Editor's note: This has been excerpted with permission from Mayer Brown's “Global Insurance Industry 2020 Year in Review."
Despite the insurance industry’s continued investment in insurtech in 2020, the COVID-19 pandemic posed particular challenges for state insurance regulators. Consumer dissatisfaction, whether expressed or simply feared, caused regulators to issue varying degrees of guidance and mandates. Regulators that historically would have balked at mid-term premium rebates encouraged, and even ordered, return of premium on insurance products whose risk profile changed dramatically due to the pandemic. Regulators embraced technology and demonstrated a willingness to reconsider long standing positions when faced with pressing need, including mandating forbearances related to cancellation for nonpayment of premium, easing the rules around telemedicine and easing the burden of paper filings with the state.
At the state and NAIC level, regulators further embraced collaboration with the industry. For example, New York’s Department of Financial Services launched DFS FastForward in June 2020, expanding on its existing insurtech support program (Project Whitehall) to support innovators seeking to deliver new solutions in financial services, fintech, insurtech and healthtech during COVID-19. Vermont launched a regulatory sandbox in January 2020, under which companies can seek waivers of certain statutory/regulatory requirements for a limited period while piloting a program or product in Vermont.
At the NAIC level, on August 14, 2020, the NAIC Executive Committee/Plenary unanimously adopted guiding principles on artificial intelligence (“AI”). The NAIC’s Principles on Artificial Intelligence were developed by the NAIC’s AI Working Group, a working group established by the NAIC’s Technology and Innovation Task Force. The AI Working Group studied the use of AI in the insurance sector, its impact on consumer protection and privacy, its interplay within the state-based regulatory framework, as well as solicited comments from key industry stakeholders.
The Principles on Artificial Intelligence, which are general guidelines on regulatory expectations with respect to the use of AI in the insurance industry, are based, in part, on the Organisation for Economic Co-operation and Development’s (“OECD”) AI principles, adopted by 42 countries, including the US. The principles outline five key tenets, summarized by the acronym FACTS:
- Fair and Ethical. Respecting the rule of law and implementing trustworthy solutions. Encourages industry participants to take proactive steps to avoid proxy discrimination against protected classes when using AI platforms.
- Accountable. Responsibility for the creation, implementation and impacts of any AI system.
- Compliant. Have knowledge and resources in place to comply with all applicable insurance laws and regulations.
- Transparent. Commitment to responsible disclosures regarding AI systems to relevant stakeholders as well as ability to inquire about and review AI driven insurance decisions.
- Secure/Safe/Robust. Ensure reasonable level of traceability of datasets, processes and decisions made and implementation of a systematic risk management process to detect and correct risks associated with privacy, digital security and unfair discrimination.
In addition, on December 9, 2020, the NAIC Executive Committee/Plenary adopted amendments to anti-rebating provisions of NAIC Unfair Trade Practices Model Act (“UTPA”). The amendments were designed by the Innovation and Technology Task Force after careful consideration of industry claims that the anti-rebating provisions were outdated and hindering insurers and producers ability to use technology to improve outcomes for insureds.
The amendments to the UTPA allow insurers and producers to, among other things provide, without charge or at a reduced cost, on a non-discriminatory basis, nine categories of “value added” services, provided the “value added” product or service relates to the insurance cover age, and the cost to the carrier or producer of providing the value added service/product is reasonable in relation to the policy premium. These value added services include those that are primarily designed to satisfy one or more of the following:
- Provide loss mitigation or loss control;
- Reduce claim costs or claim settlement costs;
- Provide education about liability risks or risk of loss to persons or property;
- Monitor or assess risk, identify sources of risk, or develop strategies for eliminating or reducing risk;
- Enhance health;
- Enhance financial wellness through items such as education or financial planning services;
- Provide post-loss services;
- Incent behavioral changes to improve the health or reduce the risk of death or disability of a customer (defined for purposes of this subsection as policyholder, potential policyholder, certificate holder, potential certificate holder, insured, potentialinsured or applicant); or
- Assist in the administration of the employee or retiree benefit insurance coverage.
In addition, the amendments to the UTPA, allow insurers and producers to offer or give non-cash gifts, items, or services, including meals to or charitable donations on behalf of a customer, up to a stipulated cash value (for personal lines) or up to an amount that is reasonable in relation to the policy premium (for commercial lines).
Despite the various challenges for the insurance industry in 2020, developments in insurtech helped to pave a path for better customer experience and operational efficiency in the insurance industry. The insurance industry proved to be resilient and flexible during the pandemic, in no small part to the contribution of technology and innovation to drive business processes forward and meet the needs of policyholders. Although it is to be seen whether the high valuations attributed to several high growth insurtechs are justified, it seems clear that the digital transformation will continue to accelerate through the insurance industry and impact the way insurance business is conducted and regulated.
