment at an individual level; and
  4. a policyholder's propensity to ask questions or file complaints.

Potential effect of White Paper

A copy of the White Paper can be found here. Price optimization was a hot button issue with state insurance regulators in 2015 and will likely remain in their sights throughout 2016. States have already been taking action to bar price optimization practices of insurers and, with the adoption of this White Paper, it is likely that more states will be encouraged to take similar steps in the near future. Also, look for states to enhance requirements for personal lines rate filings, including more disclosure and transparency around rates.


Noteworthy links from the past two weeks


  • The NAIC has approved new insurance linked securities disclosures [RiskMarketNews]  
  • Kevin McCarty in the running for NAIC top post [Florida Politics]

Property and Casualty

  • The Washington Post looked at insurers' increasing use of big data in many facets of the business [The Washington Post]  
  • A new Texas law mandating insurance coverage for transportation network companies like Uber and Lyft went into effect on January 1 [KEYE]  
  • Ohio adopted state-wide transportation network company rules that voided local requirements in Columbus [The Columbus Dispatch]  
  • The tax-free limits for micro captives were raised to $2 million under tax extension legislation recently signed into law by President Obama [Business Insurance]


  • The New York Times reported that even those insured under the Affordable Care Act can face crushing medical debt [The New York Times]  
  • Nonetheless, the Affordable Care Act entered 2016 on stronger footing than ever before [The Hill]  
  • The federal government has extended Affordable Care Act reporting deadlines related to the employer mandate by 2-3 months [Law360]  
  • A new New York law defining pregnancy as a "qualifying life event" under the Affordable Care Act went into effect on January 1 []


  • A.M. Best raised concerns about the high cost of Solvency II compliance in Bermuda [The Royal Gazette]