A key part of the counsel we provide to our insurtech clients is assisting them in navigating the insurance regulatory landscape, with 50 separate state-based legal systems regulating the insurance industry. While having to comply with 50 separate laws every time you make a business decision can appear to be an impossible task, state regulators have worked hard to standardize their laws through the National Association of Insurance Commissioners, a regulatory-support organization composed of the insurance departments in all 50 states tasked with developing model insurance laws and regulations to be adopted and implemented at the state level.
The NAIC holds a national meeting three times each year, and the impact new and innovative technologies would have on the insurance industry was a major topic at this year’s Spring Meeting in Orlando. From blockchains to autonomous vehicles, new technology has the potential to upend the traditional insurance industry, and regulators were grappling with how to adapt their laws and regulations to this changing technological landscape. Below is a summary of some of the major tech-related topics that were discussed and what we believe their regulatory impact on the insurance industry, and those working hard to bring disruptive technology to the industry, will be.
A. Insurance Underwriting and Big Data
Many of our clients have developed new and innovative proprietary data models that harness an expanding array of data to underwrite risk in a more efficient and cost-effective manner. Using new data models, life insurance companies are now able to offer “accelerated life underwriting” whereby life insurance policies are issued without the need for a traditional medical exam. Property and casualty insurers are able to utilize smart home or smart car sensors to offer lower premiums to policyholders who engage in risk-mitigating behavior. However, in the insurance industry it is not enough to simply have the best and most accurate predictive data models. Those models need to be reviewed and approved by regulators before the company can rely on them to set insurance rates and premiums.
Any data models used by an insurance company to determine premiums must be approved by regulators as part of the company’s rate filings, and the NAIC’s Big Data Working Group is currently reviewing the regulatory framework governing this rate-filing process. As part of this review, the Big Data Working Group has partnered with the Casualty Actuarial and Statistical Task Force to develop a Predictive Models White Paper that lays out the best practices for reviewing an insurance company’s generalized linear predictive models that are filed to justify rates for home and auto insurance. These best practices include a long list of information that any insurance company may proactively provide to regulators as part of the rate-filing process, including the geographical scope of the data, data sources, reliance on sub-models, data-scrubbing practices and the software used to develop the data models.
The task force submitted a draft of this white paper for public comment on October 25, 2018 and received a number of comments from stakeholders, many of whom found the best practices to be too burdensome and overreaching. Other stakeholders emphasized that regulators needed to ensure the safeguards were in place to protect the confidentiality of any proprietary data models. The task force is currently working to incorporate these comments into their draft and will release a revised draft for further comment. Although this white paper is focused on a narrow range of data models and is still a work in progress, it does provide a decent roadmap for companies to follow as they engage with regulators and provide them the information they need in order to review and approve their data models. Hopefully, this white paper and the other technical support the Big Data Working Group is working to provide to regulators will lead to a more transparent, streamlined rate review process that will enable companies harnessing data through innovative technology to have their data models approved in a more expedited fashion while ensuring that consumers are adequately protected.
B. Chatbots and AI in the Sale and Solicitation of Insurance
Our insurtech clients are often looking to disrupt the traditional insurance distribution model whereby insurance companies sell policies to their customers through insurance agents or brokers acting as middlemen. Many insurtechs believe they can utilize chatbot and artificial intelligence technology to sell insurance directly to customers, without the need for, and cost of, a human insurance agent. These insurance “robo-advisors” are a good example of where the insurance regulations have not really kept up-to-date with the rapid, technological changes in the industry. Insurance agents and brokers are still licensed and regulated as individuals or as entities even though a consumer can now buy a policy through a robo-advisor without ever having to interact with an actual, licensed person.
In order to address this regulatory gap, the NAIC’s Producer Licensing Task Force announced during the Spring Meeting that they would develop a white paper looking into the “role of chatbots and artificial intelligence in the distribution of insurance and the regulatory supervision of these technologies.” We would anticipate that this white paper could lead to increased regulation down the road concerning how licensed insurance agents and brokers use chatbots and artificial intelligence to sell, solicit and negotiate insurance.
C. Insurtechs and the Future of Anti-Rebating Laws
Under the insurance laws of most states (with the exception of a few states such as California), insurance companies and agencies are prohibited from offering rebates (i.e., discounts on premiums in order to induce a potential customer into buying a policy). While the anti-rebating laws are ostensibly designed to protect consumers, in practice they can often have an anti-consumer effect by prohibiting consumers from receiving discounts on their premiums that they would otherwise receive and by making it harder for innovative insurance-related companies to engage in rewards programs whereby customers receive premium discounts or other rewards for engaging in risk-mitigating behavior.
The NAIC’s Innovation and Technology Task Force recently identified these anti-rebating provisions as a possible barrier to innovation and is currently re-examining whether they are still needed. At the Spring Meeting, the task force announced they would hold a meeting at the NAIC/NIPR Insurance Summit in Kansas City, MO on June 4 to hear presentations from regulators and interested parties and discuss whether these anti-rebating laws could be repealed. We hope that these discussions will lead to the task force developing a model law or regulation to repeal or revise these somewhat archaic laws, and we believe this reform would be to the benefit of both the insurance industry and their consumers.
Throughout the Spring Meeting, regulators consistently expressed a readiness to work with and listen to insurtech stakeholders as the regulators look to develop new laws and regulations to adapt to the changing technological landscape in the insurance industry. If any company is looking to do something new and innovative in the insurance industry that would require regulatory approval, we always recommend engaging with regulators early and often. Obtaining regulatory buy-in at an early stage is often critical for ensuring a relatively fast and painless regulatory approval process and can significantly increase a company’s speed to market. Regulators sound ready and willing to have a dialogue with the industry on the future of insurance regulation, and companies looking to disrupt the insurance industry should consider taking them up on their offer.