Price Optimization: What it is and what it isn’t

I.I.I. Florida representative Lynne McChristian sheds light on the topic of price optimization in this post which  first appeared @InsuringFLA blog.

Florida regulators issued a memorandum to insurers recently to eliminate the use of something called price optimization. That’s probably an unfamiliar term to most people. It’s interesting that the memo had to define what “price optimization” is in order for insurers to stop doing it. Simply, the memo from the Florida Office of Insurance Regulation was to stop a practice that few insurers are using in the first place and that may actually help lower insurance costs.

Price optimization is a tool that other industries have used for years, specifically the retail and travel industries. It is a new tool for insurers, and it’s one that is designed to add sophisticated computer analysis to the final polishing of insurance prices.

At the very end of setting rates, insurers have always adjusted prices, almost always slightly lower, to reflect the industry’s competitive nature. It used to be a seat-of-the-pants guess by a real, live actuary; now, a computer helps give the final nudge.

That takes human guesswork out of it, yet the computer does the same thing.

Some critics have turned this equation upside down, stating instead that an insurance company is looking only to increase profits. Florida is one of four states that is prohibiting the practice of price optimization before there is a clear understanding of its consumer benefits. Most other states are carefully studying the practice and awaiting a white paper being developed by a special task force established by the National Association of Insurance Commissioners.

Insurers use all types of data to establish individual insurance rates. The concern critics have about price optimization is that it is not based on commonly used risk factors for auto insurance. Price optimization gave insurers one more tool to employ more sophisticated computer algorithms to give better prices to consumers. But that won’t be the case for Floridians.

Everyone cares about what they pay for insurance, and there are lots of choices for those shopping for auto insurance. So, if you think you’re not getting the best price, use these tips to shop around for auto insurance. To learn more, check out this Q&A on price optimization.

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