Colorado and Minnesota became the latest states to ban the practice of price optimization in the insurance sector this week, bringing the total to 15 states.
The news comes as the use of data mining techniques by insurers comes under increasing scrutiny by financial watchdogs the world over. The UK’s Financial Conduct Authority this week issued a call for inputs about how information from sources such as loyalty cards, social media, aggregator sites and other online platforms is being collated to give a snapshot of consumer behavior, which “brings both benefits and risks for consumers”.
Big data is the lifeblood of the financial sector and is increasingly important to insurers who can use information from diverse sources to better calculate individual risk and set more appropriate premiums. But there are questions of an ethical nature regarding the harvesting of personal information from sources such as social media.
In the US, the issue is already on the policymaker agenda. Just last week, the National Association of Insurance Commissioners voted to adopt a white paper setting guidelines on the practice.
“Any insurer currently using price optimization…must submit a new rate filing to the Division of Insurance within 90 days…Insurers that fail to comply with this bulletin and are later determined to be using price optimization may be subject to disciplinary action,” said Colorado Commissioner Marguerite Salazar after the ban on Tuesday.
In the UK, the FCA acknowledges that the collection or use of data in insurance is not a new development and that data, and data analysis, is key to assessing risk in insurance business models. But the authority is interested in how big data may alter the way risk is assessed.
Specifically, new types of data could be captured from devices, such as telematics boxes or mobile phone apps; data obtained in the provision of other products and services by the same or a related provider, for example applying home insurance claims data to motor insurance pricing, or applying insights from grocery shopping behavior to pricing insurance products; or data from publicly available sources such as social media, for example using information taken from photos or tweets.
This 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”, although it is most commonly known as price optimization, and is defined as an insurer’s use of sophisticated statistical analysis, often using non-insurance data, to affect the premium of a specific policy.
Hunter told 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.
