More states join the fight against “unfair” insurance tactics

Another state has joined the growing list of those warning insurers against using price optimization techniques that raise rates for the most loyal customers.

Insurance News

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Another state has joined the growing list of those warning insurers against using pricing tactics considered by some to be unfair.

Pennsylvania announced this week that it is officially banning the use of “price optimization” among auto insurers – a controversial practice in which the insurer identifies consumers least likely to comparison shop and then charges them higher rates.

In a notice to carriers, state Insurance Commissioner Teresa Miller emphasized that all pricing practices must be based on risk factors. Current policyholders and applicants with identical risk profiles “must be charged the same premium,” she wrote, and those that are based on anything other than loss experience will be considered “unfairly discriminatory.”

Pennsylvania joins seven other states that have issued formal warnings against price optimization, including California, Florida, Indiana, Maryland, Ohio, Vermont and Washington.

The practice has come under fire from consumer advocates that consider price optimization unfair and discriminatory. Birny Birnbaum, director of the nonprofit Center for Economic Justice, even went so far as to call the technique “simply price gouging by a fancy name.”

Given that one in four Americans has not shopped for auto insurance in the last 20 years, according to a study from insuranceQuotes.com, the proliferation of price optimization is concerning.

Yet insurers maintain that their practices are fair, stressing that consumer advocates and regulators misunderstand the purpose of price optimization.

Robert Hartwig, president of the Insurance Information Institute, rejected the claim that carriers are using analytics to unfairly price risk as “patently false and utterly nonsensical.”

“Some insurers may use advanced analytical techniques to supplement traditional actuarial tools to help them make marketing decisions within their risk-based pricing program,” Hartwig told the news service. “As would be the case in any industry, these techniques can help insurers anticipate and measure the potential impacts of price changes on growth, profitability and other important marketing considerations.

“None of this is in violation of risk-based principles long associated with ratemaking in insurance.”

He also added that an III poll found 68% of people with an annual income of less than $35,000 compared prices when shopping for auto insurance, compared with 61% of those with annual incomes of more than $100,000.

Regardless of income level, however, the presence of price optimization should be a powerful motivator for insurance agents, who excel at comparison shopping and demystifying some of the more complicated aspects of choosing a policy.

“Americans may think loyalty pays off, but when it comes to insurance, that’s not always the case,” insuranceQuotes.com senior analyst Laura Adams. “All it takes is an hour every year to compare at least three companies’ quotes – that’s worth it to potentially save hundreds, or even thousands, of dollars.”
 
 

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