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OIR Memorandum Addresses Price Optimization

OIR Memorandum Addresses Price Optimization

The Florida Office of Insurance Regulation has issued Informational Memorandum OIR-15-04M relating to “Use of Price Optimization in Premium Determination.”  The memorandum concludes that insurers using so-called price optimization should submit filings to eliminate the use of those criteria, and going forward insurers should not use price optimization in their rate filings.

The OIR notes that “price optimization” does not have a universally recognized definition.  However, the OIR indicates that price optimization typically refers to the use of non-risk factors such as retention, profitability, cross-selling opportunities or similar considerations in the pricing of insurance.

The memorandum refers to section 627.062 prohibiting rates that are excessive, inadequate or unfairly discriminatory.  The statute specifies that rates are unfairly discriminatory when credits or surcharges do not bear a reasonable relationship to the expected loss and expense experience among risks.  Because price optimization techniques generally relate to factors other than the risks themselves, the memorandum indicates that price optimization, as the term has come to be used, is inconsistent with the rating law at section 627.062 (and a similar law for private passenger auto insurance at section 627.0651).

The OIR’s memorandum is consistent with recent guidance issued in other several other states relating to price optimization.