By Josh Chetwynd
The Pennsylvania Insurance Department released an advisory notice August 22 prohibiting insurance companies from utilizing sophisticated computer software or rating model tools to vary premium prices for a very specific purpose – changing rates based on whether an applicant or policyholder might seek another insurance option.
Known as “price optimization”, these techniques allow companies to identify those clients who are more likely to shop around, placing insurers in a position to shift prices based on this risk. But the state was adamant that using big data to modify premiums under these circumstances is against the law.
“Policyholders and applicants with risk classification profiles – that is, risks of the same class and essentially the same hazard – must be charged the same premium,” wrote the Pennsylvania Insurance Department in its NOTICE 2015-06. “Rates that fail to reflect differences in expected losses and expenses with reasonable accuracy are unfairly discriminatory under Commonwealth law and will not be approved.”
In making this statement, Pennsylvania joins an emerging trend of states that are saying no to this form of computer-driven price optimization. The state becomes the eighth to speak out explicitly against the activity.
The move is worthy of applause, according to the state’s top insurance agency association.
"While we're supportive of innovative ways to make rating even more accurate," said Rick Russell, president and CEO of Insurance Agents & Brokers of Pennsylvania, "we see the need for regulators to clarify what's non-discriminatory. Bottom line: Independent agents are there to protect and educate their customers, so any move to create transparency and fairness in the underwriting process is a win."
