State insurance regulators and legislators are increasinglyscrutinizing "price optimization," a practice that some insurersare reportedly using as part of the ratemaking process. There is,however, considerable disagreement as to what price optimizationis, how it might operate in the context of insurance, and what, ifanything, regulators should do about it. Earlier this year, theNational Association of Insurance Commissioners (NAIC) instructedits Casualty Actuarial and Statistical Task Force to draft a whitepaper on price optimization, focusing on the areas ofcontroversy. 

When it's completed later this year, the paper will include aset of policy recommendations for regulators to consider. However,several states have chosen to act before the NAIC's work isfinished. As this is being written, insurance regulators inMaryland, Ohio, California, Florida, Vermont, Washington, andIndiana have issued bulletins declaring that insurers' use of priceoptimization models to determine rates and premiums constitutes"unfair discrimination" in violation of their states' insurancelaws.

None of the bulletins define "price optimization" in the sameway, although they generally describe it as the practice of varyingcustomer prices based on factors such as price sensitivity (thatis, the willingness of a policyholder to pay a higher premiumrelative to other policyholders) and propensity to shop (that is,the likelihood that a policyholder, when faced with the prospect ofpremium increase, will shop among other insurers for a lowerpremium). Because such factors are said to be unrelated to the riskof loss, price optimization "can result in two policyholdersreceiving different premium increases even though they have thesame loss history and risk profile," according to the Vermontbulletin. The specter of policyholders with similar risk profilesbeing charged different premiums for the same coverage is a commontheme of price optimization critics.