Property and casualty insurers in California have been notified by insurance commissioner Dave Jones that “price optimization” in setting rates is discriminatory and violates state law.
According to the commissioner, the practice in essence bases what a group of individuals will pay for insurance on their “willingness to pay a higher premium relative to other individuals or classes.” Customers less likely to compare prices for policies in a particular area may find themselves paying more for the same coverage offered at a lower price in a different jurisdiction because those residents are savvier when it comes to shopping for rates.
One study found that lower income residents are more likely to be impacted because there are fewer insurance options available to them.
Different rates for comparison shoppers
“It is illegal for an insurer to charge people different rates based on their sensitivity to price increases or the likelihood that they will comparison shop,” said Jones in a statement. “Price optimization represents a fundamental threat to fairness in rating. As insurance commissioner, I remain committed to ensuring California maintains a healthy and vibrant insurance marketplace, while making sure consumers remain protected.”
The Consumer Federation Group of America applauded the commissioner’s actions as California becomes the third state to ban this pricing practice. Maryland and Ohio recently instituted similar bans.
The practice does not base pricing on actuarial data, and consumer organizations view the practice as “Big Data run amok. Consumers are being punished for activities and circumstances without any disclosure or transparency by insurers. The California, Ohio and Maryland actions are the first steps in returning insurance practices to the foundation of pricing insurance based on risk of loss,” explained Birny Birnbaum, executive director of the Center for Economic Justice.
According to the California Department of Insurance, insurers collect $257 billion in premiums each year in the state. More than 750 property and casualty insurers were notified that they must stop using price optimization in setting rates in California. They have six months to adjust their rates and file new ones with the state.