January 12, 2016

Missouri Chief Regulator Huff to insurance industry: Price optimization violates Missouri law

Missouri law prohibits the use of rates that are excessive, inadequate or unfairly discriminatory

Jefferson City, Mo. - The Missouri Department of Insurance issued a bulletin to Missouri insurers in reference to the prohibited rating practice generally known as "price optimization."

"Price optimization" is the practice of measuring and modifying insurance prices based on an individual consumer's predicted response to rate changes.  An example of this would be if a policyholder did not complain about a previous rate increase or cancel the policy due to such an increase. An insurer could potentially use this data to justify additional rate increases. Conversely, the same data could result in a consumer not receiving a rate decrease for which they might otherwise qualify. In either scenario, the consumer may unfairly pay more. 

"Missouri seniors are most at risk to pay more because they tend to be more loyal to their insurance companies," said Missouri Department of Insurance Director John M. Huff. "Our department's mission is consumer protection and we are particularly sensitive to practices which harm our state's more vulnerable populations. Insurance companies should follow the law and our department will closely evaluate their rating plans to ensure all Missourians are treated fairly."

The National Association of Insurance Commissioners (NAIC), of which Huff is President, recently completed work on a White Paper analyzing the practice of price optimization. In its White Paper, the NAIC has identified the following practices and characteristics as potentially violating insurance laws that prohibit unfair discrimination:

  • How much a consumer might be willing to pay before they shop around for a better price;
  • Whether or not a consumer has a history of shopping around for a better deal;
  • Whether or not a consumer is likely to renew; and
  • The likelihood of a consumer to ask questions or file complaints.

Insurers are able to collect and analyze "Big Data" to predict these consumer behaviors. 

Missouri law requires that rates are based on insurer's expected claims, cost of doing business, and policyholder risk - not on what an insurer believes a consumer is willing to pay.