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Should price optimization be Illegal? | Quoted

P.O. IN THE NEWS

Just last week, the state of California declared the process of price optimization, which it defined as “any method of taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes,” as illegal. This means California joins ranks with Ohio and Maryland, where the practice is also illegal. How it’s illegal, according to the Sunshine State: “Price Optimization does not seek to arrive at an actuarially sound estimate of the risk of loss and other future costs of a risk transfer. Therefore, any use of Price Optimization in the ratemaking/pricing process or in a rating plan is unfairly discriminatory in violation of California law.”

In plain English? Cali thinks PO has zilch to do with a customer’s actual risk to a company and amounts to discrimination. Still scratching your head? We’ve got background.

A LITTLE P.O. HISTORY

CBS News reports that insurance companies began the practice of price optimization about five years ago, when a New York-based consulting firm offered insurers a new way to increase profits by testing “the elasticity of demand.” That is, many insurance companies began to bet on inertia: If they raised customer’s rates by small amounts over time, most wouldn’t leave. According to CBS News, about half of large insurance companies, and many small companies, use price optimization to increase rates based not on risk, but on consumer complacency.

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Should price optimization be Illegal?