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Price optimization under scrutiny

How should this practice operate in the context of insurance, and what should regulators do about it?

By Robert Detlefsen | Updated on September 18, 2015

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.

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