This document discusses price optimization in insurance pricing and the controversy surrounding its use. It begins by explaining that several states have banned or limited price optimization, which considers non-risk factors like willingness to pay higher prices. The document then discusses what price optimization is, how it builds on traditional risk-based rating, and how it models demand and optimal pricing. While it can allow companies to increase profits, some see it as unfairly discriminating against equally risky policyholders. The future of price optimization and the role of CPCUs in understanding its impact are also examined.
Insurance M&A activity in the US rose to unprecedented levels in 2015, surpassing what had been a banner year in 2014. There were 476 announced deals in the insurance sector, 79 of which had disclosed deal values with a total announced value of $53.3 billion. This was a significant increase from the 352 announced deals in 2014, of which 73 had disclosed deal values with a total announced value of $13.5 billion. Furthermore, unlike prior years where US insurance deal activity was isolated to specific subsectors, 2015 saw a significant increase in deal activity in all industry subsectors.
Healthcare reform: Five trends to watch as the Affordable Care Act turns fivePwC
In its first five years, the Affordable Care Act (ACA) has had a profound, and likely irreversible, impact on the business of healthcare. Industry leaders must rethink strategies to remain relevant in a post-ACA world.
Web Page: http://www.pwc.com/us/acahealthreform
Election-year politics are dominating legislative action this year as both parties lay down
policy agendas for 2017 and beyond. President Obama and the Republican leaders of Congress are offering competing plans on how to reform the US tax system and
to promote other policies intended to increase economic growth and make American companies more competitive. At the same time, both Democratic and Republican candidates seeking their party’s presidential nomination are advancing tax reform plans.
Insurance M&A activity in the US rose to unprecedented levels in 2015, surpassing what had been a banner year in 2014. There were 476 announced deals in the insurance sector, 79 of which had disclosed deal values with a total announced value of $53.3 billion. This was a significant increase from the 352 announced deals in 2014, of which 73 had disclosed deal values with a total announced value of $13.5 billion. Furthermore, unlike prior years where US insurance deal activity was isolated to specific subsectors, 2015 saw a significant increase in deal activity in all industry subsectors.
Healthcare reform: Five trends to watch as the Affordable Care Act turns fivePwC
In its first five years, the Affordable Care Act (ACA) has had a profound, and likely irreversible, impact on the business of healthcare. Industry leaders must rethink strategies to remain relevant in a post-ACA world.
Web Page: http://www.pwc.com/us/acahealthreform
Election-year politics are dominating legislative action this year as both parties lay down
policy agendas for 2017 and beyond. President Obama and the Republican leaders of Congress are offering competing plans on how to reform the US tax system and
to promote other policies intended to increase economic growth and make American companies more competitive. At the same time, both Democratic and Republican candidates seeking their party’s presidential nomination are advancing tax reform plans.
For private software deals, determining working capital can be tricky. Here, we will explain (from the seller’s perspective), the basics of the working capital adjustment; discuss some pitfalls; and takeaways.
In spring 2016, PwC investigated the current state and
future direction of stress testing. We surveyed 55 insurers
operating in the US about their stress testing framework and
the specific stresses that they test. We also engaged in more
detailed dialogue with a number of insurers in the US and
globally, as well as with some North American insurance
regulators.
Mercer Capital's Value Focus: Insurance Industry | Q1 2016Mercer Capital
Mercer Capital’s Insurance Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to insurance brokers, underwriters, and other industry professionals. Each issue includes a segment focus, market overview, mergers and acquisitions review, and more.
This presentation by Rachel Brass, Partner, Gibson Dunn, was made during the discussion “Hub-and-spoke arrangements” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/hsa.
A change to the FHA claim filing rule is coming. Learn how you can prepare for it with this joint point of view from PwC's Consumer Finance Group and Financial Services Regulatory Practice.
A Road Map to Major Changes Coming to Multi-Employer Pension Plans: What Part...Polsinelli PC
To address the severe underfunding of multi-employer pension plans and the teetering finances of the Pension Benefit Guaranty Corporation ("PBGC"), the Multi-Employer Pension Reform Act of 2014 ("MPRA") was enacted last December in the most significant legislation affecting these plans since 1980. Among other changes, the MPRA gives troubled funds the ability to reduce the pension benefits of participants, including benefits for some retirees already in pay-status. It also gives additional flexibility to the PBGC to help underfunded plans by providing its financial assistance and facilitating fund mergers and partitions. There are also special rules under MPRA that may impact an employer's withdrawal liability.
This webinar, presented by Employee Benefits and Executive Compensation chair Andrew Douglass and Labor and Employment vice-chair Brad Kafka, discussed how the MPRA changes affect multi-employer pension plans, and specific actions that employers should consider in light of MPRA changes taking effect this year.
One of the fastest growing concerns on insurers’ enterprise risk agenda is model risk
management. From being a phrase that primarily actuaries and other modelers used, “model risk” has become a major focus of regulators and the subject of intense activity and debate at insurers. How model risk management has evolved from ad hoc efforts to its currentproactive stage is an interesting story. But more interesting still is
what we believe could be its next stage – generating measurable business value.
Mercer Capital's Value Focus: Insurance Industry | Q4 2015 Mercer Capital
Mercer Capital’s Insurance Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to insurance brokers, underwriters, and other industry professionals. Each issue includes a segment focus, market overview, mergers and acquisitions review, and more.
The group insurance market shows real promise but, as of yet, most carriers are still trying to determine the best path forward. Moving from being in a quiet sector to the front lines of new ways of doing business has shaken the industry and confronted it with challenges –and opportunities – many could not have foreseen even a decade ago.
Mercer Capital's Value Focus: Auto Dealer Industry | Mid-year 2019Mercer Capital
Mercer Capital's Auto Dealer Industry newsletter provides perspective on valuation issues. Each newsletter also includes a macroeconomic trends, industry trends, and guideline public company metrics.
In marketing contracts between powerful firms and weak firms, it can be mutually beneficial for the powerful firm to “tie its own hands” at the initial contract by putting in place safeguards to protect the weak firm in the ongoing relationship.
Numerous financial instruments and products are used in financial planning. Life insurance is an example of both because it assists individuals accomplish financial goals via a financial mechanism that is legally structured differently from other financial planning products such as 401(k)s and individual retirement accounts.
For private software deals, determining working capital can be tricky. Here, we will explain (from the seller’s perspective), the basics of the working capital adjustment; discuss some pitfalls; and takeaways.
In spring 2016, PwC investigated the current state and
future direction of stress testing. We surveyed 55 insurers
operating in the US about their stress testing framework and
the specific stresses that they test. We also engaged in more
detailed dialogue with a number of insurers in the US and
globally, as well as with some North American insurance
regulators.
Mercer Capital's Value Focus: Insurance Industry | Q1 2016Mercer Capital
Mercer Capital’s Insurance Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to insurance brokers, underwriters, and other industry professionals. Each issue includes a segment focus, market overview, mergers and acquisitions review, and more.
This presentation by Rachel Brass, Partner, Gibson Dunn, was made during the discussion “Hub-and-spoke arrangements” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/hsa.
A change to the FHA claim filing rule is coming. Learn how you can prepare for it with this joint point of view from PwC's Consumer Finance Group and Financial Services Regulatory Practice.
A Road Map to Major Changes Coming to Multi-Employer Pension Plans: What Part...Polsinelli PC
To address the severe underfunding of multi-employer pension plans and the teetering finances of the Pension Benefit Guaranty Corporation ("PBGC"), the Multi-Employer Pension Reform Act of 2014 ("MPRA") was enacted last December in the most significant legislation affecting these plans since 1980. Among other changes, the MPRA gives troubled funds the ability to reduce the pension benefits of participants, including benefits for some retirees already in pay-status. It also gives additional flexibility to the PBGC to help underfunded plans by providing its financial assistance and facilitating fund mergers and partitions. There are also special rules under MPRA that may impact an employer's withdrawal liability.
This webinar, presented by Employee Benefits and Executive Compensation chair Andrew Douglass and Labor and Employment vice-chair Brad Kafka, discussed how the MPRA changes affect multi-employer pension plans, and specific actions that employers should consider in light of MPRA changes taking effect this year.
One of the fastest growing concerns on insurers’ enterprise risk agenda is model risk
management. From being a phrase that primarily actuaries and other modelers used, “model risk” has become a major focus of regulators and the subject of intense activity and debate at insurers. How model risk management has evolved from ad hoc efforts to its currentproactive stage is an interesting story. But more interesting still is
what we believe could be its next stage – generating measurable business value.
Mercer Capital's Value Focus: Insurance Industry | Q4 2015 Mercer Capital
Mercer Capital’s Insurance Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to insurance brokers, underwriters, and other industry professionals. Each issue includes a segment focus, market overview, mergers and acquisitions review, and more.
The group insurance market shows real promise but, as of yet, most carriers are still trying to determine the best path forward. Moving from being in a quiet sector to the front lines of new ways of doing business has shaken the industry and confronted it with challenges –and opportunities – many could not have foreseen even a decade ago.
Mercer Capital's Value Focus: Auto Dealer Industry | Mid-year 2019Mercer Capital
Mercer Capital's Auto Dealer Industry newsletter provides perspective on valuation issues. Each newsletter also includes a macroeconomic trends, industry trends, and guideline public company metrics.
In marketing contracts between powerful firms and weak firms, it can be mutually beneficial for the powerful firm to “tie its own hands” at the initial contract by putting in place safeguards to protect the weak firm in the ongoing relationship.
Numerous financial instruments and products are used in financial planning. Life insurance is an example of both because it assists individuals accomplish financial goals via a financial mechanism that is legally structured differently from other financial planning products such as 401(k)s and individual retirement accounts.
Controlling Workers’ Compensation Costs by as Much as 20% - 50%Richard Swartzbaugh
What is Workers’ Compensation?
Who Benefits from Workers’ Compensation Cost Control? Everyone!!!
Worker’s Comp costs can be one of your Company’s greatest “out of control” costs, or, YOU can but in a proven 19-step system to reduce Workers’ Comp costs by as much as 20% - 50%, and utilize critical metrics to address:
- Why workers’ compensation metrics are important
- The formulas for how to calculate 5 critical metrics
- How to leverage these metrics to make an impact at your organization
Following the step-by-step instructions in 19-Step system for the calculation and application of critical metrics will address:
- Workers’ comp viewed as a cost of doing business
- Getting management to understand value of return to work
- Convincing policy holders to embrace a worker recovery program
- Lack of informed and effective employer involvement in WC claims issues
- Stakeholder apathy
- Managers and supervisors not taking seriously their duty to protect workers
Avoiding Workers’ Comp mistakes & loopholes will help drive three major points:
- Drivers of human behavior
- Disincentives to “Return to Work”
- Most common employer mistakes
Finally:
- Evidence-based medicine will create better Workers’ Comp claim outcomes.
- In organized environments, executing successful return to work programs with Unions (and members) is essential.
- As part of a comprehensive workers compensation program, employers should maintain close communications with injured employees to ensure they recover quickly, do not drop out of the workforce and return to work rapidly. Get Well Cards are part of a positive, proactive communication strategy.
ACA Healthcare legislation and attempts at increasing regulation of self-funding and stop loss coverage are driving more employers toward stop loss captives.
Coming to Terms with Insurance Aggregators: Global lessons for carriersAccenture Insurance
Insurers have conflicting views and divergent strategies regarding aggregators. Many claim they add little if any value to both customers and carriers. Some believe they should be spurned, to prevent them gaining a foothold in new markets. Others think that getting onboard early will give them a more dominant position, resulting in a strong flow of new sales. Accenture believes they cannot be ignored. This report examines the likely future impact of aggregators, and proposes four key building blocks for an effective aggregator strategy.
Week #5-To Do List-CCHWeek 5 IntroductionIntroduction To Co.docxcelenarouzie
Week #5-To Do List-CCH
Week 5: Introduction
Introduction To Compliance Documentation & Reporting
Proper documentation is an inherent component of delivery of care, not an add-on. One of the oldest battles in healthcare is that between the hospital Medical Records department and the admitting Physician to complete necessary documentation for the Patient’s Chart. The most common cause of loss of admitting privileges has been from this source. This process has only become more important and necessary with the increasing recognition of the importance of proper documentation for legal and ethical defense purposes.
Documentation also serves a number of financial aspects of patient care delivery, including billing, grant writing for research projects, medical research to discover future tests, procedures, and cures, and funding for government supported agencies and programs.
Objectives
To successfully complete this learning unit, you will be expected to:
Identify the uses for health care documentation.
Learn the essential components of quality documentation.
Categorize the document guidelines under the federal False Claims Act.
Identify the documentation required for compliance under the Federal Stark Law.
List the aspects of documentation compliance with regard to electronic health records.
Identify the important issues regarding ethical coding practices.
Learn the most common illegal practices for HIM reporting.
Identify the key concerns under the federal False Claims Act that relate to reporting.
Determine the impact of the Physician Quality Reporting Initiative (PQRI) on HIM processes in physicians’ offices.
Identify the circumstances in which a health care professional is mandated to report a patient’s diagnosis.
Week 5: Discussion
Answer the following questions:
Review the various uses for health care documentation and discuss how each has an impact on the health care delivery system
Discuss procedures you might enact in your facility to avoid violating the False Claims Act
Discuss why physician offices should participate in PQRI
Week 5: Case Study Assignment
Please read and choose one of the following case studies:
Case study on page 111 of your textbook. (This Case Study is in the section for Securing EHR and starts with "NOTE: In each CMP (Civil Monetary Penalties) case resolved through a settlement agreement, . . . ")
Case study on page 127 of your textbook. (This Case Study is in the section for Phantom Patients and starts with "Two Charged in False Claims to Medicaid."
Case study on page 128 of your textbook. (This Case Study is in the section for Services not Performed and starts with "WASHINGTON—April 14, 2008—A board-certified radiologist, Fred Steinberg, M.D., his imaging centers . . ."
Case study on page 131 of your textbook. (This Case Study is in the section for Upcoding and starts with "July 2007: In Florida, a doctor was sentenced to 78 months in prison .
The more I understand IFRS17, the more I realize how vital it is to have a comprehensive Enterprise Risk (ERM) Regime in place as half of IFRS17 Compliance is already met by insurers with robust ERM Regimes in place that already tackles the key quantitative and qualitative risks facing the insurer. I've been working intensively on ERM since 2013 and while ERM was adopted due to pressure from regional regulators and best practices, still I feel that risk regime in many insurers is just kept to fill the stomach of the file cabinets and not taken as an active part of management decision making. Hence, it is good to see ERM gain in importance due to IFRS17 compliance with a deadline arriving soon in 1.25 years as at 1st Jan 2023.
In this 73 slides presentation we briefly describe 1) pricing how it is done in an insurance company and its various risks 2) ERM 3) Risk Registers 4) capital modeling 5) stress testing 6) reverse stress testing 7) cat and pandemic modeling 9) tangential reference to health insurance given as application 10) structural understanding of market cycles and so on.
2014 Property & Casualty Insurance Industry Outlook: Innovation leading the wayDeloitte United States
On the surface the property and casualty sector appears to be doing quite well, but running an insurance carrier is rarely smooth sailing. The last few years have been particularly difficult for those occupying C-Suite positions, as more fundamental issues are threatening not only short-term results on their balance sheets, but challenging the long-term viability of their operating models as well.
For example, a growing number of insurers are facing significant organizational disruption. Many have made large-scale investments in technology, replacing core systems for claims, policy administration and finance. Their chief challenge now is how to effectively leverage the new systems they’ve put in place and maintain their momentum with additional innovations in personnel, products and culture.
Additionally, ongoing political gridlock in Washington could undermine an already unsteady economic recovery. Not to mention regulatory uncertainty that makes it difficult for carriers to plan ahead and determine operational priorities.
Innovation may ultimately be the key to keep insurers growing regardless of shifting economic and insurance market conditions, as they devise ways to thwart ongoing and emerging competitive threats as well as capitalize on new opportunities.
For more - visit http://www.deloitte.com/view/en_US/us/Industries/Insurance-Financial-Services/039bdd0819e23410VgnVCM3000003456f70aRCRD.htm
Beyond the secular forces that we describe in our Future of Insurance series1, more immediate and cyclical issues will be shaping the insurance executive agenda i n 2 016 .2 Commercial insurers (including reinsurers) face tough times ahead with underwriting margins that are being pressured by softening prices and a potentially volatile interest rate environment.
1. CPCU Society INSIGHTS | Fall 2015 | 11
Price Optimization: The Controversy, the Future, and
What It Means for CPCUs
by Arthur J. Schwartz and Joseph S. Harrington
By now, most CPCUs are aware that insurance departments in five
states—California, Florida, Indiana, Maryland, and Ohio—have
banned or limited the use of something they call “price optimization.”
Also, regulators in New York, a state that exercises great influence
over rate regulation, have issued a call to insurers seeking
information on their use of price optimization. This suggests that
New York may take action as well.
Whether they work for carriers or insurance buyers, CPCUs need
to understand what price optimization is and how it impacts policy
rating. Even if states restrict or prohibit the explicit use of price
optimization in rating plans, the practice will almost surely transform
internal analysis of coverage pricing by risk-bearing entities.
Consumer activists and some regulators have taken aim at price
optimization for the explicit and quantified manner by which
it incorporates non-risk-related factors into insurance pricing.
Editor’s Note: Statements or opinions expressed in this article are
the sole responsibility of the authors and do not constitute any
official statements or opinions of the North Carolina Department
of Insurance or the American Association of Insurance Services.
Abstract
Price optimization is a rapidly evolving practice in insurance
pricing. It builds on traditional loss-based rating by adding
factors to reflect demand for coverage and the optimal price-per-
classification to achieve a company’s goals. Even if the use of
price optimization is restricted by regulators, CPCUs cannot avoid
its impact, as it is virtually certain that companies will use price
optimization analysis to determine the effects of their rates on
different customer segments.
Continued on page 12
2. While that may be problematic, price
optimization may provide a corresponding
benefit for insurance buyers if it allows
them to take simple steps that can
improve their rate classifications.
An Evolving Area
Price optimization is a new and rapidly
evolving area of actuarial practice that
builds on traditional loss-based policy
rating by modeling two additional
dimensions of insurance pricing:
• The overall demand for insurance,
reflecting the need, desire, and
ability of individuals, households, and
organizations to purchase coverage
• The optimal price-per-classification
to meet company objectives for profit,
revenue, retention, new business
conversion, or, most commonly, some
combination of these objectives
Optimized prices will vary depending
on the relative weight a carrier gives to
different strategic objectives. To illustrate
the impact of price optimization, we will
follow a rate development that starts
out with traditional actuarial practice:
considering historical claims and
expenses and projecting them forward,
subtracting investment income and
adding a margin for profit, we calculate
a rate level increase of 8.2 percent in
private passenger autos to maintain the
current target loss ratio.
Changes in Demand
Now we will calculate how this increase
affects demand among policyholders.
In doing so, we will consider the
economic concept of “price elasticity of
demand”—a formal way of saying that,
as the price of something increases,
the amount purchased (the demand)
decreases. (The converse is also true:
price decreases are often accompanied
by increases in units sold.)
If we implement the rate increase, we
find that some policyholders will drop
coverage, go to competitors, reduce their
limits, and/or increase their deductibles.
As a result, that 8.2 percent rate increase
could actually produce a 4.3 percent
decrease in premium revenue from our
existing accounts!
What ultimately occurs will depend
on how price sensitive the current
customers are and on how hungry
competitors may be to write business in
this class. With the inclusion of demand
modeling, insurance managers have a
more precise indication than in the past
of how customers will respond to a price
change—information that is taken for
granted in other industries.
Incorporating Price
Optimization
Equipped with a quantified indication of
how loss-based rating will affect buyer
behavior, management can utilize price
optimization models to consider rating
variables that reflect the demand for
insurance.
Such rating variables include, but are
not limited to, these, all of which are
mentioned in official bulletins of the
states that are taking action:
• Whether the buyer has made inquiries
or complaints about coverage
• Whether the buyer has shopped around
for coverage or is likely to shop around
12 | CPCU Society INSIGHTS | Fall 2015
Continued from page 11
“CPCUs need to
understand what
price optimization is
and how it impacts
policy rating”
Arthur J. Schwartz,
FCAS, MAAA, is an
associate actuary
with the North
Carolina Department
of Insurance, where
he prices for all
lines of business
except workers
compensation. One of just a few actuaries
in the United States to achieve designations
in three actuarial societies, Schwartz serves
on the Casualty Actuarial Society (CAS)
Innovation Council; he has served on the CAS
Actuarial Review newsletter and on two CAS
committees, the Future Education Task Force
and the Task Force on FCAS Education.
Joseph S. Harrington,
CPCU,ARP, is
director of corporate
communications
for the American
Association of
Insurance Services
(AAIS), a national
advisory organization that develops policy
forms and rating information used by more
than 700 property-casualty carriers throughout
the United States. During his years at AAIS,
he served as president of the Chicago West
Suburban Chapter of the CPCU Society and on
a national committee advising The Institutes
on changes to the CPCU curriculum. Before
coming to AAIS in 1994, Harrington was a
writer and editor for newspapers and business
publications.
3. Let us now consider the opposite
situation. For a different class of
business, Company A charges $340 per
year for a policy for which its principal
competitor, Company B, is charging $320.
If Company A accepts a rate decrease
of $30 (from $340 to $310), it could
undercut and attract business away
from its competitor. If an actuarial
model predicts that the 8.8 percent rate
decrease would result in a 10.2 percent
increase in policies, Company A would
actually increase profits by dropping
rates! This goes against the grain of
economics—yet makes perfect sense in
the new world of actuarial pricing.
As in the previous example, Company
A would probably increase its profit
by using a variable—in this case, the
difference between its rates and the
rates of a competitor—that is not directly
related to the risk of loss.
A Question of Fairness
The explicit, quantified consideration
of customer and competitor demand
variables raises an important question:
would two consumers posing essentially
the same level of risk be charged
different prices for coverage? And if so,
would that not violate the common legal
prohibition in the United States against
unfair pricing in insurance?
Before trying to answer that, it is helpful
to remember that Americans regularly
encounter differing prices—which is
simply a form of price optimization—in
ordinary commerce. Perhaps the best-
known example is airline pricing. Most
passengers know that the price of a seat
on a plane differs from passenger to
passenger depending on several factors:
class of service (business or coach),
distance between destinations, nonstop
or connecting service, competitor prices
for different locations, and the number
of days before a flight that a ticket is
purchased. One could also consider any
kind of off-peak discount—for train rides,
restaurant meals, movie tickets, and
more— as a form of price optimization,
a conscious decision to reduce profit
margins to increase volume.
Interestingly, European insurance
markets do not operate under the
principle that equivalent risks must be
rated equally. In the United Kingdom, for
example, insurers can change their prices
several times over the course of a day!
Like gasoline in the U.S., an auto policy
in London may cost more or less in the
afternoon than it did in the morning.
Future Action
Whether, and to what extent, price
optimization is suitable for ratemaking
in the U.S. is being debated by
regulators in state capitals as well as
by the National Association of Insurance
Commissioners (NAIC). The practice is
also being scrutinized by a committee
of the Casualty Actuarial Society, which
is considering how far actuaries can
venture beyond loss considerations in
pricing or coverage and still adhere to the
principles of their profession.
• Whether the buyer is willing and/or
able to pay higher premiums
Controversy has arisen over the use
of demand-related variables in rating
plans when those variables explicitly
consider factors not directly related
to a policyholder’s risk of loss. Thus,
demand variables are seen by some
to fall afoul of laws, regulations, and
ratemaking principles prohibiting unfair
discrimination in insurance pricing.
Considering the Competition
Pricing a product or service does
not happen in a vacuum, of course.
Competitors respond to each other’s rate
changes with changes of their own.
To simplify this dynamic, consider
Company A as charging $920 per year
for a policy in a certain class, while its
principal competitor, Company B, is
charging $1,125.
If Company A increased its rate to
$1,075, it would still be charging less
than Company B, despite a 16.8 percent
increase in the class rate. Its premium
revenue for that class would probably
not increase by a full 16.8 percent,
because some insureds would reduce
their limits, increase their deductibles, or
move to other competitors. Nonetheless,
Company A would probably increase its
profit by using a variable—in this case,
the difference between class rates of a
competitor—that is not directly related to
the risk of loss.
Similarly, if a company charges more
for a given class than its competitors,
it can quantitatively project whether
and how much its premium volume
would increase if it implemented a
rate decrease and attracted more new
business. I think this needs to be spelled
out the same way, because it is very
interesting and counteracts the idea that
price optimization would only result in
consumers paying higher prices, which
is not true.
Continued on page 14
CPCU Society INSIGHTS | Fall 2015 | 13
“Demand variables
are seen by some
to fall afoul of
laws, regulations,
and ratemaking
principles prohibiting
unfair discrimination
in insurance
pricing”
4. There are two likely scenarios for
the future of price optimization. The
first is for regulators to prohibit price
optimization entirely, which might entail
restrictions on demand-side pricing
practices that have long been tolerated,
and even encouraged, such as capping
rate increases. On the other hand,
regulators and the industry may arrive
at a consensus concerning safe harbors
for limited but permissible use of price
optimization factors.
Under the second scenario, it is likely that
every rate filing will require an actuarial
certification of the methods used and the
variables considered. These certifications
would become as important for rate
development as statements of actuarial
opinion currently are for the development
of loss and loss adjustment expense
reserves. Also, to the extent that the use
of price optimization is restricted in rate
filings, property-casualty actuaries would
have to adhere to those restrictions in
internal company rate development or
risk violating professional standards.
CPCUs’ Involvement
No matter how rates are developed, it is
virtually assured that companies will use
price optimization analysis to determine
the effects of their rates on different
customer segments, and that they will
direct their marketing and underwriting
efforts to achieve strategic goals.
Given that, CPCUs cannot avoid the
impact of price optimization. The most
constructive way to engage this new
development is to know all the factors
used by carriers employed and to ask
about the impact they have on the final
premium.
Most importantly, CPCUs must
understand that price optimization does
not victimize passive policyholders as
much as it empowers insurance buyers
to affect their rate classification by
actions they can take on their own.
14 | CPCU Society INSIGHTS | Fall 2015
Continued from page 13
State Actions to Date on Price Optimization
in Property-Casualty Insurance
In every case listed below except Indiana and Vermont, these actions apply to all lines of
property-casualty insurance:
October 31, 2014: Maryland Bulletin 14-23 prohibits price optimization, defined as
using factors unrelated to the risk of loss, such as a customer’s willingness to pay a
higher price. Affected insurers are required to file corrective action plans by January 1,
2015.
January 29, 2015: Ohio Bulletin 2015-01 prohibits property-casualty insurers from
using any variables in pricing that are unrelated to a difference in losses. Affected
insurers have until March 31, 2015, to file revised rates.
February 18, 2015: California issues a notice stating that use of data regarding “the
willingness to pay a higher premium” was unfair discrimination. Insurers that have used
such factors have six months to file revised rates.
March 18, 2015: New York issues five questions seeking whether insurers are using
price optimization. Companies that respond “yes” are directed to provide a discussion
of the methods used, variables considered, and a list of filings by April 15, 2015.
May 7, 2015: Indiana issues a draft bulletin covering personal lines only and requiring
insurers to disclose more information on their price optimization methods. The draft is
open for comments from insurers and interested parties.
May 14, 2015: Florida Bulletin OIR-15-04M prohibits the use of price optimization.
Insurers cannot price risks using any factors not related to expected loss and
expense experience. Insurers that have used price optimization are requested to refile
immediately and not to use such variables in future filings.
June 24, 2015: Vermont Bulletin 186, addressing price optimization, states that
“henceforth all personal lines rate filings must disclose [in online filings] whether the
company uses non-risk-related factors”; rate filings currently under review are to be
amended to disclose such information.