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California Prohibits Price Optimization

Feb. 20, 2015 AAIS Advisory notice

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A recent bulletin from the California Department of Insurance (CID) adds that state to the list of those who have taken regulatory action to ban the practice of "price optimization." 

Previously, Maryland and Ohio had issued explicit regulatory prohibitions against price optimization.

The California bulletin defines price optimization as "any method of taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes."

In recent years, some insurers have developed rating plans that include factors for predicting how much an insurance buyer might pay. For example, individuals who have not shopped around for coverage or made a complaint to their insurer might be charged a higher premium than others with a similar risk profile.

Like its counterparts in Maryland and Ohio, the CID interprets price optimization to be a form of unfair discrimination in rating, and therefore prohibited under California law.

Insurers using price optimization in California are directed to cease the practice. In particular, they are required to remove any price adjustments resulting from price optimization from all ensuing filings, and to remove any current price optimization factors by filing action within six months.

AAIS rating information is unaffected by the directive.

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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