Recent innovations in insurance, fueled by technology companies (InsurTech), provide exciting new opportunities for cheaper, simpler, customer-centric insurance products. Using a variety of technologies like artificial intelligence (AI), machine learning, predictive analytics and mobile technology—as well as blockchain and distributed ledger technologies—companies are able to develop new products with new underwriting and distribution models to meet the changing needs of today’s consumers.
This environment provides a challenge to insurance regulators, as many of these innovations fall outside of the current regulatory structure. The primary role of the state regulator is to protect the consumer, which aligns well with the focus of the customer-centric InsurTech innovators. The divide is technology. Regulators need to find ways to work collaboratively with stakeholders to bridge the divide and determine the best approaches to effectively regulate a rapidly evolving industry to protect the consumer, ensure a level playing field, and encourage healthy competition and innovation.
In a perfect world, consumer protection would be seen as a shared responsibility; the appropriate regulatory structure would be obvious to all stakeholders and would simply fall into place. But we are not there yet.
Insurers and InsurTech companies are eager to embrace the new technologies and sometimes see the regulator as an impediment to innovation. Current regulatory restrictions related to rebating, producer licensing, distribution and marketing are among the laws that concern the companies driving technological innovation. Additionally, the length of time it takes to revise laws in every state in which a company operates is a source of frustration. Regulators’ concerns include cybersecurity, data privacy, and solvency of regulated and currently unregulated entities.
So, how do we move forward?
Simply stated, you cannot regulate that which you do not understand. Regulators will need to collaborate with the technology innovators to better understand the types of innovations being developed and to identify the areas of regulation that may need to be revised, while educating the innovators on insurance law. Some states are already achieving this goal by hosting technology sandboxes, fashioned after the innovation hubs used in other countries, where technology companies meet with state regulators to have nonbinding discussions regarding insurance regulatory requirements as they relate to the proposed products, technology, models and processes.
Other states are considering using regulatory sandboxes, which allow technology firms and insurance companies to test their innovative products in a controlled environment while certain laws and regulations are waived. Earlier this year, Kentucky passed a law to create the first U.S. InsurTech regulatory sandbox. While some states have embraced the concept of regulatory sandboxes, some stakeholders are concerned that allowing some entities to operate outside of the insurance regulatory structure and avoid certain laws may be in conflict with the regulator’s duty to protect the consumer and would create an unlevel playing field.
Regardless of the approach, to move forward, companies need to see regulators as collaborators for consumer protection rather than as impediments to innovation.
Regulators are also starting to use some of the same technologies used by the technology innovators. This will allow regulators to streamline current processes while developing a deep understanding of the benefits, risks and limitations of innovative technologies, which would facilitate effective communication with innovative companies.
Regulators may need to hire individuals with technological expertise in areas such as predictive analytics and AI, and create new functional areas of oversight to effectively regulate the evolving insurance industry. However, tight budgets may restrict a state’s ability to develop the required expertise.
One of the biggest risks to the actuarial profession, and by extension to the insurance industry, is reliance on other experts. The risk related to the dependency on third parties for critical information or processes will only grow as insurance companies increase their reliance on InsurTech firms to develop new and innovative products. Company actuaries and regulators alike have a responsibility to understand the information, models and products that third parties provide.
For example, some underwriting models are developed by data scientists or other professionals who are not subject to the actuarial standards of practice and may not fully understand insurance-specific limitations and requirements. It would be important for the creator of the model to provide sufficient documentation so the individual using or reviewing the model can evaluate its efficacy, appropriateness and compliance with insurance laws. Therefore, regulators may need to reevaluate the level of transparency needed from insurers relating to the information provided by third parties and the extent to which these third parties may need to be regulated.
The National Association of Insurance Commissioners (NAIC) is currently working on several key initiatives aimed at ensuring insurance regulation keeps pace with the rapid rate of technological innovation. However, we all share responsibility for the future of insurance.
Risk and opportunity are two sides of the same coin. These new innovative approaches to insurance provide exciting opportunities for consumers. With sufficient foresight, diligence and collaboration, we can all work together to enhance these opportunities while mitigating the risk.