Some insurers operating in New York have received a letter from the state's Department of Financial Services requiring them to indicate, by April 15, 2015, whether they utilize practices associated with "price optimization" in their underwriting or rating.
The letter defines price optimization as "the practice of varying rates based on factors other than those directly related to risk of loss," such as an insured's likelihood to renew a policy or on an individual's or class's willingness to pay a higher premium relative to other individuals or classes.
Specifically, the letter asks if the insurer:
- Uses formal or informal price optimization models for rating or tier placement; or
- Considers policyholder retention or the likelihood that a policyholder will shop for coverage in the carrier's assignment of tiers or rating factors.
If a company answers "yes" in either case, it is directed to describe in detail its use of price optimization models and considerations, and identify where price optimization techniques have been used in existing filings.
The letter explains that its purpose is to determine whether "corrective actions" are needed to address price optimization, but no restrictions are put forth at this time.
To date, Maryland, Ohio, and California have issued prohibitions on the use of price optimization.
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