Connecticut has become the latest state to outright ban so called “price optimization” or “elasticity of demand” practices by insurers.
Insurance Commissioner Katharine Wade said Friday that the Department of Insurance has officially warned Connecticut-based insurance companies against using the controversial pricing method that relies more on consumer buying habits than sound actuarial and risk-based principles.
The controversial practice gives insurance companies the ability to use a wide variety of non-cost based factors to increase premiums to the highest amount before a consumer would seek to shop around with other carriers.
“The Department views price optimization as a discriminatory practice and therefore a violation of state insurance law,” Wade said. “It can result in two policyholders who have the same loss history and risk profile receiving two different premium increases.”
Property casualty carriers that use this methodology are required to resubmit filings with the Department and remove such factors within 60 days.
“Insurers that fail to do so and are later determined to have used price optimization or elasticity of demand or failed to disclose such use to the Commissioner may be subject to disciplinary action,” the Commissioner said.
This brings the total number of states to ban the practice of price optimization to 16, following Colorado and Minnesota, last month, after the National Association of Insurance Commissioners voted to adopt a white paper setting guidelines on the practice.
The practice is something self-proclaimed “whistle blower” and director of insurance at the Consumer Federation of America Robert Hunter has also been looking at in the US for the last two and a half years.
Hunter is a former Texas insurance commissioner and refers to the practice as “price gouging”, telling Insurance Business the practice is very widespread and allows carriers to make targeted pricing decisions to maximize their own bottom-line rather than accurately reflect the policyholder’s risk.
“Some data mining is ok, it allows an insurer to underwrite on true risk issues,” he said. “But price optimization can determine if a driver or homeowner is charged in excess of the risk price.”
Hunter said he’s taking his fight state by state, and with almost one third on board he’s making some headway.