The Ohio Department of Insurance (“ODI”) has banned the use ofprice optimization by insurance companies.

In Bulletin 2015-01, the ODI said that it had received inquiriesabout the use of price optimization, which it said referred to “aninsurer's practice of varying premiums based upon factors that areunrelated to risk of loss in order to charge each insured thehighest price that the market will bear.”

The ODI pointed out that Ohio insurance law prohibited charging“unfairly discriminatory rates,” requires that rates “be based uponrisks,” and requires “differences among risks to have ademonstrable probable effect on losses or expenses.”

The ODI said that although risk classifications were “widelyaccepted as a legitimate insurance actuarial principle,” the“fundamental factor underlying insurance rates” was that they“reflect a risk of loss.”

Price optimization, the ODI continued, involved gathering andanalyzing data related to “numerous characteristics specific to aparticular policyholder” that were “unrelated to risk of loss orexpense,” including:

- whether the policyholderhad complained about his or her policy;

- the amount or percentagechange of the policyholder's auto premium at renewal in prioryears; and

- the amount or percentagechange of the policyholder's homeowners' premium at renewal inprior years.

From this and similar data, the ODI said, insurers coulddetermine the “price elasticity of demand,” or how much of apremium increase a particular policyholder would tolerate beforeswitching insurance carriers. Thus, the ODI stated, priceoptimization techniques allowed insurers “to set premiums based onan analysis of individual policyholder behavior reflecting awillingness to pay higher premiums than others – a factorcompletely unrelated to risk of loss or expense.”

The ODI concluded that price optimization involved“discriminat[ing] between individuals of the same class and ofessentially the same hazard” based on factors that did not have ademonstrable “probable effect upon losses or expenses.” It thenfound that the use of price optimization resulted in rates thatwere “unfairly discriminatory” in violation of Ohio insurancelaw.

The ODI ruled that any insurer utilizing price optimization mustnotify the ODI by March 31 that it will not use price optimizationafter May 31, 2015 for new business and June 30, 2015 for renewalbusiness.

Learn more: http://insurance.ohio.gov/Legal/Bulletins/Documents/2015-01.pdf.

The above article was drawn from FC&SLegal, and originally published by The NationalUnderwriter Company.