I
T’S UNCLEAR WHETHER other auto
insurers are using personalized
pricing. Some industries have
been experimenting with
personalized pricing for decades.
Amazon sold DVDs to different
people for different prices 20 years
ago—but offered to refund the
difference to the overpayers after the
practice was discovered, according to
news reports. In the past several years,
both the Staples and Princeton Review
websites were found to have been
changing prices based on ZIP codes.
Experts said discriminatory details
can wend their way into personalized
pricing algorithms through other
factors, even if that’s not the intent.
“Whether it’s race or gender or
sex or health, all of these factors are
going to be relevant statistically to
questions of how much can you get
away with charging,” said Daniel
Schwarcz, a professor at the University
of Minnesota Law School who studies
pricing discrimination.
Unlike DVDs, staplers, or tutoring, auto
insurance isn’t an optional purchase; it’s
required by law for drivers in every state
except New Hampshire and Virginia.
That translates into hundreds of millions
of vehicles that must be insured so
people can get to work, drive their kids to
school, run errands.
Driving without insurance can lead
to large fines, license suspension,
and even incarceration. With such
dire consequences, nearly every state
prohibits discriminatory rate-setting,
requiring premiums to be “cost-based”
or “loss-based,” meaning insurance
companies can only price in the risk of
a claim and a little overhead. Allstate’s
proposal didn’t abide by those rules,
according to Maryland regulators.
“Allstate is failing to limit rate
increases in a manner that treats all
insureds with like insuring or risk
characteristics equally,” a Maryland
insurance regulator at the time,
Geoffrey Cabin, wrote in the denial
letter in May 2014, specifically calling
out the new retention algorithm.
Cabin listed other problems with
the rate request and summarized the
result: “This filing is disapproved.”
But in emails to The Markup and
Consumer Reports, Jones, the Allstate
spokeswoman, insisted the insurer had
withdrawn the filing.
Maryland Insurance Administration
spokesman Joseph Sviatko said Allstate
did withdraw the filing, but only after
the state emailed the denial letter. Oddly,
the filing is labeled “withdrawn” rather
than “disapproved” in public records,
and Sviatko said he couldn’t explain
why. He said the designation makes “no
practical difference” internally.
He also could not explain why the
state’s denial letter was not mentioned
or included in the public record—we had
to request it twice to get a copy. The first
time, we were told it didn’t exist.
There is one key difference with
the “withdrawn” label on the rate
filing: Allstate officials have used it to
claim over the past six years to other
states’ regulators, investors—and now
the media—that its plan had not been
rejected. It’s unclear what effect those
statements have had.
Louisiana regulators asked Allstate
whether any states had rejected the
algorithm and retention model. In a
written response in February 2015,
Allstate said the plan had not been
“disapproved in any states” but had
been “withdrawn” in Maryland,
without mentioning the salient fact that
the regulator had first rejected it and
deemed it discriminatory.
But when an audience member at the
March 2015 Raymond James Institutional
Investor conference asked Allstate
officials whether they were worried
about increasing regulatory scrutiny
over price optimization, vice president
of investor relations Pat Macellaro was
not forthcoming. “I don’t know if it
necessarily applies to Allstate,” he said.
The Louisiana Department of
Insurance’s chief actuary, Rich Piazza,
told The Markup and Consumer Reports
that Allstate’s proposal there was
“basically a flavor of price optimization”
and was not allowed. Records show
Allstate withdrew the plan.
Some regulators are less inquisitive.
New Mexico officials said they have no
idea whether Allstate used a retention
model there in 2016, as the insurer
claimed in public records. Regulators
approved the rate filing without review,
as they normally do.
I
T’S DIFFICULT FOR regulators to
tell whether any particular insurer
is using personalized pricing,
according to a report by the
National Association of Insurance
Commissioners. “Regulators do not
currently have the data necessary for an
independent evaluation of most of the
insurer modeling and calculations,”
the report said.
“They don’t lie, but they just don’t
tell you unless you ask the right
set of questions,” said Piazza, the
Louisiana official. “The regulator won’t
necessarily know what the insurance
company is doing or what goes into
their models. Heck, we don’t even
know half the models’ names.”
—Additional reporting by
Ryan Felton of Consumer Reports
Consumer Reports has partnered
with The Markup, a nonprofit newsroom
investigating the effects of technology on
society, to produce this special report
on price optimization in car insurance.
Both teams spent months analyzing the
data, and the article—and accompanying
white paper describing our statistical
approach—were written and reported
by The Markup with Consumer
Reports’ collaboration. For more,
go to CR.org/carinsurance0420.
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