It’s time for dialogue, not demagoguery, on price optimization
Social activist Saul Alinsky’s “Rules for Radicals: A Pragmatic Primer for Realistic Radicals” was written as a how-to guide for community activists looking to compel political change. Yet its rules are no less applicable to parties already in power, particularly regulators.
From their perch atop a complex and wealthy industry, insurance regulators are well-positioned to take political stands by employing Alinsky’s thirteenth rule: “Pick the target, freeze it…and polarize it.”
Insurance regulators throughout the country have begun to target, freeze and polarize an increasingly visible set of rating practices known as “price optimization.” In authentic Alinsky-ian fashion, regulators have resorted to freezing price optimization practices as impermissible deviations from existing prohibitions against charging rates that are “unfairly discriminatory.” They are doing so without the benefit of a genuine understanding of what such practices actually entail.
In fact, even among the states that have sought to proscribe the use of price optimization, there is no common definition of the practice. For instance, last October, Maryland released a bulletin describing the practice as
[V]arying rates based on factors other than risk of loss, including, but not limited to: (a) the likelihood that a policyholder will engage in activities that result in policy turnover; and (b) the willingness of a policyholder to pay a higher premium compared to other policyholders.
Next up was Ohio, which issued a bulletin in January defining the practice as:
[V]arying premiums based upon factors that are unrelated to risk of loss in order to charge each insured the highest price that the market will bear.
A February notice from California Insurance Commissioner Dave Jones to 750 insurers said price optimization was:
[A]ny method of taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes.
In May, Florida’s Office of Insurance Regulation issued a memorandum that conceded price optimization simply “does not have a universally recognized definition.” Nonetheless, for the purposes of banning the practice, the OIR defined it as:
A process for modifying the insurance premium that would otherwise be charged to an insured or class of insureds in order to maximize insurer retention, profitability, written premium, market share, or any combination of these while remaining within real world constraints.
Most recently, Indiana released a bulletin earlier this month without a formal definition of price optimization at all! It nonetheless firmly established “that the use of price optimization in establishing rates is not permitted.” Companies that currently employ the undefined practices were given 90 days to correct their errant ways and submit new filings. The contours of price optimization were described as:
“[U]sing data collection and analysis to predict which consumers will accept higher rates without changing insurers and/or varying premiums based upon factors that are unrelated to the risk of loss so that each insured is charged the highest price that the market will bear.”
When pressed for a definition of the practice at the National Conference of Insurance Legislators meeting earlier this month, Indiana Insurance Commissioner Steve Robertson retreated to Justice Potter Stewart’s subjective formulation for the identification of pornography: “I may not know how to define it, but I know it when I see it.”
Such an approach is problematic. The disparate definitional guidance provided by the states may inadvertently proscribe practices which have been, to date, permissible.
Consider a scenario outlined by California attorney Bill Gausewitz, of the increased expenses incurred by an insurer whose strategy is to provide high levels of customer service, compared with one that simply offers the lowest-priced coverage. Gausewitz rightly concludes that such expenses are unrelated to the risk of loss and thus would run afoul of overly-broad formulations of price optimization practices.
On a more fundamental level, such restrictions could encumber the flexible application of crucial actuarial judgement concerning the development of rates.
R Street has discussed price optimization in the past and we, like insurance regulators, are circumspect about embracing the practices encompassed by it. We certainly have concerns about moving away from risk-based pricing. But unlike the regulators, we are loathe to mischaracterize the practices or otherwise inadvertently proscribe otherwise admissible practices in a rush to address price optimization. In their haste, insurance regulators have accomplished both.
The value of price optimization practices should be discussed and considered at length, and the National Association of Insurance Commissioners is doing its best to accomplish just that. But as the states promulgate judgments of their own, doing so will require regulators to un-freeze the very public characterizations that they have made of the practices.
It is time for regulators to leave the combative, unproductive and ultimately political Alinsky-inspired approach in the past and exercise the kind of judgment that the market and consumers require.
