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Price optimization hurts loyal customers

December 8, 2017 by Steven M. Gursten

Rep. Moss (D-Southfield)’s House Bill 5271 would prohibit car insurance companies from using price optimization to charge higher rates to loyal insureds

Price optimization

Of all the ridiculous rationalizations insurance companies use for jacking up people’s car insurance premiums, the discriminatory rate-setting strategy called “price optimization” certainly takes the cake.

Pure and simple, price optimization punishes people for being loyal customers.

Car insurance companies use price optimization to jack up a customer’s rates if the insurer believes he or she is unlikely to comparison-shop and, ultimately, switch to another insurer that offers lower rates with the same or better coverage.

In other words, you’ll be “rewarded” for your loyalty to your insurance company by paying more for its product.

What a deal, right?

Wrong, thankfully, says Rep. Jeremy Moss (D-Southfield) who introduced House Bill 5271 on November 28, 2017, which proposes to both ban “price optimization” as an underwriting factor for insurers and proposes to classify premiums based on price optimization as “unfairly discriminatory,” which are prohibited by the Insurance Code.

Significantly, this is an important issue to Rep. Moss: He introduced a nearly identical bill, House Bill 5735, in 2016, which, unfortunately, “died” due to inaction at the conclusion of the 2015-16 legislative session.

As an insurance lawyer, I supported HB 5735, and I whole-heartedly support HB 5271 – and for all the same reasons that I stated in my July 19, 2016, blog post, “Price optimization: The high cost of being loyal to your own insurance company”:

  • “Here’s an ugly truth about auto insurance companies. Rather than being rewarded with perks, special offers, discounts or especially reduced auto insurance rates, your auto insurer may be doing the exact opposite and charging you higher prices.”
  • “As an insurance attorney who’s done battle with the auto No Fault insurance companies for years over efforts to boost profits on the backs of injured car accident victims with unpaid No Fault medical bills and wage loss and attendant care, I’m sadly not at all surprised by the ‘price optimization’ scam.”

What is price optimization in the auto insurance context?

HB 5271 explains that “price optimization” – which the bills seeks to bring an end to – “means” that an auto insurance company is “establishing rates or varying premiums at any time based on factors that are unrelated to risk of loss, including, but not limited to, any of the following”:

  • “[C]harging each insured the highest price that the market will bear.”
  • “[C]onsidering the likelihood that the insured will engage in activities that result in insurance policy turnover.”
  • “[E]stimating the willingness of the insured to pay a higher premium compared to other insureds.”
  • “[U]sing any measure of a consumer’s or group of consumers’ price elasticity of demand.”

Additionally, the bill elaborates on what it means by “activities that result in insurance policy turnover” by providing the following non-exhaustive list of activities:

  • “[S]hopping with other insurers for a lower premium.”
  • “[C]anceling a policy before the expiration of the policy term.”
  • “[F]ailing to renew a policy at the renewal of the policy term.”
  • “[C]omplaining to the insurer or the insurer’s agent or representative.”

Does price optimization result in unfairly discriminatory auto insurance rates?

Yes, and if passed, HB 5271 would help to stop this aspect of discriminatory auto insurance pricing.

For example, the bill proposes to build on the Insurance Code’s existing prohibition of “unfairly discriminatory” “rates for automobile insurance” (MCL 500.2109(1)(a) and (c)) by declaring that:

“A rate is unfairly discriminatory as to the premium charged to the risk if the rate is established through or impacted by price optimization.”

What would stop insurers from still using price optimization to set rates?

HB 5271 addresses that issue by providing that “an insurer shall not establish its underwriting rules through price optimization …”

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