AI is here, but who will regulate it?

Insurance companies are a full go on incorporating artificial intelligence into everything they do. Behind the scenes, however, there is uncertainty over the scope of AI regulations and who will be writing them.

Surveys by the National Association of Insurance Commissioners revealed high current or planned AI usage across various sectors: health insurers, 92%; auto insurers, 88%; home insurers, 70%; life insurers, 58%.

More than 90% of insurance executives identified AI as a top strategic initiative going forward.

In short, AI is here and it is a powerful tool that is changing the insurance industry from beginning to end. That comes with questions about privacy rights, potential discrimination and other possible misuses in need of regulatory oversight.

The NAIC has been slow to meet the AI challenge, consumer representatives say. In December 2023, the NAIC adopted the Model Bulletin on the Use of Algorithms, Predictive Models and Artificial Intelligence Systems by Insurers.

The bulletin carries no authority and “will be effective in any particular state only if it is adopted by that state and would apply to any insurer holding a certificate of authority to do business in the state,” the law firm BakerHostetler explained in a blog post.

“[I]nsurers are expected to develop and maintain a written program for the responsible use of AI systems,” the law firm wrote. “The model bulletin also encourages insurers to use verification and testing methods ‘to identify errors and bias’ and the potential for unfair discrimination in predictive models and other AI systems.”

Evaluation tool pilot

While some NAIC regulators preach caution on moving ahead with a full-fledged AI model law, the Big Data and Artificial Intelligence Working Group is moving forward with an AI evaluation tool for insurers.

The AI Systems Evaluation Tool is a risk-based framework with questionnaires and checklists designed for state insurance regulators to assess how insurers use AI, focusing on financial stability and consumer protection.

The working group proposed the AI evaluation tool over the summer. Regulators are not required to use it, but it is another option when performing market conduct exams, Iowa Insurance Commissioner Doug Ommen said during a fall meeting.

Regulators are committed to kicking off a pilot program in 2026 to test the tool. Ten insurance companies are set to participate in the pilot, Ommen said.

The structure of the pilot was still under discussion when this issue went to press. But it will be followed by an evaluation period to help refine the AI Systems Evaluation Tool, Ommen said during a December meeting.

“At the conclusion of the pilot period, we’ll then hear from the pilot group and consider lessons learned from this tool and consider refinements,” he said. “It’s important to understand that the pilot itself will be very instructive.”

The Feds want control

Federal interest in AI poses a challenge to NAIC’s initiatives.

On Dec. 11, President Donald Trump signed an executive order titled “Ensuring a National Policy Framework for Artificial Intelligence,” which aims to promote “United States leadership in Artificial Intelligence” by preempting state AI laws and regulations.

The Trump EO is a deregulatory move with a view “that state-level safety, bias-
mitigation, and transparency requirements risk imposing ideologically driven constraints on AI outputs and hamstringing the innovation needed for the United States to win the AI race,” the law firm Gibson Dunn concluded in a client alert.

The EO explicitly calls out Colorado’s AI Act as an example of a problematic state law, the law firm noted.

Colorado’s AI regulation for the insurance industry aims to prevent unfair discrimination based on protected classes when using AI, algorithms and external consumer data. It is considered one of the toughest and most comprehensive laws to date.

Trump’s order “directs the Attorney General to establish an AI Litigation Task Force . . . whose sole responsibility shall be to challenge State AI laws.”

State insurance regulators are adamant that they alone regulate the insurance industry. Many were not shy about issuing rare criticism of the Trump administration on the AI order.

“[W]e are greatly disturbed with the recently signed Executive Order that aims to limit the ability of States to regulate artificial intelligence,” the National Council of Insurance Legislators said in a statement. “[I]t’s vital that state legislators have the ability to develop policy that protects our constituents. Those constituents have been steadfast in asking for safeguards against the current unknowns surrounding AI, and it’s important that they not be deprived of state-based policy solutions.”

NCOIL comprises state legislators who serve on insurance committees within their state legislative body. In May, the organization spoke out when a proposed 10-year moratorium on state authority over AI was being considered by Congress.

‘Unintended consequences’

The NAIC was more direct, stating that Trump’s executive order “creates significant unintended consequences.”

“This could implicate routine analytical tools insurers use every day and prevent regulators from addressing risks in areas like rate setting, underwriting, and claims processing—even when no true AI is involved,” the NAIC statement said.

The EO “could disrupt well-established processes that ensure fairness and transparency in insurance markets and safeguard consumers from unfair or discriminatory practices. It introduces legal uncertainty, which may weaken the insurance market by delaying business decisions, deterring investment, and postponing essential consumer protections,” the statement continued.

Gibson Dunn takes a dim view of the EO’s chances of superseding state authority over AI.

“[T]he likely bases that the DOJ would have to challenge state AI laws are those stated in the EO: preemption or unconstitutional regulation of interstate commerce,” Gibson Dunn writes. “Neither would likely succeed.” 

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.