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

In Bulletin 2015-01, the ODI said that it had received inquiries about the use of price optimization, which it said referred to “an insurer’s practice of varying premiums based upon factors that are unrelated to risk of loss in order to charge each insured the highest price that the market will bear.”

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

The ODI said that although risk classifications were “widely accepted 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 and analyzing data related to “numerous characteristics specific to a particular policyholder” that were “unrelated to risk of loss or expense,” including:

-       whether the policyholder had complained about his or her policy;

-       the amount or percentage change of the policyholder’s auto premium at renewal in prior years; and

-       the amount or percentage change of the policyholder’s homeowners’ premium at renewal in prior years.

From this and similar data, the ODI said, insurers could determine the “price elasticity of demand,” or how much of a premium increase a particular policyholder would tolerate before switching insurance carriers. Thus, the ODI stated, price optimization techniques allowed insurers “to set premiums based on an analysis of individual policyholder behavior reflecting a willingness to pay higher premiums than others – a factor completely unrelated to risk of loss or expense.”

The ODI concluded that price optimization involved “discriminat[ing] between individuals of the same class and of essentially the same hazard” based on factors that did not have a demonstrable “probable effect upon losses or expenses.” It then found that the use of price optimization resulted in rates that were “unfairly discriminatory” in violation of Ohio insurance law.

The ODI ruled that any insurer utilizing price optimization must notify the ODI by March 31 that it will not use price optimization after May 31, 2015 for new business and June 30, 2015 for renewal business.

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The above article was drawn from FC&S Legal, and originally published by The National Underwriter Company.