Legitimate Considerations in an Insurance Company’s Determination of Premiums

J.P. Gonzalez-Sirgo
Founder of J.P. Gonzalez-Sirgo, P.A.

Although most homeowners in Florida have property insurance, they might possess only a nominal understanding regarding the pricing of insurance policies.  Almost all adults throughout the U.S. are subject to a mandatory requirement that they carry insurance by state law (car insurance) and/or mortgage lender requirement (homeowner’s insurance).  However, concerns raised by the pricing practices of Allstate insurance company late last year demonstrate the special pricing consideration for insurance policies in Florida.

The Consumer Federation of America (CFA) expressed concerns about the procedures used by Allstate in establishing premium levels.  The objections were based on the insurance company’s focus on market principles like “price elasticity,” which is a function of supply and demand.  Admittedly, these are valid considerations that are routinely relied on for pricing of most products in the market.  However, insurance is a highly regulated industry that is supposed to base pricing on “risk calculations” rather than market principles. 

The CFA reminded insurers of this fundamental principle regarding pricing of insurance in Florida in the wake of concerns about Allstate’s pricing issues.  The Florida agency that oversees insurance regulations noted that state law imposes a requirement that insurance rates be established based on “generally accepted and reasonable actuarial techniques.”  The agency also emphasized that market principles like adjusting supply to impact demand are not appropriate pricing strategies.  The use of market principles to determine pricing in this context is called “pricing optimization.”  The term applies to the use of price elasticity principles to maximize market share, profits, customer retention, and/or policy premiums.

The CFA communication provided a clear warning to insurance carriers that the use of price optimization principles when setting rates would result in rejection of the pricing scheme.  However, there is no law in Florida requiring pre-approval of rates.  Therefore, pricing in policies sold to consumers might be developed based on unfair discriminatory pricing and rejected later, so insurers also can face muddled chaos.

The insurance industry in Florida has criticized CFA’s use of the term “price optimization” because insurers and insurance trade groups claim the term is not adequately defined.  Insurers contend that the term is overly vague and expansive.  Insurance carriers contend this alleged lack of clarity is likely to result in unjustified rejection of rates that forces insurers to incur financial penalties. 

The purported issues involving ambiguity associated with the term price optimization involves the meaning of the term "maximum profits" and the types of insurance governed by this pricing regulation.  Insurance lobbyists contend that insurers and regulators can easily reach different conclusions regarding the meaning of “maximum profits.”  Further, insurers argue that it is not clear which sectors of the insurance industry should be subject to price optimization restrictions.  Specifically, the insurance industry has questioned whether the limitation applies to commercial policies.

Despite these objections, policyholders are placed in a precarious position if rates are determined by price optimization principles rather than calculations based on the risk of loss.  In this Allstate pricing scheme, premiums were higher for potential policyholders who were not expected to engage in comparison price shopping for a lower rate.  Because the Florida insurance industry is highly regulated, policyholders have legal rights and options, but they often need an experienced Florida insurance claims lawyer to obtain the full amount of a claim.

Our Miami insurance claims law firm invites you to contact us if you are having difficulties with your insurance company.  Miami insurance claims attorney J.P. Gonzalez-Sirgo handles property damage claims against insurance companies in Miami and throughout Florida. The Law Firm of J.P. Gonzalez-Sirgo, P.A. offers free consultations and case evaluations.  No Recovery, No Lawyer Fees.  Call 305-461-1095 or Toll Free 1-866-71-CLAIM.

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