Best’s News & Research Service - January 15, 2015 10:58 AM (EST)
CFA Pushing Commissioners to Reject Allstate Filings Using New Price-Optimization Rating Factor
WASHINGTON //BestWire// - The Consumer Federation of America is asking state regulators to either disapprove or rescind efforts by Allstate Insurance to use certain price optimization techniques it believes results in discriminatory automobile and homeowners insurance pricing.
A Jan. 12 CFA letter to Wisconsin Insurance Commissioner Ted Nickel asked him to disapprove of Allstate filings that use price optimization techniques that include a new Complementary Group Rating factor.
"We are convinced that the filing produces unfairly discriminatory prices in that two identical drivers of the same risk can be charged substantially different prices based on Allstate's determination of whether the individual being analyzed is more or less likely to leave the insurer if the price goes up (i.e., by use of elasticity of demand models applied individually to each policy in Wisconsin)," the CFA letter to Nickel said. "Prices may also be excessive compared to the risk-based prices for those consumers Allstate determines will shop less or otherwise identifies as less-desirable customers based on what the filing labels 'marketplace considerations.'"
CFA Director of Insurance J. Robert Hunter's letter to Nickel said price optimization violates state law and the Casualty Actuarial Society's Principles Regarding Property/Casualty Insurance Ratemaking that requires rates be cost/risk-based.
The CFA sent a December letter to all state commissioners asking them to halt Allstate Property & Casualty Co.'s auto insurance rate filings in Wisconsin, Pennsylvania and Oklahoma. The CFA followed it up Jan. 12 with letters to commissioners that CFA believes has received questionable Allstate price optimization filings in Wisconsin, Oregon, Oklahoma, Illinois, Arizona, Missouri, Utah, and Colorado. The CFA also sent letters to commissioners who may have received such filings in Virginia, Nebraska, Tennessee, Idaho, Iowa, Indiana, and Louisiana. Last fall, Maryland became the first state to order insurers to file plans to end price-optimization strategies (Best's News Service, Dec. 31, 2014).
Hunter told Best's News Service techniques allow insurance companies to take individual policies and consider certain characteristics to determine rates. Hunter cited an Allstate filing in Wisconsin that became effective Dec. 11, 2013 as an example.
The December letter said Allstate introduced a new Complementary Group Rating Plan that evaluated policyholders on expected loss costs, policyholder disruption and marketplace considerations. The letter also said the filing also contains a matrix that allows Allstate to place individual policyholders into a specific complementary group based on the birthday of the eldest driver on the policy; gender; years of prior insurance; and ZIP code. While Allstate does not disclose its methodology for evaluating marketplace considerations, the letter said the CFA was "confident that this is an evaluation of non-risk related factors such as price elasticity of demand and other characteristics related to willingness to pay higher than actuarially sound rates."
Allstate said it's committed to operating with "absolute integrity" and said the company's pricing is legal and actuarially sound. "The Consumer Federation of America's allegations of illegal pricing methods continue to be wrong and misinformed," Allstate spokesman Justin Herndon said in a statement.
Herndon defended Allstate's pricing specifics. "Our rating plans have been and continue to be risk-based, using traditional variable such as driving safety record, garaging location and type of vehicle," Herndon said. "Marketplace considerations, as part of risk-based pricing, are used appropriately, and we are open and transparent with regulators in all aspects of our pricing."
Herndon said Allstate meets customer needs in the marketplace. "Our success in increasing new customers and renewing more existing customers in the competitive insurance environment is evidence of this," he said.
State insurance commissioners are in the early stages of looking at the issue, Hunter said. Two states were considering legislation on lines similar to Maryland's order. "States are thinking about the Maryland approach," he said.
The Property Casualty Insurers Association of America said regulators should examine the issue slowly. "Price optimization is a more nuanced and complicated strategy than how the CFA has characterized it. As a result, it is important for regulators and policymakers to take a balanced and deliberative approach to examining this issue," said David Snyder, PCI's vice president, international policy, policy development and research, in a statement.
There is great variation in how companies approach underwriting and rating, Snyder said. "Consumers have lots of options for purchasing insurance and the primary determinant regarding what a consumer pays and is based on the likelihood of that driver filing a claim and the cost of that claim," Snyder said.
(By Thomas Harman, associate editor, BestWeek: Tom.Harman@ambest.com)