By Lyle Adriano, INSURANCE BUSINESS MAGAZINE
February 2, 2022
Court documents recently filed with a California administrative law judge reveal that both the state insurance regulator California Department of Insurance (CDI) and Consumer Watchdog have accused Allstate Insurance of “systematically overcharging” local customers about $1 billion over the past decade.
The documents, initially filed in October, allowed the state to intervene in an investigation into Allstate’s alleged practice of “price optimization” – the practice of charging higher premiums to customers that are unlikely to change to a competitor.
Both the CDI and Consumer Watchdog have accused Allstate of engaging in price optimization by giving smaller-than-appropriate discounts to the least price-sensitive of its customers – customers with clean driving records who held multiple policies with Allstate, or who had several decades of driving experience.
CDI senior casualty actuary Edward Cimini Jr. said in the document that he found that Allstate gave smaller discounts to drivers with over 39 years of experience – a group that he poined out is unlikely to shop around for insurance.
“Since Allstate’s selections were not based on underlying costs, the final rates that Allstate charged these policyholders were actuarily unsound and unfairly discriminatory,” said Cimini.
In his pre-filed direct testimony, Allan Schwartz – an actuarial consultant retained by Consumer Watchdog to review Allstate’s pricing – estimated that the insurer overcharged its Californian auto insurance customers “about $1 billion.”
“Those policyholders were known by Allstate to have a lower elasticity of demand and were more likely to renew with Allstate even though they were charged premiums in excess of those based upon an actuarially sound estimate of the cost of risk transfer,” Schwartz explained.
Both documents were filed following an investigation into Allstate’s new pricing algorithm by technology newsgroup The Markup in 2020. In that investigation, The Markup found that Allstate was planning to use its new pricing algorithm in Maryland which would have unfairly targeted its highest-paying customers. The investigation also found that the new algorithm was approved in several other states.
The Markup has reached out to Allstate for comment on the allegations, which the insurer has denied.
“Allstate does not employ, and has never employed, price optimization in determining premiums in California because Allstate does not take into account an individual’s or class’s willingness to pay a higher premium relative to other individuals or classes,” a company spokesperson told the news outlet in an email statement.