Rhode Island’s Rhode Island Department of Business Regulation (“DBR”) has joined the growing list of state insurance regulators to issue a bulletin on the practice of price optimization. On September 18, 2015, the DBR issued Bulletin Number 2015-8 to remind property and casualty insurers issuing personal lines policies in Rhode Island that all ratemaking must conform to the state’s statutory requirements in R.I. Gen. Laws §§ 27-6-1, 27-9-1 and 27-44-1 and the rates must not be “excessive, inadequate or unfairly discriminatory.” Per the Bulletin, a rate will be considered unfairly discriminatory “if price differentials fail to reflect equitably the differences in expected losses and expenses for different classes of policyholders.” The Bulletin warns against the use of non-risk related factors in setting rates such as “price elasticity of demand” – a method to predict a policyholder’s willingness to accept rate increases before switching to a different insurer – because DBR views the use of such factors as unfairly discriminatory to policyholders of the same risk profile and in conflict with statutory principles that underlie the state’s “open and competitive” property and casualty marketplace.
Personal lines insurers that use price optimization to rate policies delivered or issued for delivery in the state have until November 18, 2015, sixty days after the Bulletin was issued, to submit revised filings to DBR removing non-risk related factors in setting rate classifications. Insurers are also required to disclose whether they use non-risk related factors, and insurers with currently pending rate filings are required to amend the filings to disclose this information. Companies that fail to do so and are later determined to have used price optimization or elasticity of demand, or failed to disclose such use to the DBR “may be subject to disciplinary action.”
The Bulletin makes clear that the DBR does not intend to prohibit or restrict capping or transitional prices applied on a group basis. Nor is it meant to prohibit sophisticated data analysis to develop rating cells, so long as the resulting rating classifications are based strictly on risk of loss and not on elasticity of demand.
A copy of the Bulletin can be found here.
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