The state Senate has approved a bill that would ban a controversial practice by insurance companies called "price optimization."
Price optimization is the practice of using sophisticated data analysis tools to research a customer's shopping behavior, and then use that behavior as a factor in setting their policy rates.
Democratic state Senator Jeremy Moss sponsored the bill. He said insurance companies shouldn't be able to charge customers more just because they might pay the higher rate instead of shopping around.
"It's wrong, it's exploitive and it's something that we have to go after if we want to tackle these obscenely high car insurance rates in Michigan," Moss said.
The Department of Insurance and Financial Services said it supports the bill.
"It has been the Department’s practice to closely review all insurance rate filings to ensure that price optimization is not being used. DIFS issued Bulletin 2024-09-INS on the topic. This bulletin addresses the practice of 'price optimization' and informs property and casualty insurers writing business in Michigan that the use of price optimization in ratemaking is not permitted," said the department.
The Insurance Alliance of Michigan, a trade group representing insurance companies, said it supports a ban on price optimization "in concept," but said insurance companies are already prohibited from setting rates that are discriminatory, which includes price optimization practices.
But the group said the bill could potentially ban insurance companies from setting someone's rates below an actuarially justified market rate (a rate that reflects the expected cost of covering a particular group of policyholders), for competitive purposes. In other words, it could prohibit certain discounts.
"The statutory and regulatory framework that prohibits price optimization and protects consumers is already working in Michigan without the need for additional statutory language that might have unintended consequences," IAM said in a letter to the bill's sponsors.
Doug Heller is director of insurance for the consumer advocacy organization the Consumer Federation of America.
In his letter to state legislators, he said the proposed legislation makes the prohibition on this form of discrimination explicit.
"With price optimization algorithms, insurers gather information about individual policyholders, that may include demographic data, shopping habits, family structure, financial status, and personal activities, to guess which consumers are likely to accept price increases and which consumers will shop around. Lower-income consumers, who often have fewer market options, less available time, and lower financial literacy, can be disproportionately targeted by this practice."
In an email to Michigan Public, Heller said insurance companies may have developed ways to hide their use of price optimization, in part by calling it something else.
"Doubtless, insurers have gotten more sophisticated in their deception with respect to how they describe the use of 'elasticity of demand' models for pricing ('price optimization') — sometimes calling it a retention model or maybe just some 'rating tier' system," Heller said.
"DIFS might start by requiring insurance executives to declare under penalty of perjury that their filing does not contain price optimization (with a clear definition of the range of things that would be P.O. even by a different name) and develop an internal review regime that trains DIFS staff to look for filings with the markers of price optimization to be pulled out for deeper review," said Heller.
The bill has now gone to the state House, where it's expected to pass.
