Insurance regulators are scrutinizing private passenger car insurance

WORKING GROUP ON BIG DATA AND ARTIFICIAL INTELLIGENCE (H).

The NAIC’s Committee on Innovation, Cybersecurity, and Technology (H)—the first new “letter committee” created by the NAIC in nearly 20 years—consists of several working groups, including the letter (the Working Group). The task force convened on July 14, 2022 to deliver a preliminary analysis of industry responses to its artificial intelligence and machine learning (AI/ML) survey. The initial survey, which focused on private passenger auto insurance, was conducted under the auspices of nine states and was limited to larger auto insurance writers (over $75 million in gross written premiums annually), showing that nearly 90% of respondents applied AI /ML to one or more business functions. Insurers reported that AI/ML is most commonly used in claims, followed by fraud detection, marketing, rating, underwriting and loss prevention, in that order. The full results of the study may be released at the NAIC’s upcoming summer national meeting in Portland, Oregon, when the task force meets on August 10, 2022. Regulators plan to use the initial study on AI/ML and will conduct studies on lines of insurance of owners and life insurance later that day year. In addition to its survey work, the task force also evaluates the activities of third-party data and model providers and develops a recommended regulatory framework to monitor and oversee the industry’s use of said providers.

ACTIVITY OF STATE REGULATORS

Washington, D.C. hearing

On June 29, 2022, the District of Columbia Department of Insurance, Securities and Banking (DISB) held a stakeholder hearing to discuss the development of a process by which DISB will collect and evaluate data related to unintentional bias in private passenger motor vehicles insurances. The data will be used to inform DISB’s Diversity, Equity and Inclusion initiative on insurers’ use of underwriting and rating underwriting factors. DISB Commissioner Karima Woods explained that 27 insurance groups write private passenger auto insurance involving $387 million in premiums in the District of Columbia, with the top five groups writing 85% of the premiums.

California Bulletin 2022-5

On June 30, 2022, Insurance Commissioner Ricardo Lara issued Bulletin 2022-5 (the Bulletin) “to remind all insurance companies [including nonadmitted/surplus lines insurers] and licensees of their duty to market and issue insurance, charge premiums, investigate suspected fraud, and pay insurance claims in a manner that treats all similarly situated persons equally.” The bulletin discussed the need to “avoid both knowing and unconscious bias or discrimination that can and often does arise from the use of artificial intelligence as well as other forms of ‘Big Data’. The bulletin also highlights growing concern about “the use of supposedly neutral individual characteristics as substitutes for prohibited characteristics, resulting in racial bias, unfair discrimination, or disparate impact.

The bulletin explains that “before using any data collection method, fraud algorithm, rating/underwriting or marketing tool, insurers and licensees should conduct their own due diligence to ensure full compliance with all applicable laws” and “provide transparency to Californians by informing consumers of the specific reasons for any adverse underwriting decisions.” The bulletin also directs “all persons engaged in the insurance business in California,” in the broadest possible sense, “to review all applicable laws and train their staff in the proper application of all laws applicable to insurance’. Finally, the newsletter asserts that the California Department of Insurance “reserves the right to audit and investigate all insurer business practices, including marketing, rating, solicitation and underwriting criteria, programs, algorithms and models.”

Connecticut requires insurers to certify compliance each year

As previously reported, the Connecticut Insurance Department (CID) also issued a reminder (Notice) that the state expects insurers and other licensees to fully comply with applicable state and federal laws regarding discrimination. Although not explicit, CID requires annual certification by local insurers; the first such certification must be issued by September 1, 2022. The notice reminds insurers that, as stated in the California Bulletin above, CID will include anti-discrimination compliance in insurers’ periodic reviews. The notice also reminds insurers that with respect to AI and ML, the CID will examine technologies whether developed in-house or purchased from third parties. As for the scope of CID’s reviews of the use of Big Data, in particular, the entire Big Data ecosystem – from social media to the Internet of Things – will be in scope.

KEY CONCLUSIONS

The above activity provides examples of increased scrutiny by insurance regulators regarding the use of new technologies, including AI, ML and Big Data, and the determination of insurance regulators to confirm compliance with applicable state and federal anti-discrimination standards. Industry will continue to be required (if not required) to provide survey responses as regulators review the use of AI, ML and Big Data across different classes of business and for various other purposes. Regulators are beginning to warn that periodic reviews of financial and market behavior will include these tools, as they will likely evaluate filings using algorithms developed with such tools. From an overall compliance perspective, all insurers and licensees should consider the appropriateness of staff training, particularly in states such as California and Connecticut, which will require periodic compliance certifications to be submitted.

McDermott’s fully integrated insurance transaction and regulatory team represents a broad and diverse number of clients who are innovating in the insurance industry. Please feel free to contact the authors of this article or your regular McDermott contact with any questions.

Leave a Comment