New York is the first state to set specific guidance governing how life insurers use algorithms to comb through everything from homeownership records to credit scores and internet use in an effort to size up an applicant’s risk. At least a couple dozen insurers are employing these automated programs to speed up the buying process, facilitate online life-insurance issuance and boost stagnant policy sales.
The regulator’s goal, according to New York Financial Services Superintendent Maria T. Vullo, is to establish ground rules before the use of this information becomes more widespread.
“Because this is a rapidly evolving area in insurance underwriting, it was important for the department to create general principles now,” she said in an interview.
Under guidance released earlier this month, life insurers will have to use statistical and actuarial analysis to determine that any algorithms and data are free of bias against racial minorities and other groups protected by law. Insurers can’t accept an outside vendor’s claim that its process is fair, the department said.
The guidance applies to companies operating in New York, but industry consultants said it could have an impact beyond the state’s borders. New York has one of the largest insurance departments in the state-regulated industry. Regulators issue new guidance when they want to clarify how new developments affect existing laws.
“Everybody will pay attention,” said Tom Scales, a practice leader for life insurance at Celent, an insurance-technology research and advice firm that is part of Marsh & McLennan Co s.
Trade groups said they are studying the directive. Insurers would “continue to explore ways to help more Americans benefit from financial protection,” said Mary Griffin, president of the Life Insurance Council of New York. “Algorithmic underwriting can make it easier and quicker for people to get coverage in place.”
New York’s guidance follows an 18-month investigation in which regulators queried 160 life insurers about their practices. The department’s regulators found a range of data in use: homeownership records, credit information, educational attainment, civil judgments, licensures and other public filings.
Only one insurer out of the 160 said it was using social media, retail purchases or internet activities in underwriting, according to a person familiar with the department’s findings.
The department also learned that some vendors are pitching data to insurers that includes “condition or type of an applicant’s electronic devices” and “how the consumer appears in a photograph,” it said in material posted on its website.
“All have the potential to reflect disguised and illegal race-based underwriting,” the department said of the various categories of nontraditional data. New York insurance laws have long prohibited the use of race in underwriting.
Consultants said the use of social media in underwriting decisions is limited so far. “The data exists and is being collected, but the quality and the integrity of that data is not yet demonstrated to be accurate enough to be an underwriting input at this time,” said Ari Chester, a partner at McKinsey & Co.
Instead, many insurers are relying on a trove of public information. LexisNexis Risk Solutions said more than 30 insurers are using a model it developed that draws on motor-vehicle records; bankruptcy, criminal and other court documents; professional licenses; college-attendee records, property deeds and tax filings; liens and evictions and other records.
The tool doesn’t use anything from social media, said Elliott Wallace, a LexisNexis Risk Solutions vice president. LexisNexis, he added, is “comfortable with the department scrutinizing and looking at our models.”
Ms. Vullo’s department said information that is directly related to medical conditions—such as prescription-drug databases—is permissible, as are motor-vehicle reports and some criminal matters. Traffic fatalities are a leading cause of death for younger people.
Other regulators are also keeping an eye on developments with life insurers. The National Association of Insurance Commissioners, a standards-setting group for state insurance departments, has a “Big Data Working Group” that is in early stages of focusing on life insurers’ accelerated underwriting efforts, among other issues.