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Insurers to FOIR: It depends on what your definition of ‘is’ is p2

Mon Jul 20th, 2015 on     Insurance Law,    

In December 2014, the Consumer Federation of America raised some questions about how Allstate was calculating auto insurance premiums. The CFA alleged that Allstate was basing those premiums on “marketplace considerations.” These marketplace considerations focus on competition and supply and demand — factors that in most industries would certainly influence price.

Insurance, however, is not just any industry. Insurance is highly regulated, and the price of coverage should be based on risk, not competition. In fact, the Florida Office of Insurance Regulation recently reminded insurers that the law requires rates to be based on “generally accepted and reasonable actuarial techniques,” and that marketplace considerations — the practice is called price optimization — should not play any part in those calculations.

The OIR’s communication was clear: Insurance companies may continue to submit rates that are based on price optimization, but they should be prepared to have their rates rejected. Because Florida does not require prior approval of insurance rates, an insurer could sell policies based on the unfairly discriminatory rate before OIR reviews and rejects it. The result could be a mess for the insurer.

The issue for insurance companies is the definition of price optimization that Florida is using. Relying on such a vague, broad definition could result in unfair rate rejections and penalties for insurers, according to the Property Casualty Insurers Association of America. Insurers also say that CFA’s and regulators’ complaints show just how little they understand the rating process itself.

The OIR is basing the warning on the state’s definition of price optimization. The term refers to a process designed to maximize insurer retention, profit, written premium, or market share, whether alone or in any combination.

PCI takes issue in particular with the reference to maximizing profit, explaining that it could have a different meaning for insurance companies and regulators. There is also the question of which types of insurance the OIR is talking about: personal, commercial or both?

The Center for Economic Justice agrees with the OIR and consumer groups. According to its chief executive, “Price optimization by insurers is big data run amok. Consumers are being punished for activities and circumstances without any disclosure or transparency by insurers.” Eliminating price optimization would take insurance companies back to rating based on the risk of loss, not the possibility of gain.

Source: Insurance Journal, “Florida Bans Price Optimization; Insurers Question Definition,” Amy O’ Connor, May 19, 2015

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