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Maine and Pennsylvania Address Price Optimization

Aug. 25, 2015 AAIS Advisory notice

Maine and Pennsylvania are the latest states to issue directives prohibiting the use of price optimization to rate property/casualty insurance policies.

Price optimization refers to the practice of considering demand-related factors, such as an individual's willingness to pay more for coverage than others of an equivalent risk profile, in addition to loss and expense considerations.

A recent bulletin from the Pennsylvania Insurance Department states that "insurers, rating organization and advisory organizations are reminded that policyholders and applicants with identical risk profiles . . . must be charged the same premium." There is no call for carriers to amend existing filings, however.

AAIS derives it loss costs and rating factors solely from loss and expense data; its manual rating information is not affected by the Pennsylvania directive.

In Maine, personal lines insurers that  use price optimization  must submit revised rate filings removing such factors within 60 days of a recent bulletin, issued on Aug. 24.

Insurers with rate filings currently pending are directed to disclose any use of price optimization within those filings. Insurers are further directed to disclose on the SERFF general information page whether the company uses non-risk-related factors such as price optimization or elasticity of demand.

The bulletin states that it is not intended "to prohibit or restrict such practices as capping or transitional pricing if applied on a group basis."

The bulletin adds that "the use of sophisticated data analysis to develop finely tuned methodologies with a multiplicity of possible rating cells is not, in and of itself, necessarily a violation of Maine’s rating laws as long as the classifications are based strictly on risk of loss."

The bulletin in Maine concludes by stating that it "is intended solely for informational purposes. It is not intended to set forth legal rights, duties, or privileges."

AAIS Advisory notices are posted periodically to announce AAIS product developments, and to provide news items that are relevant to our program users. Advisory notices are news summaries that paraphrase documents which should be consulted directly for complete, authoritative information.

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