The superintendent of the New York State Department of Financial Services has written a letter to insurance companies seeking information on “price optimization,” expressing concern that insurers are charging higher premiums based on whether a consumer is less likely to notice, shop around or object.

Price optimization, as defined by the department, refers to the practice of varying rates based on factors other than those directly related to risk of loss, for example, setting rates or factors based on an insured’s likelihood to renew a policy or on an individual’s or class of individuals’ perceived willingness to pay a higher premium relative to other individuals or classes.

“Such practices are inconsistent with traditional cost-based rating approaches and could violate Insurance Law 2303, which prohibits the use of rates that are unfairly discriminatory,” Benjamin Lawsky, superintendent of the department, stated in the letter.

Insurers are being directed to answer the following questions by April 15, 2015:

• Does the company currently use any formalized price optimization models, or less formal price optimization considerations, as part of the company’s pricing, rate filing or tier placement decisions for any line of insurance in this state?
• Does the company have a process or tool in place by which either initial tier placement or rating factors are made after giving consideration to any of the following, including but not limited to: policyholder retention or renewal analysis; the likelihood that a particular insured or class of insureds will shop around for insurance coverage when faced with a rate increase (known as price elasticity or price elasticity of demand)?
• Describe in detail all such price optimization models and considerations used by the company, as well as how the company specifically incorporates the results of price optimization models and considerations into its pricing decisions.
• Identify and list any and all risk or policy characteristics that the company incorporates into its price optimization models.
• Identify the department tracking numbers of any filings that the company has submitted that reflect any type of price optimization in the selection of rates, including the specific location within each filing where such information can be found.