CFA urges states to prohibit price optimization in insurance

The Consumer Federation of America (CFA) has written state insurance commissioners, urging them to follow the Texas Department of Insurance (TDI) in prohibiting the use of price optimization in insurance. 

TDI issued a bulletin Sept. 2 reminding insurance companies it’s illegal to use factors other than insurance risk to set home and auto insurance rates.

“The practice of price optimization includes considering ‘the elasticity of demand’ to predict policyholders’ behavior — for example, the likelihood a policyholder will renew or shop for a lower premium, or a policyholder’s willingness to accept a price increase,” the bulletin states. “Price optimization turns loyalty into a pricing factor. Texas law requires rates to be based on risk, not on whether a consumer is likely to tolerate a higher price.”

CFA writes in its letter that price optimization leads to higher premiums for those without the time, access to choices, or wherewithal to effectively shop around. 

“It is particularly insidious when it is used in personal lines insurance, given that auto insurance is a government-mandated purchase for the vast majority of Americans and homeowners insurance is mandatory for anyone with a mortgage,” CFA states. 

Customer premiums are increased or decreased based on an algorithmic estimate of how high they can go before shopping for a better deal, according to the letter. It adds that price optimization charges different premiums to consumers with similar or identical risk profiles. 

CFA has warned regulators about the use of price optimization since 2013, the letter states. It also presented concerns to the Federal Trade Commission regarding optimization in 2024. It adds that the commission began investigating the range of market abuses under the umbrella of surveillance pricing, including insurance price optimization. 

The following states have issued bulletins concerning price optimization: 

• • Alaska
  • California
  • Colorado
  • Connecticut
  • Delaware
  • District of Columbia
  • Florida
  • Indiana
  • Maine
  • Maryland
  • Minnesota
  • Missouri
  • Montana
  • Nevada
  • Ohio
  • Pennsylvania
  • Rhode Island
  • Texas
  • Vermont
  • Virginia
  • Washington

Twenty-one states have issued bulletins on price-optimization, but many are more than a decade old, according to the letter.

“We urge those of you in states with bulletins issued to review the systems in place to ensure companies have not introduced or re-introduced price optimization techniques, perhaps under different names, in the intervening years,” the letter states. “For those states that have not yet issued a bulletin, we urge you to do so now and believe the Texas Bulletin provides a succinct and effective template.” 

CFA provides a list of states it believes have not issued a bulletin: 

• • Alabama
  • Arizona
  • Arkansas
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Iowa
  • Kansas
  • Kentucky
  • Louisiana
  • Massachusetts
  • Michigan
  • Mississippi
  • Nebraska
  • New Hampshire
  • New Jersey
  • New Mexico
  • New York
  • North Carolina
  • North Dakota
  • Oklahoma
  • Oregon
  • South Carolina
  • South Dakota
  • Tennessee
  • Utah
  • West Virginia
  • Wisconsin
  • Wyoming

“We would welcome, of course, any corrections to that list if your state has, in fact, taken action to block this unfairly discriminatory pricing technique,” the letter states.

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