Price optimization in automobile insurance has been getting a lot of attention lately, especially since it is controversial.
Some consumer advocates say price optimization can be unfair to auto insurance customers. Insurers, however, believe using all the data possible for pricing premiums is good business.
Determining how insurers can acceptably develop rates – the basis of premiums — ultimately falls on state insurance commissioners. Before they can decide on if or how to regulate price optimization, they need a reliable definition.
As I cover in my recent Actuarial Review article, Descending Confusion, some state insurance departments have already begun limiting price optimization using definitions that could disqualify decades-long actuarial practices. Most commissioners, however, want to further investigate price optimization first.
The challenge is that there are several definitions of price optimization.
….for consumers to really get the best price for insurance,
they really should shop around on a regular basis.
The goal of my article is to present facts and opinions about price optimization while avoiding political pitfalls. I can assure you it was no easy task.
I do thank the Casualty Actuarial Society (CAS), which represents the actuaries who price auto insurance, for giving me the opportunity to tackle this controversial subject. I have had the opportunity to work with countless CAS actuaries in my career and their personal and professional standards should be emulated by every profession.
While this is all fine and good, my mother is going to ask me what I think of price optimization.
Here’s what I’ll tell her. There is nothing wrong with insurers making a profit. It helps ensure that insurance is available to consumers.
And since insurance is such a highly regulated industry, insurers really can’t gouge customers as some would suggest. At the same time, for consumers to really get the best price for insurance, they really should shop around on a regular basis.
But hey, even Flo would tell you that!