Last year, right around Halloween, I started noticing some odd goings on at the professional association for actuaries, the Casualty Actuarial Society (CAS). As a Fellow in the CAS, I was receiving invitations to attend webinars with titles such as “Price Optimization vs. Actuarial Standards.” For obvious reasons, this sort of discussion piqued my interest, and I started attending some of these webinars.Executive SummaryPrice optimization bases premiums on the maximum amount that a consumer is expected to be willing to pay rather than calculating premiums based on projected costs, such as claims, overhead and profit. Actuary J. Robert Hunter, who is also Director of Insurance for the Consumer Federation of America, says the price optimization technique is actuarially unsound and unfairly discriminatory.
What I learned was that in the relative obscurity of insurance ratemaking, a small army of consultants, marketing experts and insurance executives were trying to upend the system of cost-driven premiums and push a model that would provide new ways to exploit segments of the insurance consumer market. In the eyes of “price optimization” (PO) proponents, insurance companies were leaving money on the table, and they knew how to get it.
PO is a practice where premiums are based on the maximum amount that a consumer is expected to be willing to pay rather than the traditionally accepted method of calculating premiums based on projected costs, such as claims, overhead and profit. There is growing evidence that the practice of PO is widespread. There is also growing agreement that this pricing technique is actuarially unsound and unfairly discriminatory.