Florida consumers may not realize it, but a heated discussion is brewing between their property/casualty insurance companies and the state’s Office of Insurance Regulation. The subject is price optimization, and the OIR recently reminded p/c insurers that state law prohibits its use.
What is price optimization?
The answer seems to depend entirely on who is talking.
For consumer advocates and the OIR, price optimization is akin to price gouging. The economic principle is “price elasticity,” or, in this case, price inelasticity.
When demand is driven by even a small change in price, the item is elastic. When the price of iPods dropped, demand increased. Similarly, when consumers have more options, demand is inelastic: If the price of a Dell printer increases, consumers will substitute a cheaper brand that will meet the same need.
There are, however, things that you need regardless of the price. When you buy gas for your car, you may shop around for a better price, but you are not likely to stop buying gas altogether. We need milk, and even if it bothers us that the price has gone up, we still need it and buy it.
In the context of insurance, then, price optimization occurs when an insurance company sees that there are few alternatives in the marketplace and, as a result, raises premiums.
Hypothetically, ABC Home Insurance Co. has a hefty percentage of the market in Any County. For whatever reason, other insurance companies are not selling there. ABC responds the way Mad Max does in the original “Road Warrior”: You want insurance, you come to me — and I name the price. ABC jacks up its premiums simply because it can.
But it can’t, according to Florida law, the OIR says.
We’ll explain why in our next post.
Source: Insurance Journal, “Florida Bans Price Optimization; Insurers Question Definition,” Amy O’ Connor, May 19, 2015Share