7 states adopt AI rules; insurer compliance called ‘significant lift’

Seven states are on board with guidelines for use of artificial intelligence that insurers “are expected” to follow.

Adopted by the National Association of Insurance Commissioners and sent to the states in December, the AI framework is an initial regulatory effort to gain oversight over the rapidly evolving technology.

Momentum for AI regulation in the insurance sector “is definitely growing,” said Mary Jane Wilson-Bilik, partner at the law firm Eversheds Sutherland.

The NAIC Model Bulletin on the Use of Artificial Intelligence Systems by Insurers is in place in Alaska, Connecticut, New Hampshire, Illinois, Vermont, Nevada, and Rhode Island. Other states are expected to follow in the coming weeks and months.

The bulletin states that insurers “are expected” to develop, implement and maintain a written program for the responsible use of AI systems, Wilson-Bilik explained.

“It sets out guidelines for the contents of that program that includes governance, risk management and internal controls, and controls regarding the acquisition and/or use of third-party AI systems and data,” she added.

While consumer advocates urged the NAIC to go further to regulate AI, legal observers say the bulletin's requirements will keep insurers busy.

"Complying with the NAIC bulletin will entail a significant lift for most insurers," said Scott Kosnoff, insurance partner and co-leader of Faegre Drinker’s Artificial Intelligence, Algorithmic Decision-Making and Big Data team. "It’s not the sort of thing you can knock out over a three-day weekend."

Not all states are following the NAIC model. California, Colorado, and New York each took different approaches:

California: In June 2022, California regulators issued a bulletin that broadly addresses allegations of racial bias and unfair discrimination in marketing, rating, and claims practices by the insurance industry, the law firm Locke Lord noted.

Colorado: The state is out front on AI regulation, passing a bill regulating life insurers’ use of algorithms and predictive models, while separate regulations covering private passenger auto and health insurance are planned.

New York: In January, New York regulators issued a circular letter seeking comment on use of AI by insurers. Regulators focus on underwriting and pricing, warning of the risk of “unfair adverse” effects stemming from the use of AI and external consumer data and information sources.

Potential for unfair discrimination

Consumer advocates are particularly concerned that AI modeling could generate unintentional discrimination through use of big data to plot insurance strategies.

For example, a 2017 study by Consumer Reports and ProPublica found disparities in auto insurance prices between minority and white neighborhoods that could not be explained by risk alone.

In August 2020, the NAIC adopted guiding principles on artificial intelligence after robust discussions. Regulators added language encouraging insurers to take proactive steps to avoid proxy discrimination against protected classes when using AI platforms.

"The NAIC bulletin instructs insurers to look to the 2020 principles as an appropriate source of guidance as they develop and use AI systems," Wilson-Bilik said. "While not explicitly discussed in the model bulletin, one can infer that regulators expects insurers to review the outputs of their AI systems for unfair proxy discrimination against protected classes."

Insurers are vulnerable to litigation and may welcome regulatory guardrails, legal analysts say. For example, Cigna faces a California lawsuit alleging the insurer used a computer algorithm to automatically reject hundreds of thousands of patient claims without examining them individually as required by state law.

"Unfortunately, insurers that use AI are going to be subject to some amount of regulatory, litigation and reputational risk," Kosnoff said. "To mitigate that risk, insurers should strive to have a good story to tell – one that demonstrates to regulators and other stakeholders that the insurer understands the concerns that have been raised about AI, takes those concerns seriously and is acting with reasonable care to try to avoid negative outcomes."

Insurers hope for a consistent standard

A common complaint from insurers is the state-based system of insurance regulation often leads to a "patchwork" of differing standards from state to state. In particular, among high-value states such as liberal New York and conservative Texas.

But despite efforts in New York and Colorado to deviate from the NAIC on AI regulations, legal analysts say a common standard governing AI use is possible. Even probable.

"Absent federal legislation, uniform regulation on AI use by insurers is unlikely, but widespread adoption of the NAIC bulletin would establish consistent expectations in the adopting states," Kosnoff said. "As a practical matter, implementing a thoughtful and credible AI governance/risk management framework should give insurers a good start toward satisfying most of the competing regulatory and legislative proposals."

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.