Article Synopsis :
Hogan Lovell’s Insurance Horizons 2019 is a digest of articles that cover a broad spread of insurance topics, sectors and jurisdictions around the world.
We could fill the library with pieces for several months just from this publication, but we will focus on just one for this month.
The rise of insurtech, AI, machine learning, blockchain and smart contracts in the US looks at how these terms have all moved into common usage over the past few years.
These innovations are providing powerful new ways to conduct business. However, usage-based insurance, peer to peer insurance, machine learning algorithms, robo advisory processes, blockchain-based insurance, and the Internet of Things (IoT) are posing many challenges from the regulatory perspective.
Regulators, providers and insurance companies are asking themselves questions like:
- Do digital marketing and advertising activities trigger insurance producer licensing requirements?
- Does the provision of value-added services violate state anti-rebating laws?
- How can insurance referrals be compensated without triggering insurance regulations?
AI and machine learning
The power of AI and machine learning has regulators concerned about consumer protection.
Certain protected characteristics, such as sex, age, race and religion may not be considered under insurance law. However, algorithms may unwittingly create proxies for these identifiers through the accumulation, processing and assimilation of data.
Using machine learning to price risk could prove beneficial to insurers, allowing them to reduce moral hazard and adverse selection that comes from the general distribution of insurance.
However, tailoring risk through highly customised policies that reflect an individual’s unique characteristics may undermine the insurance function to pool risk. This could leave groups or categories excluded from the private marketplace, rendered uninsurable by the algorithm.
Regulators are keeping a close eye on the potential for insurtech and the sharing of data to act in an anticompetitive manner.
The National Association of Insurance Commissioners (NAIC) has compiled best practices for regulators to use in reviewing insurance company filings containing predictive models. These may not be the “most streamlined” as one draft identified 16 best practices to apply and 92 pieces of information that should be considered by a regulator.
Actuarial modelling has benefited from data collection and analysis, including data mining, statistical modelling, and machine learning. But regulators are struggling to assess filed rate plans that use the predictive model generated by the new technology. As a result, regulators are considering the use of sandboxes to ‘field-test’ the fintech that is being adopted in markets like the UK and Asia.
Blockchain offers great potential to the insurance industry, bringing increased efficiencies and cost to existing processes. Data management and claims administration are already being improved.
The matter of personal data remains a concern and blockchain will have to comply with existing privacy and data protection regulations.
In the US, insurers are often required to retain records in state and be available to the local regulator for inspection. Blockchain might make more easily available and even streamline compliance by allowing a state regulator direct access to real-time transactions.
Smart contracts could make use of blockchain to revolutionise claims filing processes for insureds and reduce the cost of handling these claims for insurers. The process can be fully automated with a smart contract that can determine a customer’s eligibility and make an immediate payout without the need for a traditional claim.
The reduction in costs for admin, compliance and claims will make microinsurance economically viable and open up new markets.
There remain regulatory and compliance hurdles to be overcome under existing insurance laws, though. Some regulatory regimes may not view these as insurance policies, but derivative contracts and seek to regulate them as securities.
If a regulated insurance product, will automated payments be permitted, particularly if funds are to be escrowed? Will cryptocurrency be a legitimate medium for payments?
Claims-handling procedures will also need to be considered carefully.
The implementation of these technologies open opportunities for new products, markets, and efficiencies.
Insurers and regulators need to collaborate in order to ensure that the benefits of digital transformation are not derailed by inflexible state laws as each new innovation breaks the boundaries of existing regulatory regimes.
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Digital Insurer's CommentsThe reward for adopting these new technologies is tantalisingly close. However, state laws may limit the benefit felt if regulators are not able to keep pace with change.
It is also the responsibility of insurers to adequately demonstrate that consumers will be protected when using these new products.
The need for collaboration is clear. Partnership between regulators and insurers is the only way to deliver the new insurance environment required for the new technologies to flourish in.
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