- Regulators Hone NAIC Price Optimization White Paper; Next Steps and Recommendations Due by July 31, 2015
- August 4, 2015 | Author: G. Donovan Brown
- Law Firm: Colodny Fass, P.A. - Tallahassee Office
- The National Association of Insurance Commissioners' Casualty Actuarial and Statistical Task Force ("Task Force") met via teleconference on July 21, 2015 to review comments received on the May 19 Price Optimization White Paper ("White Paper") draft. A first draft had been reviewed earlier this year.
Standing in for Louisiana Insurance Commissioner Jim Donelon as Chairman at the meeting was Louisiana Department of Insurance Actuary Richard Piazza. He invited those present on the call who had submitted written comments to give a brief overview of their positions on price optimization.
First to speak was Lisa Brown, American Insurance Association Senior Counsel and Director for Compliance Resources, who explained that her comments were simply a suggested re-organization of the existing material.
"There seem to be a lot of definitions thrown around--implied or otherwise--with inconsistent characterizations," she observed. "The most important thing to note that, if there is egregious insurer behavior that needs to be thwarted, the definitions should catch that, but not to the detriment of other companies."
"Lately, 'price optimization' has been a term used to describe insurer behavior and it's not," Ms. Brown pointed out.
To formulate its comments, the Casualty Actuarial Society had created its own internal Task Force of members, who were described as being "involved in day-to-day ratemaking." They listed what they believe to be misperceptions about price optimization, followed by their explanation of the corresponding "reality."
- Price optimization uses a variety of non-insurance data
- Price optimization has been developed to increase insurers' profits
- Price optimization negatively impacts low income consumers
- Price optimization results in different consumers with the same risk profile being charged different rates and is therefore unfairly discriminatory
- Price optimization introduces a systematic component into the pricing process that is not related to the risk of loss
- Price optimization results in customers being charged the highest price the market will bear
"The reality is that actuaries always consider competitors' pricing, market activities, influence and prospective loss costs," the representative added. "Otherwise we're not really doing our job in estimating the loss costs for a future book of business."
Calling price optimization "a new approach to ratemaking," Consumer Federation of America Director Bob Hunter said it was also a " . . . departure from the cost-based pricing, which is the foundation of statutory rate standards and actuarial ratemaking principals."
"Insurers are hiding the fact they're using these policies," said Mr. Hunter, who also spoke on behalf of the Center for Economic Justice. "Who would spend millions on these tools if (the investment) were not going to be repaid at the end?"
He suggested that the discussion on price optimization should be broadened to include any action related to establishing the price of insurance for individual applicants and existing policyholders, including underwriting, tier placement, rating factors or other mechanisms.
"This is critical because of industry's penchant for avoiding regulatory scrutiny of risk classifications by calling them something else," Mr. Hunter explained.
"Insurers have historically used subjective judgment of market considerations to select rates that are different from cost-based indications," National Association of Mutual Insurance Companies' Public Policy Vice President Bob Detlefsen said. "Regulators have accepted those adjustments in the past by placing some restrictions on the use of such judgment. If there is some reason why the same restrictions applied to subjective judgment of market considerationscould not also be applied to the use of price optimization software, the (White Paper) should explain the reason."
The draft White Paper could benefit from independent analysis by the Task Force members about which models and practices are acceptable to them or not, Mr. Detlefsen added.
Property Casualty Insurers Association of America Director of Personal Lines Policy Alex Hageli said that, overall, regulators have more-than-adequate tools to address price optimization concerns, but should also factor in real-world application to their approach.
"What we're really concerned about is that a number of states have issued (price optimization) bulletins and, although it seems they're all directed at the same problem, the fact that they're issued by different authors with different wording might produce some inadvertent or unintended consequences," he cautioned.
American Academy of Actuaries member Claudine Modlin encouraged the inclusion of a definition for the term "price optimization."
She also suggested an explanation of what type of math is being used in the practice of price optimization, as well as how is it being used, how far should it deviate and whether some data should be off limits to use in rate classifications. She questioned whether the term "actuarially sound" refers to the output or the process.
A Task Force member suggested gathering a collection of price optimization best practices from a regulator's perspective that could be applied to states segregated by their use of "prior approval" versus "file and use" for rate approvals.
The Task Force agreed to give those wishing to provide additional recommendations and next steps to be inserted into the draft White Paper until July 31, 2015 to submit them.