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New Technology Developments Impacting Insurance Regulation

By Mike Consedine, CEO, National Association of Insurance Commissioners (NAIC)

Mike Consedine, CEO, National Association of Insurance Commissioners (NAIC)

It’s an exciting time to be in the insurance regulatory space.

Technologies such as telematics, blockchain, big data and cloud computing are transforming our world. As a result, we have new insurance products to streamline customer acquisition and claims settlements as well as creating new ways to identify, assess, and monitor risk. The challenge for regulators is keeping pace with change.

"Insurance departments are balancing the demand for innovation with the need for a stable, safe, competitive and fair playing field​"

History has shown the state-based system of insurance regulation has consistently responded effectively to developments in the industry. However, the speed of innovation has accelerated exponentially in recent years. Technology is revolutionizing the financial services marketplace. State insurance regulators recognize the shifting landscape and are stepping up. Insurance departments are balancing the demand for innovation with the need for a stable, safe, competitive and fair playing field.

State Ahead

Last year the National Association of Insurance Commissioners (NAIC) developed our strategic plan, State Ahead, to support insurance regulators in this changing marketplace. This plan is an ambitious vision for the evolution of the NAIC’s regulatory support capabilities.

State Ahead gives state regulators, through the NAIC, new tools, talent and technology to make informed regulatory decisions. We are harnessing our wealth of available data to develop a next-generation suite of analytical tools for regulators, providing insights to make more informed and timely decisions. Let me highlight some of the emerging technologies the plan addresses.

Artificial Intelligence

The wealth of data, increased computer power through cloud platforms, and the desire to streamline customer experiences has led to increased usage of Artificial Intelligence (AI). Regulators and insurance companies must be able to explain decisions produced when using AI and ensure fair treatment of consumers.

For example, given the number of variables fed into a machine-learning environment, it’s hard to interpret how a result was derived. Further, deep learning and neural networks produce results their creators don’t even understand. These systems are able to sense patterns and results humans can’t.

We must proceed here with caution and have a common understanding of the decision-making process before implementation. At the same time, the NAIC is developing its own regtech, including investigating artificial intelligence and predictive analytics. We see great promise in these technologies to make regulation smarter and more efficient.

Regulatory Innovation

Just as insurers are benefitting from data analytics, State Ahead outlines new technology in business intelligence and data analytics to improve the efficiency and effectiveness for state insurance regulators. Enhancing financial analysis and examination tools to incorporate more powerful visualizations and drill-down capability is the initial step.

We see a future where regulators have access to point-in-time financial measurements in conjunction with data analytics to produce real-time – if not predictive – market insights.

The next phase includes building an analytics data warehouse to support machine learning functions and exploring AI disciplines. These developments will improve macroprudential surveillance activities for identifying financial stability concerns both to and from the insurance industry.

Cybersecurity

Insurance companies are particularly attractive targets for hackers, due to the amount and sensitivity of data they collect. To address this threat, the NAIC is advancing a number of initiatives to address cybersecurity from an industry and internal NAIC systems perspective. We are creating a Cybersecurity Insurance Institute to centralize our efforts.

In addition to being responsible for their own cybersecurity, insurers are also underwriting commercial cybersecurity policies. The global market for cyber insurance purchased by businesses is growing – and quickly. Cybersecurity insurance is a relatively new product and collecting information regarding its penetration is vital to understanding the new market.

Data Analytics

As data becomes cheaper and easier to obtain, insurers are increasing the use of analytical tools to assess risk and predict losses. In addition, companies are collecting nontraditional data to assist with ratemaking, underwriting, claim settlement and customer engagement.

Through predictive analytics, companies are using complex models for marketing and pricing and more deeply engaging policyholders throughout the life of insurance products. Examples include insurers sending alerts about severe weather and coaching consumers regarding health and lifestyle choices based on feedback from wearable devices.

When properly managed, data analysis can improve how an insurer does business and can benefit policyholders. Innovations allow insurers to price more accurately. However, regulators will verify companies aren’t using rating factors, either directly or as a proxy, violating laws or harming consumers.

Conclusion

State regulators welcome the positive potential that technology and innovation can have on consumers and companies alike, but we will be vigilant to ensure policyholders remain protected and companies manage their risk appropriately.

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