Best’s News & Research Service - September 14, 2015 04:15 PM (EDT)
Consumer Group Asks the NAIC to Ban Price Optimization
WASHINGTON //BestWire// - The Consumer Federation of America is asking the National Association of Insurance Commissioners to recommend state regulators halt the use of price optimization — a premium-setting technique that analyzes customer shopping habits in order to determine how much insurers can increase premiums for individual consumers.
The Sept. 14 letter from CFA Director of Insurance J. Robert Hunter to the NAIC is a response to the latest draft of an NAIC white paper on price optimization that intends to explain price optimization and provide guidance to state regulators on how to address use of those techniques by insurers (Best's News Service, Aug. 15, 2015).
The white paper draft contains recommendations that would have those few states that lack a provision for personal lines insurance rating laws to include a provision that rates "shall not be inadequate, excessive or unfairly discriminatory." States, the recommendations said, should consider issuing a letter or bulletin to communicate the interpretation of "unfairly discriminatory rates." States should be specific about rate filing and insurer desk filings to improve transparency and disclosure and to aid in regulatory review.
Hunter's letter said while the draft contained proposals that would limit price optimization, the white paper's authors should instead ban it.
Hunter wrote nearly every state prohibits discriminatory insurance rates. It describes price-optimization as "a method that uses non-risk-related information to systematically move insurance premiums away from their cost-based level. No one denies this."
Moving prices to reflect non-risk information such as price elasticity of demand — in this case determining how high rates can be raised before a consumer would change insurers — causes rates to be unfairly discriminatory and illegal in almost all states. "It is our view that the only conclusion that can be drawn from a review of price optimization techniques is that price optimization is illegal and must be prohibited," Hunter wrote.
Bob Detlefsen, the National Association of Mutual Insurance Companies vice president of public policy, said the CFA would be satisfied with nothing less than a price optimization ban and a statement that price optimization is illegal.
The white paper is being developed by the casualty actuarial and statistical task force. Detlefsen said the white paper presents regulators with a range of alternatives that it considered to be reasonable and rejected the CFA's idea the paper should address price optimization legality.
The American Insurance Association suggested references to competitive analysis and retention analysis be removed from parts of the guidance because they contradict language provided in an appendix.
Specifically, the AIA wants references to competitive analysis and retention analysis to be removed from the draft that states what insurance rating practices may be deemed as unfairly discriminatory. Items such as a consumer's likelihood to shop for insurance or propensity to ask questions would remain as subjects to be considered.
The task force is hosting a Sept. 29 drafting group webinar that Detlefsen said would be used to discuss public comments received before the Sept. 14 deadline.
(By Thomas Harman, Washington Bureau manager, BestWeek: Tom.Harman@ambest.com)