Colorado 15th state to ban price optimization

Commissioner Marguerite Salazar issues bulletin, says any companies currently practicing optimization have 90 days to submit a revised filing

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Colorado Insurance Commissioner Marguerite Salazar issued a bulletin last week prohibiting insurance companies from using “price optimization” techniques in rating customers, emphasizing that it is illegal and unfair discrimination to use non-risk factors when setting rates.  According to the bulletin:

“These provisions evidence a clear purpose in Colorado that insurers classify risk according to actuarially supported considerations grounded in expected losses and expenses. Moreover, insurers are expected to disclose these considerations in their filings and otherwise justify their rates. Failure to do so puts insurers at high risk of violating Colorado insurance law.”

She wrote in the bulletin that any insurance companies already using price optimizations techniques have 90 days to submit a new rate filing to the state.

Colorado is the 15th state to notify insurers that price optimization violates state insurance statutes that require cost-based pricing and prohibit unfair discrimination in setting insurance premiums. Maryland, California, Ohio, Florida, Vermont, Washington, Indiana, Pennsylvania, Maine, Washington, D.C., Rhode Island, Montana, Delaware and Minnesota have previously issued notices to insurers with the same message as the Colorado bulletin: utilizing non-risk related consumer characteristics to set insurance prices is illegal.

While insurance companies tend to deny using optimization, consumer groups such as the Consumer Federation of America (CFA) say it is happening. “In recent years, insurance companies have begun to use ‘price optimization’ to raise customers’ premiums based on individual shopping habits and perceived ‘price elasticity of demand,’ which is a measurement of a consumer’s tolerance for price changes and can also reflect their level of access to other choices. Price optimization aims to determine how much insurers can increase rates for each individual customer beyond what is appropriate based on his or her risk profile,” said CFA in a recent press release.

“Most Americans are required by law to buy auto insurance and by their mortgage company to buy homeowners insurance, and it is terribly unfair and entirely illegal for insurance companies to vary premiums based on whether or not they are statistically likely to shop around,” said J. Robert Hunter, Director of Insurance for CFA and former Texas Insurance Commissioner.  “It is the obligation of Insurance Commissioners to protect consumers from this kind of price gouging, and we applaud Commissioner Salazar for her action.”

Commissioner Salazar told Insurance Business America that she sees her job as one of standing up for consumers. “I come from a consumer-oriented background,” she said, adding that it is her job to help people understand insurance and make smart decisions about insurance.
 

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