An Insurance Journal article highlights Connecticut’s recent ban on price optimization in property and casualty insurance (e.g., homeowners’ and motor vehicle insurance). Price optimization is the process of adjusting an insured’s premium based on factors unrelated to risk. An example would be using an individual policyholder’s response to a previous premium increase to determine how much of a premium increase the policyholder will tolerate at renewal before switching to a different insurer. This practice can potentially result in two policyholders with identical loss histories and risk profiles receiving different premium increases. According to the Connecticut Insurance Department, price optimization “can . . . result in premiums that are excessive or inadequate.”
Price optimization is being scrutinized by insurance regulators because rates are subject to statutory requirements. Statutory rate standards in most states require that rates not be excessive, inadequate, or unfairly discriminatory (see, e.g., CGS § 38a-686). According to a National Association of Insurance Commissioners white paper, actuarial principals dictate rates that are correlated with risk and not excessive, inadequate, or unfairly discriminatory.
According to a recent OLR report on price optimization, at least 12 other states and the District of Columbia ban insurers from using price optimization. Regulators in these jurisdictions find that because price optimization varies rates based on a factor other than risk of loss (e.g., a person’s willingness to pay), it violates the statutory requirement that rates not be unfairly discriminatory. The states are: California, Delaware, Florida, Indiana, Maine, Maryland, Montana, Ohio, Pennsylvania, Rhode Island, Vermont, and Washington. Additionally, New York’s insurance department is currently studying the practice.