Out of the Storm News
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Back in her high school days, my daughter got to be a pretty darned good field hockey player, eventually became the captain of her team. But in her sophomore year, Regina was still locked in a competition with another student athlete to earn a spot on the varsity squad’s post-season roster.
The other young lady was picked instead and, of course, we were disappointed. But the major grievance came when the coach let us know the other child was selected because her parents would have raised a ruckus had she not been, and the coach knew we wouldn’t complain.
Something very similar appears to be going on in auto insurance pricing. Some very clever companies — in particular, the consulting firms Earnix and Towers Perrin — apparently have found big data patterns that allow them to make calculations about customer loyalty, inertia and price sensitivity. It’s what the economists call elasticity of demand.
Earnix boasts on its website:
Where allowed by regulations, Earnix enables insurers to customize rates down to ‘a segment of one,’ offering each customer the best possible product and price combination to meet customer demand while optimizing company goals for retention and profitability.
This is clearly an innovation that would not have been possible without the modern digital economy. That we have enhanced predictability is clearly a good thing. For now though, I’m going to focus on the contingency expressed upfront “…where allowed by regulations.”
The practice and culture of insurance pricing long has been predicated on making sophisticated estimates of risk and matching the appropriate premium to that projected exposure. This new wrinkle in the pricing matrix certainly has a nontraditional twist.
I’m always disposed to let markets sort out pricing. Heritage once did a study that showed no beneficial long-term effects in more than 4,000 years of attempted price controls. But it strikes me there are certain unique dangers insurers face in going off message in their never-ending quest to match cost-centric pricing to risk factors and to avoid political thumbs on the scale.
Virtually all states have a basic law regulating pricing of insurance contracts which dictates premiums must be sufficient, neither excessive nor “unfairly discriminatory.” That latter bit of language typically has been interpreted to mean that it is literally against the law to charge different premiums to customers with identical risk profiles. To discriminate among potential insureds on the basis that one customer is more likely to comparison shop elsewhere than another may be legally problematic, as former Texas Insurance Commissioner J. Robert Hunter, now director of insurance at the Consumer Federation of America, has argued in letters to several state regulatory agencies.
I tend to think this is a minor issue, as no one could pretend rates aren’t adjusted all the time based on marketplace variables like competition, a company’s desire to expand or contract in a particular territory or a host of other reasons. Insurers also long have used loyalty discounts to try to retain their most favored customers. Management at insurance companies are informed by their actuarial departments, but not necessarily bound by their sophisticated math. But this process is relatively opaque to the public and, frequently, is considered proprietary.
In the industry’s defense, “same-risk profiles” may be as difficult to define and identify as “revenue-neutral” tax reform. Nonetheless, the more complicated the industry’s argument becomes, the more regulators and politicians will want a look inside the black box. That’s likely something an industry that already faces political headwinds on amorphous concepts like the “affordability” of insurance might want to avoid.
If the industry wants to fight for “price optimization,” it had better be prepared to show how it would benefit consumers broadly. The industry already faces fights on so many fronts, from flood insurance to the stacking of liability coverages to diminished value definitions to the use of credit information in underwriting and rate-setting to rating by age and gender. Pursuing price optimization solely on the basis that this kind of big data mining will increase the industry’s profitability is unlikely to get a sympathetic hearing in the court of public opinion, in my judgment.This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
From Credit Union Times:
An annual report card on state insurance regulation produced by the Washington-based public policy think tank R Street Institute and published in December ranked the states on several regulatory categories and calculated an overall grade that ranged in from A+ for Vermont to F for California and North Carolina. The report found, in fact, that in 2014, most state legislatures did little to move the needle on regulation.
Florida created a regulatory framework for private insurers to offer flood coverage, and eliminated the assessments in place since 2007 for a hurricane catastrophe fund. California set up a regulatory framework for ride-sharing companies like Uber, which included insurance requirements. Connecticut prohibited insurers from imposing extra requirements on homeowners in areas prone to windstorms.
Aside from these specific state issues, the report identified some regulatory issues that span state borders. It noted that about half the states have adopted model legislation from the National Conference of Insurance Legislators that prohibits the use of credit scores as the sole factor in determining rates.
Regulatory modernization is an area that has seen more collaborative efforts, the report noted. The Interstate Insurance Product Regulation Commission was established in 2006 to streamline approval of life insurance products and help insurers compete with banks and securities firms in innovating new products.
The insurers based in the 44 state signatories to the Interstate Insurance Product Regulation Commission can make a single filing for new products in life, annuity, disability and long-term care insurance and then offer it in all signatory states once it is approved.
Meanwhile, insurance regulators are slowly adapting to the digital age. The report noted that 18 states allow customers to access insurance documents online, 24 states allow companies to send notifications by web only once customers have opted in, and 37 states now permit drivers to show electronic proof of insurance when stopped by police.
Notable signatories from these groups include Blankenhorn and Rauch, as well as Joseph Bottum, June Carbone, Christopher DeMuth, Rev. Dr. Robert Michael Franklin, Rep. Richard L. Hanna (R-NY), Kay Hymowitz, Douglas Holz-Eakin, Michael Ignatieff, Eli Lehrer, Linda McClain, Lawrence Mead, John Podhoretz, Isabel Sawhill, Justice Leah Ward Sears and Andrew Sullivan.
There is simply no evidence that secondhand aerosols exhaled by e-cigarette users endanger non-users. As Dr. Joel Nitzkin, a former co-chair of the Tobacco Control Task Force of the American Association of Public Health Physicians, said, “[T]here is no public health justification for banning e-cigarette use in no-smoking areas.”
From Saint Petersblog:
It’s not often you see the word “liberalize” coming from a conservative/libertarian advocacy group, but in the debate over Florida’s “Growler bill,” almost anything is possible.
“R Street welcomes bill to liberalize Florida liquor laws” is the headline of a press release from the Washington D.C.-based think tank.
R Street Institute was praising the passage of HB 107, known as the “Growler Bill,” through the Florida House Business and Professions Subcommittee.
The bill, at least in part, seeks to repeal state’s “separation law” requiring spirits to be sold only in independent liquor stores and locations separate from where groceries, beer and wine are retailed.
If passed, R Street — whose slogan is “Free Markets. Real Solutions” — says retailers that currently sell beer and wine can now enter the market for spirits and hard liquor. This includes supermarkets, convenience stores and big box stores with strong consumer protections in place that prevent minors from accessing alcohol.
The attached comments were sent to the National Association of Insurance Commissioners’ Sharing Economy Working Group in response to the group’s draft white paper TNC Insurance Principles for Legislators and Regulators.
AUSTIN, Texas (Feb.18, 2015) – The R Street Institute welcomed bills introduced in both houses of the Texas Legislature that would modernize alcohol regulation by removing anticompetitive provisions in current state law.
S.B. 609 and H.B. 1225 will repeal the prohibition against publicly traded companies selling distilled spirits. Currently, only privately held companies are allowed by law to sell distilled spirits. Supermarkets, big box stores and convenience stores that currently sell beer and wine already have strong consumer protections in place to prevent minors from accessing alcohol, and often outperform traditional liquor stores in theft prevention and age screening.
“The prohibition in Texas serves no other purpose than to limit competition, and Texas is the only state in the nation that distinguishes retailers by their corporate status for the purposes of selling spirits,” said Josiah Neeley, R Street’s Texas state director.
Current law also limits the number of stores where a company may sell spirits, but includes so many loopholes and exemptions as to undermine any legitimate purpose behind the law. The bills would also provide clarification by repealing the limit on the number of permits a single entity can own.
R Street is pleased to join Texans for Consumer Freedom, a coalition supporting these alcohol reform efforts.
“When the only rationale for a rule is that it limits competition, then that rule needs to go,” said Neeley. “Government shouldn’t be sticking its thumb on the scale to favor one type of business over another.”