Insurance Optimization

 Insurance Optimization

What Is Price Optimization in Insurance?

Price optimization may mean different things in different contexts or industries. In insurance, it occurs when insurers adjust premiums based on advanced modeling methods and large datasets from insurance and non-insurance databases that include personal consumer information (where allowed by law). Price optimization comes into play after an insurer uses traditional risk-based pricing strategies and may increase an individual’s premiums based on factors other than that person’s loss risk. 

Robert Hunter, director of insurance at the Consumer Federation of America (CFA), calls price optimization “profit maximization.” Your policy’s price may increase simply because the insurer determined that your market segment isn’t as sensitive to price increases, so it boosted the cost to what it considers the “optimal” level for your pool of people.

Is Price Optimization Legal?

State insurance departments in at least 20 jurisdictions have issued bulletins in recent years stating that price optimization is an illegal pricing practice. The list comprises Alaska, California, Colorado, Connecticut, Delaware, Florida, Indiana, Maine, Maryland, Minnesota, Missouri, Montana, Nevada, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, Washington, and Washington, D.C.

Organizations like the CFA stand firmly against price optimization, stating that it breaks laws in every state that require insurance companies to use actuarial standards in setting rates. The organization “prohibit[s] the kind of discrimination upon which Price Optimization relies,” according to a CFA press release on the subject. But industry organizations disagree. 

Despite the bans in some states, the industry-backed Insurance Information Institute (III) declares there is nothing wrong with or inappropriate about using price optimization. The III claims this practice is routinely used in non-insurance industries—where it is accepted and uncontroversial—and doesn’t see price optimization as violating any state insurance department principles.

The National Association of Mutual Insurance Companies (NAMIC) also holds that market considerations are legitimate and essential in pricing property and casualty insurance. However, the NAMIC supports measures that ensure equal treatment of individuals in the same risk group regarding pricing.