NAIC’s Casualty Actuarial and Statistical Task Force Extends Price Optimization White Paper Comment Deadline to September 14, 2015
Aug 28, 2015
Above: Colodny Fass’ Donovan Brown Notes Comment Deadline Extended On NAIC Price Optimization White Paper
The deadline to submit comments on the National Association of Insurance Commissioners’ (“NAIC’s”) Price Optimization White Paper Draft (“White Paper”) has been extended to September 14, 2015, the NAIC’s Casualty Actuarial and Statistical Task Force (“Task Force”) announced today, August 28, 2015.
To view the White Paper, click here.
At the NAIC’s recent Summer 2015 National Meeting, Louisiana Department of Insurance Chief Actuary Richard Piazza, who represents Louisiana Insurance Commissioner Jim Donelon as Task Force Chair, said he does not believe the Task Force should define “price optimization,” since the concern–regardless of the definition–is the possible outcome of unfair discrimination, he said.
Regulators at the meeting discussed possibly creating a uniform filing form to aid rate reviews and provide information about price optimization, as well as adjustment of the White Paper’s section on “credibility” to reflect new product filings in cases where there might be no historical experience.
Mr. Piazza said the NAIC should revisit the definition of “unfair discrimination” to include in insurance rating laws. State of Washington Department of Insurance Senior Actuary Lee Barclay said that any definition of “unfair discrimination” is related, if not intertwined to the work of the Casualty Actuarial Society’s Statement of Principles on ratemaking and the Actuarial Standards Board’s new Actuarial Standard of Practice on ratemaking. Mr. Piazza agreed the groups should interact in revising the definition.
Minnesota Insurance Department Actuarial Director and Regulatory Policy Analyst Phil Vigliaturo said his state has a legal definition of “unfairly discriminatory.” Other state’s versions of the definition might be based on the 1947 All-Industry Bill, which might not be adequate to face current issues like price optimization.
Representing Alabama Insurance Commissioner Jim Ridling, Deputy Commissioner and Casualty Actuary Charles Angell said the White Paper’s reference to a proposed rate being within a reasonable range of indicated is likely focused on classification rating factors, rather than the overall rate level. He said there are cases where a company has an indication of +20 percent and decides to only take +5 percent with the first renewal, which he said the White Paper should allow for.
Representing California Insurance Commissioner Dave Jones, California Insurance Department Chief Actuary for Financial Surveillance Ron Dahlquist suggested using the term “relativities.”
Other discussion points included:
- How “cost-based adjustments” would be interpreted by non-actuaries
- The suggestion that “risk” should be listed as a consideration, along with insurance expenses, insurance claims and business costs
- Inconsistencies with the evaluation of competition, including disallowing competitive analysis as a component of price optimization
- Use of the propensity to “shop” to adjust rates
- Elimination of the White Paper’s list of non-usable activities, or clarifying it to not be all-inclusive (i.e., “including but not limited to”)
- Removing the White Paper header that reads “Is price optimization legal?”
Center for Economic Justice Director Birny Birnbaum said a 10-year retention discount based on loss costs is qualitatively different from a price optimization activity using non-cost related factors. He said there is a difference between the outcome desired from price optimization versus the tools and information used in price optimization. Maximization of profit is the outcome desired, but regulatory focus should be on the consumer demand model and the data used, he added.
Property Casualty Insurers Association of America International Policy Vice President Dave Snyder said the White Paper should provide considerations allowing regulators to decide what is acceptable under their state laws. He agreed that some of the items in the list of what might be “unfairly discriminatory” seem too broad and said he supports a focus on the outcome of price optimization to vary otherwise similarly situated policies on the basis of price elasticity. Rather than provide one list of what is “unfairly discriminatory,” Mr. Snyder suggested that states use an alert or “things to consider” to communicate with the industry. Reviews should be done on a filing-by-filing basis, he added.
Mr. Birnbaum continued that, although nearly every state has a law stating that rates cannot be excessive, inadequate or unfairly discriminatory, regulators should coalesce around a common set of sensible practices. He added that price optimization competitive analysis is qualitatively different than former competitive analysis, and that it is one thing to cap a rate in a county, but another thing to cap at a granular geographic level, where a company can evaluate the market and whether anything other than standard insurers are available in a neighborhood. Thus, “competitive analysis” might be framed more accurately described as “granular adjustments.” Rate-capping in one place is not a “free lunch,” he said, explaining that it usually results in higher prices someplace else and companies are not likely to forgo profit. Lastly, Mr. Birnbaum said it is not clear that regulators can statutorily depart from cost-based pricing, even when they believe it to be a good thing.
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