Big Data: Insurance Innovation Regulation

Cybersecurity and Privacy   |   Life, Annuity, and Retirement Solutions   |   Property & Casualty Insurance   |   Technology   |   August 17, 2017
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The use of big data and analytics, and other innovative technologies, is transforming the way the insurance business is being conducted. This article describes some of the changes that are occurring and how regulators are attempting to keep pace with them. It argues that the current regulatory framework is robust and that regulators should be careful not to stifle innovation by creating new burdensome regulations. Rather, they should seek to support efforts to innovate, so that insurers can bring valuable new goods and services to the marketplace.

Definitions vary, but for purposes of this article, "big data" means the vast amounts of data used in connection with software programs, algorithms, and artificial intelligence to improve the way insurers provide products and services. Big data includes data that insurers already have from conducting their businesses - for example, from insurance applications, policy administration, and claims records. Some of this data can be newly accessed and analyzed using fresh technologies. Big data also means external data, which can include sources that insurers have used for many years, such as motor vehicle records and credit reports from credit rating agencies. It also can mean new sources that reflect an insured or applicant's lifestyle. This latter type of big data is collected from a wide variety of sources, including social media posts, public records, mobile device usage, among other sources. Insurers vary in what data they use and the ways in which they use it.

Insurers are looking to innovate. Last year, $1.7 billion was reportedly invested in "InsurTech." This year's spending is expected to far exceed that level. This innovation is being driven by technological advances, and the corresponding marketplace expectation that products will improve and be delivered faster and in more consumer-friendly ways. Insurance is viewed as lagging behind other industries in terms of offering products and services for the new internet-based and mobile economy that better caters to all consumers - but, in particular, to millennials. Insurers are using new technologies, including big data and analytics, to improve their marketing and distribution, underwriting, and claims processes, among others. Examples of the new technologies insurers are using to market and distribute their products include digital, mobile, and email marketing campaigns. Additionally, insurers are using new technologies to streamline the application process, including allowing insurance applications to be completed online, in whole or in part. Insurers have also been experimenting with direct-to-consumer programs in an effort to capture millennials and others who have become accustomed to purchasing goods and services directly, often over the web.

Insurers are using big data and analytics to speed up the underwriting process and to improve its accuracy. Some life insurers, for example, are offering accelerated underwriting for a number of applicants on certain policies. This means some can apply for and receive a policy within days, or even sooner, where previously it would take weeks and often require a medical exam involving the collection of bodily fluids. Auto insurers are also using telematics to gather data on insureds' driving habits and offer discounts to safe drivers. Relatedly, one major life insurer has employed wearable technology, and provides rewards and discounts based on the insured's healthy lifestyle choices. These developments are drawing together actuarial science and data science, as underwriting and rating at large insurance companies begins to involve both these disciplines.

Innovative technologies are changing the way claims are processed. For example, property and casualty insurers are developing systems where claims payments can be made automatically, based on the occurrence of an event, such as a drought, earthquake, or hurricane. Insurers are also beginning to use sensors to help them more effectively deploy claims adjusters in the areas of greatest damage following a weather event, such as a hail storm. Equipment insurers are employing internet-of-things devices that not only monitor the risk associated with insured property, but also help prevent claims by detecting potential losses before they occur. Technologies are also being developed that would help reconstruct accidents based on details and pictures that the insureds themselves provide to insurers.

Insurers currently operate under a robust legal and regulatory framework. Laws that are potentially applicable to insurers' business practices include state unfair trade practices laws, the Fair Credit Reporting Act and its state corollaries, the Health Insurance Privacy and Portability Act, the Gramm-Leach-Bliley Act, unfair claims practices laws, and a number of state and federal privacy laws.

Insurance is regulated primarily by the states under the McCarran Ferguson Act. The National Association of Insurance Commissioners (NAIC) is a standard-setting organization run by the chief insurance executive from each of the 50 states, the District of Columbia, and five U.S. territories. The NAIC formed the Big Data Working Group several years ago, originally under the auspices of its Market Regulation Committee. The Big Data Working Group is now overseen by the NAIC Executive Committee's Innovation Task Force, together with the Cybersecurity Working Group and Speed to Market Working Group.

The Big Data Working Group, chaired by Oregon Insurance Commissioner Laura Cali Robison, is seeking to understand how the industry is evolving so that it can regulate effectively. Cali Robison has repeatedly stated that the goal of the Big Data Working Group is to foster innovation while protecting consumers. Innovation was a major focus at the 2017 Insurance Summit co-sponsored by the NAIC in May in Kansas City. There, state regulators heard from InsurTech innovators about the ways new technologies could transform the way the insurance business is conducted and regulated. Regulators are reportedly also planning visits to InsurTech companies in Silicon Valley this October to better understand how emerging technologies might shape the marketplace.

The NAIC's Big Data Working Group has adopted three charges: (A) review and consider any necessary changes to the existing regulatory framework; (B) propose a mechanism to provide resources, and allow states to share resources, to facilitate review of complex models used for underwriting, rating, and claims; and (C) assess data and tools required for regulators to appropriately monitor the marketplace. For each charge, the working group will first address property and casualty insurance before life and health insurance. The panel's current focus is on charge B, creating a mechanism to help states, and to facilitate the sharing of state resources, in connection with the review of complex rating models for auto and home insurance.

Regulators must be careful not to stifle innovation so that insurers can bring valuable new products and services to the marketplace. One proposed solution is to use "innovation sandboxes," which are safe spaces where insurers can test new products and services under regulatory supervision, without the threat of harsh sanction. Other countries have employed these "sandboxes" to great effect. An added challenge in the U.S., however, is that each state has an insurance regulator. Thus, there are likely to be multiple views from regulators on any particular new methodology, product, or service. Regulators and insurers need to work sensibly together to foster innovation while protecting consumers.

Ben V. Seessel is a shareholder in the Hartford office of Carlton Fields. He represents insurers and other financial services companies in class action and complex litigation matters in federal and state courts across the country and counsels them on regulatory and transactional matters. He can be reached at [email protected].

Reprinted with permission from the August 17, 2017 issue of The Connecticut Law Tribune. ©2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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