Indiana Becomes Seventh State to Ban Insurance Price Optimization

Above:  Colodny Fass’ Donovan Brown Notes Indiana Insurance Commissioner’s Directive on Price Optimization 

 

Indiana became the seventh state to ban insurance company use of “price optimization” in ratemaking with its publication of Bulletin 219 by the Indiana Insurance Department (“IID”) yesterday, July 20, 2015.

To view the Bulletin, click here.

Indiana follows California, Florida, Maryland, Ohio, Vermont and Washington in addressing the issue, which is concurrently being debated by the National Association of Insurance Commissioners’ Casualty Actuarial and Statistical Task Force with the goal of publishing a white paper and possibly additional regulator guidance.  (Note:  Colodny Fass representatives attended today’s Casualty Actuarial and Statistical Task Force meeting to discuss related comments on the draft white paper and will provide a complete report.)

Directed to all personal lines insurers doing business in Indiana, Bulletin 219 instructs all companies currently using price optimization to rate policies being sold in Indiana to submit a new rate filing within 90 days yesterday’s Bulletin publication. Companies that fail to comply and are later determined to be using price optimization in the manner described may be subject to disciplinary action, Indiana Insurance Commissioner Stephen Robertson stated.

While the IID did not define “price optimization,” it described it as including the use of ” . . . data collection and analysis to predict which consumers will accept higher rates without changing insurers and/or varying premiums based upon factors that are unrelated to risk of loss so that each insured is charged the highest price that the market will bear.”

“There is growing concern by the Department that insurers are shifting from cost-based ratemaking and increasingly  introducing price sensitivity into their rating methodologies,” Commissioner Robertson wrote yesterday.  “One of the components of price optimization is demand price elasticity modeling.  Price optimizing predicts which consumers are more or less ‘price sensitive.’   Predictions may be based on, among other things, a consumer’s reaction to past rate changes and information collected by an agent or through the insurance application process.  This may include data elements that measure consumer purchasing patterns and socioeconomic status.”

The Bulletin also cautioned that insurers should also be mindful of compliance with the following specific Indiana insurance laws, regardless of the IID’s direct intervention:

¥ IC 27-1-22-3(a)(4) states that rates shall not be excessive, inadequate, or unfairly discriminatory.

¥ IC 27-4-1-4(a)(7)(C)(iii) prohibits making or permitting unfair discrimination between persons of the same class involving essentially the same hazards.

¥ IC 27-f -22-3(a)(2) states that “classification rates may be modified to produce rates for individual risks in accordance with rating plans which establish standards for measuring variations in hazards or expense provisions, or both. Such standards may measure any difference among risks that can be demonstrated to have a probable effect upon losses or expenses.”

¥ IC 27-1-22-4(a) requires every insurer to file with the commissioner “every manual of classifications, rules, and rates, every rating schedule, every rating plan, and every modification of any of the foregoing which it proposes to use.”

¥ IC 27-1-22-S(e) states, “No manual of classifications, rule, rate, rating schedule, rating plan, or any modification of any of the foregoing which establishes standards for measuring variations in hazards or expense provisions, or both, which has been filed pursuant to [IC 27-1-22-4] shall be disapproved if the rates produced thereby meet the requirements of [IC 27-1-22-3].”

The IID views a rating factor or rating methodology that adapts rates based on considerations other than risk to be at high risk of violating Indiana insurance laws, particularly IC 27-1-22-3, which requires that rates not be excessive, inadequate or unfairly discriminatory.  When a rating factor or rating methodology adjustments result in classification rates outside of a reasonable range of cost-based estimates, or lead to unfairly discriminatory rates, rates are not in compliance with the law.

The Consumer Federation of America (“CFA”) issued a news release yesterday thanking Commissioner Robertson for issuing Bulletin 219.  

To read the complete CFA release, click here.

In December, the CFA released an analysis of a new Allstate rating structure it alleged was being used in 31 states.  The CFA subsequently asked insurance commissioners in these states to not only reject Allstate’s plan, but to evaluate other companies’ rating systems to determine and block other uses of similar ratemaking.

 

 

Should you have any questions or comments, please contact G. Donovan Brown at Colodny Fass (+1 850 545 8864 or DBrown@ColodnyFass.com).

 

 

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