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Vermont Requires Disclosure of Non-Risk Factors in Personal Lines Rate Filings

June 29, 2015 AAIS Advisory notice

Future personal lines rate filings in Vermont, as well as those currently under review, must disclose to the state's insurance division whether those filings include "non-risk related factors" such as "price elasticity of demand."  

As defined in a recent bulletin from the division, "price elasticity of demand" seeks to predict how much of a price increase a policyholder will tolerate before shopping for coverage or switching to another insurer.

The bulletin does not expressly ban the use of such factors, but warns insurers that Vermont law requires that "base rates and rating classes must be based on factors specifically related to an insurer's expected losses and expenses."

The bulletin is addressed to the use of "price optimization," a practice the division says "involves the judgmental use of factors not specifically related to an policyholder's risk profile." 

According to the bulletin, price optimization "can result in two policyholders receiving different premium increases  even though they  have the same loss history and risk profile." Regarding that possibility, insurers are reminded that "unfair discrimination is considered to exist if price differentials 'fail to reflect equitably the differences in expected loss and expenses' for different classes of policyholders."

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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