Case Update: Allstate Price Optimization

Allstate Faces a California Hearing in May on an Estimated $1 Billion in Auto Insurance Overcharges

Evidence Shows Allstate Penalized Its Best Customers, Violating California’s Proposition 103

After a seven-year investigation, Allstate, the fourth largest auto insurance company in California, will face a hearing at the California Department of Insurance on May 10, 2022 to determine whether the company overcharged California motorists for auto insurance.

Evidence uncovered during the inquiry has led experts for Consumer Watchdog, the California Department of Insurance, and consumers who have sued the company in federal court to conclude that Allstate engaged in “Price Optimization,” a technique used to determine whether certain customers would accept unjustified premium increases without shopping around for a better deal. Allstate is a leading proponent of the technique throughout the country, according to a detailed exposé published by Consumer Reports in 2020.

Consumer Watchdog’s actuarial expert estimates that Allstate overcharged its best California customers—among its safest drivers and most profitable policyholders—by approximately $1.03 billion from 2012 to 2021. Such overcharges are barred by Proposition 103, the voter-approved insurance reform law.

If the Insurance Commissioner determines that Allstate engaged in Price Optimization, Allstate could be forced to issue refunds to consumers through the pending federal class action suit. And Allstate would be subject to civil penalties of between $5,000 and $10,000 for each of tens of thousands of violations of Proposition 103.

Background: Price Optimization and Proposition 103

Price Optimization is a method by which an insurance company considers a consumer’s sensitivity to changes in price when the company sets insurance rates and premiums. More precisely, the insurance company considers the likelihood that a customer would tolerate an increase in the price of insurance. This is also known as “elasticity of demand.” Customers who are relatively insensitive to price increases are referred to as “inelastic.” The vast amount of data available about every consumer has made it easier for businesses to discriminate between people who are price sensitive and those who are not.

The voters of California passed Proposition 103 in 1988 “to ensure that insurance is fair, available, and affordable for all Californians.” To that end, Proposition 103 mandates that auto insurance premiums be based primarily on factors most within the driver’s control—driving safety record, annual mileage, and years of driving experience—and only such other factors that have a substantial relationship to risk of loss and that the Commissioner has adopted by regulation. (Ins. Code § 1861.02(a).) Although insurance companies are allowed to consider other optional rating factors, they are permitted only if the company can prove, in a public hearing, that the optional rating factor has a “substantial relationship to the risk of loss,” and the optional rating factor is then adopted by regulation as an approved optional rating factor by the elected Insurance Commissioner. (Ins. Code § 1861.02(a)(4); 10 CCR § 2632.5(d) (listing the current, approved optional rating factors).) It is a system designed to make insurance rates fair and affordable, reward good drivers, and eliminate the arbitrary discrimination that was rampant in the 1980s before the voters passed Proposition 103.

Because consideration of a driver’s sensitivity to accept premium increases has nothing to do with a motorist’s risk of loss, “elasticity of demand” is not—nor could it ever be—an approved rating factor under Proposition 103. Therefore, the use of Price Optimization is illegal. (Ins. Code § 1861.02; Ins. Code § 1861.05(a).)

The public—and most government regulators across the United States—were largely unaware of insurers’ use of Price Optimization until it was revealed in 2013 in an Allstate filing submitted to Wisconsin insurance regulators that was accidentally made public. (J. Robert Hunter, “Proof That Price Optimization Is Being Used and Producing Unfairly Discriminatory Rates,” Consumer Federation of America, Dec. 16, 2014.) Since then, at least 18 states and Washington, D.C. have barred its use.

The California Department of Insurance issued a bulletin in 2015 banning Price Optimization and mandating that any insurers who were engaged in its use cease the practice because it violates California law. (Notice Regarding Unfair Discrimination in Rating: Price Optimization (Feb. 18, 2015).) In addition, any insurer that had “a [rating] factor or factors based on Price Optimization in its rating plan” was required to submit a revised rate plan filing removing these factors no later than August 2015.

California Investigation of Allstate

In early 2020, Consumer Reports published a detailed exposé on Allstate’s use of Price Optimization across the nation. It explained that the practical effect of Price Optimization is to create a “suckers list” of customers who are “big spenders and [Allstate] would squeeze more money out of them than others.” (A. Sankin et al., “Why You May Be Paying Too Much for Your Car Insurance,” Consumer Reports, Feb. 25, 2020.) And the article noted that in 2011, “Allstate executives [were] boast[ing] about the benefits of price optimization to investors, saying it was leading to growth in its auto insurance line.”

Allstate did not submit a new rating plan in response to the Commissioner’s 2015 bulletin banning Price Optimization in California.

The current Department of Insurance investigation was prompted by a class action in federal court brought on behalf of California consumers. (Stevenson v. Allstate Ins. Co. and Allstate Indem. Co., No. 15-cv-04788-YGR (N.D. Cal).) In March 2016, the federal court asked the Insurance Commissioner to investigate whether Allstate had engaged in Price Optimization in California. Both in response to the district court’s referral and on its own motion, Insurance Commissioner Dave Jones ordered a public inquiry into: “(1) whether Allstate has violated California insurance law by using illegal price optimization; (2) how Allstate implemented any such illegal price optimization in its rate and/or class plan; and (3) how any such illegal price optimization impacted Allstate’s policyholders.” (Notice of Hearing at 3, In the Matter of the Rating Practices of Allstate Ins. Co. and Allstate Indem. Co., File No. NC-2018-00001 (Apr. 27, 2018).)

In 2018, Consumer Watchdog intervened in the agency’s investigation to protect California consumers against Price Optimization and to enforce Proposition 103. Consumer Watchdog is not a party in the federal civil proceeding and does not represent any other party in that matter.

Expert: Allstate Systematically Overcharged California Customers in Violation of Proposition 103

After reviewing the testimony of Allstate’s witnesses and documentary evidence, Consumer Watchdog’s actuary, Mr. Allan Schwartz, concluded that Allstate considered elasticity of demand in setting its premiums from 2012 at least through October 2021. Mr. Schwartz summarized his conclusions as follows:

      1. Allstate engaged in Price Optimization. It did so by taking into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes.

      2. The Price Optimization was implemented by charging excessive premiums to certain policyholders through the use of higher than the actuarially indicated values for Allstate customers who were entitled to Allstate’s Distinguished Driver Discount and its Multiple Policy Discount.

      3. The aggregate overcharge to these policyholders from the time of the Allstate filing implementation to date is about $1 billion.

These customers are among Allstate’s safest drivers; they are among its most profitable customers (those who purchase home policies from Allstate in addition to the purchase of auto insurance); and they are customers who Allstate considered very likely to remain loyal to the company—least likely to defect due to premium increases. Various documents obtained from Allstate through discovery establish that Allstate considered price elasticity in making those decisions, based on its clear knowledge that these customers were inelastic—that is, unlikely to leave the company if they were required to pay more than they should have. Allstate’s pricing decisions resulted in higher premiums that were unrelated to the risk of loss.

Upcoming Actions

The federal court asked the Insurance Commissioner to investigate and report the results of the investigation to the federal court. The public hearing, presently scheduled on May 10 before a California Administrative Law Judge, will be followed by briefing and eventually a proposed decision by the judge. The Insurance Commissioner can accept or reject the proposed decision, request further evidence be taken, or decide the case himself. The Commissioner’s final decision will be forwarded to the federal court for further action, including a determination of Allstate’s liability and its obligation, if any, to compensate Allstate customers who the company overcharged.

The Commissioner also has the authority to bring a separate enforcement action against Allstate if the Commissioner determines that the company violated Proposition 103. In such a proceeding, the Commissioner is authorized to impose civil penalties of $5,000 for “each act,” or $10,000 if the violation was found to be willful, for the serious violations uncovered by Consumer Watchdog’s actuary (and echoed by the Pre-filed Direct Testimony of CDI’s own expert). (Ins. Code § 1858.07.) Here, Allstate would be subject to a civil penalty for each instance in which it charged excessive premiums to certain policyholders through the use of Price Optimization. From 2012 to 2021, Consumer Watchdog estimates that Allstate committed at least approximately 4,346,736 “act[s]” that overcharged policyholders. This could result in a civil fine against Allstate in the tens of billions of dollars. It is important to note that civil penalties are paid to the state; the Commissioner will not be responsible for obtaining compensation for Allstate’s policyholders, as that is the subject of the class action lawsuit in federal court.

It is premature to speculate as to what Insurance Commissioner Lara will do if Allstate is found to have violated the law. However, there must be consequences when an insurance company violates California’s voter approved protections against discriminatory pricing and practices; the elected Commissioner is responsible under California law for protecting the integrity of the marketplace and the Department’s regulatory authority by treating the results of this investigation with the significance they deserve.

Read the testimony of Allan Schwartz, Consumer Watchdog’s actuary, on his analysis of the evidence.https://consumerwatchdog.org/sites/default/files/2022-03/2021-10-28%20Public%20Redacted%20Pre-Filed%20Direct%20Testimony%20of%20Allan%20I.%20Schwartz.pdf

Read the Consumer Reports exposé on Allstate and Price Optimization. https://www.consumerreports.org/media-room/press-releases/2020/02/investigation-finds-allstates-secret-algorithm-resulted-in-sucke/

Read follow up stories here. https://themarkup.org/allstates-algorithm/2022/02/01/newly-public-documents-allege-allstate-overcharged-loyal-california-customers-1-billion

https://www.consumerwatchdog.org/news-story/allstate-systemically-overcharging-customers

https://www.consumerwatchdog.org/news-story/allstate-price-optimization-hearing-california-scheduled-may

 https://www.consumerwatchdog.org/news-story/expert-testifies-allstate-overcharged-some-policyholders-total-nearly-1b

Read the notice of administrative hearing issued by Insurance Commissioner Dave Jones: https://consumerwatchdog.org/sites/default/files/2022-03/2018-04-27%20NOTICE%20OF%20HEARING.pdf

Background on Proposition 103

Enacted by California voters on November 8, 1988, Proposition 103 requires that auto insurance rates be based primarily on a driver’s safety record, miles driven, and driving experience. It requires all automobile rating factors to be approved by the Department of Insurance and prohibits discriminatory rating factors that have nothing to do with a motorist’s risk, such as “Price Optimization.” The initiative applied the state’s consumer protection, civil rights, and antitrust laws to insurance for the first time and authorizes consumers to challenge violations of the law in the courts or at the Department of Insurance, requiring insurance companies to pay consumers’ attorney’s fees for such challenges. In addition to regulating rates, Proposition 103 made the Insurance Commissioner’s office an elected position that is accountable to the voters.

In February 2019, the Consumer Federation of America reported that Prop 103 had saved California motorists over $154 billion since 1989.

https://consumerfed.org/press_release/americans-could-save-billions-on-auto-insurance-through-stronger-consumer-protections-and-improved-state-regulations/

For more information about Proposition 103 visit: https://www.consumerwatchdog.org/prop-103-california-insurance-reform

Consumer Watchdog, founded in 1985, is a non-profit, non-partisan consumer protection and advocacy organization.