State insurance regulators and legislators are increasingly scrutinizing "price optimization," a practice that some insurers are reportedly using as part of the ratemaking process. There is, however, considerable disagreement as to what price optimization is, how it might operate in the context of insurance, and what, if anything, regulators should do about it. Earlier this year, the National Association of Insurance Commissioners (NAIC) instructed its Casualty Actuarial and Statistical Task Force to draft a white paper on price optimization, focusing on the areas of controversy. 

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

None of the bulletins define "price optimization" in the same way, although they generally describe it as the practice of varying customer prices based on factors such as price sensitivity (that is, the willingness of a policyholder to pay a higher premium relative to other policyholders) and propensity to shop (that is, the likelihood that a policyholder, when faced with the prospect of premium increase, will shop among other insurers for a lower premium). Because such factors are said to be unrelated to the risk of loss, price optimization "can result in two policyholders receiving different premium increases even though they have the same loss history and risk profile," according to the Vermont bulletin. The specter of policyholders with similar risk profiles being charged different premiums for the same coverage is a common theme of price optimization critics.