Minnesota Commerce Commissioner Orders Insurers to Stop ‘Illegal Pricing Practice’
Nov 16, 2015
Minnesota Commerce Commissioner Mike Rothman is ordering insurers doing business in Minnesota to stop the practice of “price optimization” in setting rates for auto and homeowners insurance, the Minnesota Department of Commerce (“MDOC”) reported today, November 16, 2015.
Commissioner Rothman said the anti-consumer practice violates state law because it unfairly discriminates by charging different premiums for consumers who otherwise have similar risk profiles.
According to the MDOC, price optimization generally refers to the use of non-insurance consumer data, sophisticated statistical analysis and computer models to set insurance rates, relying on factors other than a consumer’s expected losses, expenses or risk to the insurer.
For example, rates might be manipulated based on calculations that some consumers are more likely than others to accept higher premiums and renew their policies rather than switch to a different insurer.
“Using price optimization in insurance is high-tech price gouging and it’s unfair to insurance consumers,” Commissioner Rothman said. “People’s insurance premiums are determined by their risks and expected costs to an insurer. For example, it’s okay for an insurance company to charge more because someone has a bad driving record. It’s not okay to charge more because of their shopping habits.”
Commissioner Rothman noted that certain groups–including seniors and low-income consumers–are more likely to stick with their existing insurer and less likely to move to a different company.
“A business might be expected to reward its faithful customers with some kind of loyalty discount or bonus,” he added. “But insurance companies that use price optimization are secretly and unfairly penalizing customers for their loyalty by charging them higher premiums.”
Commissioner Rothman said his agency recently objected to a rate filing by an auto insurer that included price optimization techniques.
Because of concerns that price optimization is becoming a more widespread industry practice, Rothman said he issued Bulletin 2015-3 today to all property and casualty insurers doing business in Minnesota.
The Bulletin directs any insurer that currently uses price optimization to immediately stop the practice and file a corrective action plan with the MDOC within 60 days. In addition, insurance companies must certify in all future property and casualty rate filings that they are not using price optimization.
To view the Bulletin, click here.
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