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GAO: Regulations could wilt insurtech bloom.
  • Frank Klimko
  • July 2019
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As the insurtech space continues to grow and disrupt the insurance industry, greater adoption of high-tech tools—such as artificial intelligence, algorithms and machine learning—could run afoul of regulations over privacy and underwriting, according to a recent government report.

“The insurance industry has begun to adopt several types of technology that are designed to provide a range of benefits to insurers and consumers,” according to a U.S. Government Accountability Office report, “including improved risk monitoring, reduced costs and improved underwriting.”

“However, the use of these technologies also can create challenges for insurers and potential risks for consumers, including changed business models, pricing fairness and privacy issues,” the report said.

The use of AI for underwriting models can lower the guardrails that prevent the inclusion of factors prohibited by regulation, such as race, it said. The AI models are often developed by data scientists who—unlike insurance actuaries—may not fully understand underwriting requirements.

“For example, several stakeholders told us that certain factors, while not specifically disallowed by insurance regulations, could end up serving as a proxy for a disallowed factor,” it said. “One example cited by a stakeholder was the use of information on consumer magazine subscriptions, which are not prohibited on their own, but could serve as proxies for factors that are prohibited.”

The GAO report noted broad privacy concerns over the collection of policyholder data. Although an automobile insurer may use data on the consumer's driving habits to underwrite premium rates, the device also may collect information on where and when a consumer drives, which the policyholder may not want to reveal, it said.

“This presents a larger privacy issue as it may not be possible for a consumer to know exactly what is collected, or when and how the data are used,” it said. The report also noted some disquiet over the reduced level of oversight for insurtechs who sell coverage through the nonadmitted space.

The report said the National Association of Insurance Commissioners and state regulators have initiated a number of actions designed to address insurtech concerns, such as the work of an NAIC task force, which is studying regulatory innovation issues, and the release of NAIC draft best practices for states to use when reviewing complex rating models.

The GAO made no recommendations, but did paint a picture of the insurtech space. As of mid-2018, there were more than 1,000 insurtech firms established in more than 60 countries, with more than half of those launched in the United States since 2008, the report said.

–Frank Klimko

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