Michigan Enacts Law Against Price Optimization in Property Insurance

Michigan has taken a significant step in regulating the property and casualty insurance sector by enacting a law prohibiting price optimization, a practice deemed unfair and deceptive.

Effective immediately, the law was solidified through Senate Bill 1013, amending the Michigan Insurance Code to establish price optimization as an illegal act. This move aligns Michigan with approximately 20 other states that have enacted similar bans. Price optimization involves adjusting premiums based on a policyholder's perceived tolerance for price increases, rather than on risk or expense-related factors. The law requires all pricing inputs to be exclusively risk-related, prohibiting insurers from considering factors such as the likelihood of a policyholder switching providers or terminating policies.

Implications for Insurers Operating in Michigan

For property and casualty insurers in Michigan, immediate compliance is crucial. The new regulation mandates that insurers revise any rating algorithms incorporating metrics of policyholder retention, willingness-to-pay evaluations, or price elasticity of demand. This law not only aims to protect consumers from unfair pricing practices but also provides a clearer, statutory basis for enforcement, beyond the regulatory bulletin issued by the Michigan Department of Insurance and Financial Services in 2024.

Key Prohibitions Under the New Law

• Insurers cannot assess the likelihood of a customer seeking alternative insurance.
• The use of price elasticity of demand in pricing algorithms is prohibited.
• Estimating a policyholder's willingness to pay more than others for the same coverage is not allowed.
• Insurers must remove any non-risk-related factors from premium calculations.

What This Means for Industry Professionals

Agents, agencies, and carriers must carefully evaluate and adjust their pricing strategies to ensure compliance with the new regulations. The law underlines the necessity of transparent pricing practices strictly aligned with risk assessment. Insurers should prioritize revising their current algorithms, align with the statutory changes, and prepare for the next submission cycle to avoid potential violations. This legislative change signifies a growing trend towards consumer protection in the insurance industry, urging companies to adopt more fair and transparent pricing models.