by Lyle Adriano
Several states, including Maine, Maryland, Ohio, Pennsylvania, Rhode Island, Vermont, Washington, the District of Columbia, California, Florida and Indiana have warned insurance agencies not to engage in “price optimization.”
Price optimization is the practice of determining a customer’s rate by analyzing the individual’s spending habits or history of shopping. The analysis gauges how large of a premium the customer can tolerate before seeking other bids.
Those against the practice say that when insurers refer to individual consumer data—like purchase records from credit cards and the like—they could end up charging widely different rates to customers who pose the same insurance risk. The insurance industry begs to disagree, and says that it examines consumer data to rate groups of customers, not per customer, to ensure that there is relatively stable pricing across the board.
Douglas Heller of the Consumer Federation of America said that insurance companies are assessing their individual policyholders on factors completely unrelated to risk. He also said that state regulators want to get into the development of advanced technology that allows them to properly monitor consumer data.
“There’s a reasonable concern that if they let the horse out of the barn, that insurance companies will get so technologically out ahead that insurance regulators will really lose their ability to oversee the industry,” he shared.
There are already restrictions on price optimization, but those restrictions vary widely by state.
According to consumer advocates, since electronic transactions make customers’ purchasing history accessible, insurers are looking beyond the usual risk factors to “optimize” their premiums.
Heller said insurance companies get such data from third-party vendors who develop detailed customer analyses based on a range of data. Such data includes whether a certain customer has shopped around for insurance, where the customer regularly shops, and what kind of products the customer buys.
Robert Hartwig, economist and president of the Insurance Information Institute, argued that insurance carriers use their consumers’ data to analyze groups, not individuals. He added that consumer data helps insurance companies “set accurate, competitive prices.”
As their use of data involves groups, not individuals, Hartwig believes that regulations on price optimization will not affect how insurance companies do business. He also mentioned the competitiveness of the insurance market, and said it is not as volatile as other markets.
Consumer advocates, however, argued that price optimization hurts both homeowners and motorists who are less likely to shop around. Price optimization might seem like a tool for insurers to gauge the market, but Heller underlined that insurance is “. . . something the government mandates every driver purchase.”
