Regulators Can Learn AI; New InsurTech Groups Will Help

It was the mid-1990s. Karen Clark’s Applied Insurance Research and Hemant Shah’s Risk Management Software were InsurTechs in their early stages of development—before the term for insurance technology company even existed.

Regulators didn’t know what to make of catastrophe model information that carriers started to include in homeowners filings as actuarial and statistical support for their rates.

Scott Harrison, one of five co-founders of a group called the American InsurTech Council, remembers that moment in the history of the property/casualty insurance industry, when he was a deputy superintendent for the New York State Insurance Department.

“This was brand new technology.” And many thought that “regulatory actuaries will never be able to figure it out,” he said. “That simply turned out not to be the case,” said Harrison, who drew a parallel between the need for increased regulatory understanding of property-catastrophe models in the 1990s to the desire for greater regulatory understanding of artificial intelligence and machine learning today.

“Right now we’re in a period where there’s a lot of interest in using artificial intelligence in a lot of different ways. And some of those ways intersect with consumers,” he said, referring to the use of artificial intelligence for underwriting and claims paying. “We need to get to a point where there’s sufficient transparency [so that] regulators can discern the difference between appropriate and inappropriate use of technology” as they fulfill their consumer protection responsibilities, he said.

At the same time, “companies’ legitimate interests in the intellectual property of [technology] like artificial intelligence” needs to be protected, he said.

Back in the 1990s, Harrison spent time with modelers, who were “highly motivated to ensure that regulators developed the right comfort level.” Then, he worked to get regulators talking with the developers. “There was a give and take. There was a dialogue taking place,” and regulators came to know who to contact with their questions,” he said, noting that regulators today “feel they have enough ability now to understand how the models work, to ask questions and to do good regulatory oversight of companies who are using the models.”

As co-founder of the AITC, the former regulator has joined another former regulator and three other veterans of the regulatory and legal compliance side of the insurance industry on a mission to recreate that “give and take”—this time for highly motivated InsurTechs developing insurance-related applications of AI, ML and other emerging technologies.

Importantly, Harrison stresses that the Council aims to bring together “stakeholders from across the InsurTech ecosystem,” referring to a potential membership that will include InsurTech companies, legacy carriers committed to innovation and InsurTech investors from the venture capital world. With veterans of insurance regulation guiding the effort, “the idea is to bring these stakeholders under a single organizational umbrella, where we could be thinking about the public policy issues—combining the technical side with the insurance expertise and the regulatory expertise,” he said.

According to a media statement announcing the public rollout of the group in mid-December, AITC will pursue the public policy interests of the members of this InsurTech ecosystem “by providing advocacy, policy research, education, outreach to regulators, other policymakers and the general public, across all lines of insurance.”

“AITC is committed to the development of clear regulatory standards for InsurTech that encourage innovation while ensuring transparency and essential consumer protections,” the statement said.

More Than One Group

Currently, the AITC does not have any members, according to Harrison, who spoke to Carrier Management days before the AITC was set to file for formal legal status as a not-for-profit in the District of Columbia. Although Harrison has been working on the AITC concept since 2019, and the group’s leaders have been informally offering comments on insurance technology issues to the National Association of Insurance Commissioners for several years, he said that standing up a legal entity was delayed by the pandemic and the need to road test the idea to gauge whether there was enough interest.

The December media announcement and a presentation at the December NAIC in San Diego were the first public introductions, but Harrison and the AITC co-founders are also reaching out to the networks they have developed over their decades in regulatory and compliance roles. In spite of the fact that Harrison and his co-founders have deep experience on the life/health side of the business—Co-Founder Tom Mays, for example, served as vice president of government relations for Pacific Life Insurance for 25 years—Harrison confirmed that the focus will be on all lines of insurance. Not only is the AITC interested in signing up members from P/C insurers and InsurTechs, but “we’d be interested in having reinsurers” as well, he said.

But the AITC isn’t the only choice for P/C InsurTechs. Also presenting at the December NAIC meeting was The InsurTech Coalition—a group that does have members already. The InsurTech Coalition’s members include Boost, Branch, Clearcover, Hippo, Lemonade, Metromile, Next and Root, according to Dave Luketic, vice president of government affairs for Root, who responded to Carrier Management’s questions about the Coalition via email on behalf of the group.

The InsurTech Coalition, armed with a mission to support innovation and technology in insurance, currently has members from the P/C InsurTech space, including Boost, Branch, Clearcover, Hippo, Lemonade, Metromile, Next, Root. But the InsurTech welcomes all InsurTechs as members.

Anyone interested in more information or joining can email dave.luketic@joinroot.com.

“We will focus on all issues facing emerging companies in insurance. We advocate for a regulatory environment that promotes new companies and new products in the insurance market. Specially, we are focusing on ‘speed to market,’ the responsible use of AI and machine learning, as well as the issues facing emerging companies,” he said, expressing a mission similar to AITC.

Although The InsurTech Coalition’s membership is currently made up of InsurTechs participating on the personal lines side of the P/C insurance industry, like AITC, Luketic confirmed that “the Coalition welcomes all InsurTechs as members.”

“Our mission is to support innovation and technology in insurance. We are focused on supporting new emerging companies that are using technology to help all consumers. In addition, the Coalition will collaborate with government officials to foster a healthy and competitive environment for new emerging companies,” he said.

One important difference between the groups surfaced as Luketic and Harrison responded to questions about their respective groups: The InsurTech Coalition’s membership is exclusively InsurTechs, while the AITC hopes to include representatives of traditional incumbent insurers as well.

“The InsurTech Coalition is the only ‘company founded’ and ‘company driven”‘ organization supporting InsurTechs,” Luketic said.

This is important “because the voice of InsurTech’s can only be driven by InsurTech companies. Our group is represented by multiple member companies,” he said.

Harrison said the AITC “would love the opportunity to work together with [The InsurTech Coalition] on issues where we have common purpose. “But a coalition—I’ve managed coalitions like that in the past. They can be very effective, but a coalition represents the interests of the members of the coalition…”

“By forming an organization with legal significance, there’s a permanence associated with our organization that we think will make us unique. And the fact that we’re going to include, within our organization, voices from across the InsurTech spectrum including investor groups makes us unique,” said Harrison, who has served as the executive director of the Affordable Insurance Alliance, an organization formed by life insurers to support the development of principles-based approach for the valuation of life insurance reserves in the U.S.

“The fact that we’re going to include, within our organization, voices from across the InsurTech spectrum including investor groups makes us unique.”

Scott Harrison, AITC

“We will have a point of view just like other organizations,” he said, referring to existing P/C insurance trade organizations. “They have a point of view, but at the same time they represent the groups that support them. We see the same thing happening here. The difference is we had to bring the technology and insurance sides under one organization.”

In fact, AITC will be welcoming “legacy carriers committed to innovation” to its ranks as well, and trade associations like The American Property Casualty Insurance Association and The National Association of Mutual Insurance Companies already represent the interests of legacy carriers.

“I imagine that there will be times when we will be working closely with groups like NAMIC and APCIA—on issues where we have common purpose. We don’t see ourselves as a competing organization at all,” Harrison said of AITC. But those other organizations “have a lot of other very important issues on their plate. By providing a singular focus on InsurTech, we think we’ll make those groups even more effective in their advocacy on InsurTech issues,” he said.

Weighing In: Big Data and Sandboxes

Luketic said that The InsurTech Coalition started meeting early in 2021. Although he did not describe specific activities that group members have tackled since coming together, Carrier Management found one comment letter that the Coalition sent to the NAIC’s Big Data and Artificial Intelligence (EX) Working Group in July. The letter responded to a request for comment about a draft survey on carriers’ use of AI and big data. APCIA and NAMIC also responded, and all three groups were concerned that the confidentiality of trade secret information be maintained.

“[T]he data we collect, and the manner in which it is used in rating and underwriting—while completely within the purview of state insurance regulators to examine—may involve the disclosure of trade secret or proprietary information that has substantial competitive value to the market,” the letter from The InsurTech Coalition said, going on to recommend remedies including “confidentiality agreements with the states and NAIC” or the collection “of each response by a domestic regulator pursuant to confidential examination procedures.”

Harrison said the AITC has submitted letters in support of sandbox legislation in the state of South Dakota and West Virginia. Anticipating that his group will become much more active once the legal filing as a nonprofit entity is complete, he said the focus will be on “the modernization of the regulatory framework that needs to take place.”

“The regulatory standards that are in place have been developed over the last 100 years or so. They were developed when the world functioned on an analog basis,” he said. As the insurance industry moves quickly toward digitalization, requirements for wet signatures on applications for insurance and other documents, and rules for the physical delivery of policies no longer make sense, he said, giving examples of issues that might be on the AITC agenda.

Harrison envisions having P/C and life/health subgroups developing within the confines of the AITC. “The property/casualty area is ahead the life/health industry to a certain extent” because P/C companies like Root and Lemonade have been using AI and telematics already. While AITC subgroups or committees can give P/C companies the opportunity to focus on issues most germane to their industry, Harrison stressed, “our policy recommendations are going be consistent. We’re not going to have a policy recommendation that work for the P/C companies, but don’t work for life/health companies. That doesn’t benefit regulators. And it doesn’t benefit consumers to have this sort fractured policy-making approach,” he said.

(Editor’s Note: In March 2020, Carrier Management heard a presentation at an InsurTech NY Spring conference, during which a representative of a law firm discussed his firm’s intent to spearhead the creation of another group—InsureTech America—that would act as “a unified voice addressing regulatory and legal issues in InsurTech. At the time, the speaker also talked about the need to focus on changing existing rules requiring wet signatures and paper delivery, as well as anti-rebating and inducement laws. At press time CM was unable to reach representatives of this group to find out if it actually launched.)