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Insurance Industry Needs Better Arguments for ‘Price Optimization’ | Insurance Journal

This is clearly an innovation that would not have been possible without the modern digital economy. That we have enhanced predictability is clearly a good thing. For now though, I’m going to focus on the contingency expressed upfront “…where allowed by regulations.”

The practice and culture of insurance pricing long has been predicated on making sophisticated estimates of risk and matching the appropriate premium to that projected exposure. This new wrinkle in the pricing matrix certainly has a nontraditional twist.

I’m always disposed to let markets sort out pricing. Heritage once did a study that showed no beneficial long-term effects in more than 4,000 years of attempted price controls. But it strikes me there are certain unique dangers insurers face in going off message in their never-ending quest to match cost-centric pricing to risk factors and to avoid political thumbs on the scale.

Virtually all states have a basic law regulating pricing of insurance contracts which dictates premiums must be sufficient, neither excessive nor “unfairly discriminatory.” That latter bit of language typically has been interpreted to mean that it is literally against the law to charge different premiums to customers with identical risk profiles. To discriminate among potential insureds on the basis that one customer is more likely to comparison shop elsewhere than another may be legally problematic, as former Texas Insurance Commissioner J. Robert Hunter, now director of insurance at the Consumer Federation of America, has argued in letters to several state regulatory agencies.

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Insurance Industry Needs Better Arguments for ‘Price Optimization’.

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