Colorado Law Bars Insurance Discrimination By Data

By Steven A. Morelli

Colorado has a new law prohibiting insurance companies from disproportionately harming people based on race, sex, sexual orientation or gender identity, although it does not directly bar the use of credit histories and other data in setting individual rates.

The law tackles the issue of discrimination by proxy, when third-party data that is used to set rates also disproportionately affects particular groups adversely. It requires that insurers to demonstrate that their use of external data and algorithms do not discriminate against protected classes.

SB 169 requires that insurance companies not discriminate against protected classes in the “marketing, underwriting, pricing, utilization management, reimbursement methodologies, and claims management in the transaction of insurance.” Carriers are required to change practices when unfair discrimination results from algorithms, models or the use of external data sources.

'A Victory For Fairness'

The law also instructs the insurance commissioner to conduct a process with input from companies and consumers to adopt rules to ensure that insurers’ use of data and models does not result in harmful discrimination, while giving companies the opportunity to mitigate any biases in their algorithms, according to the Consumer Federation of America, which along with Consumer Reports applauded the law’s passage.

“This is a victory for fairness in insurance markets,” said Douglas Heller, CFA’s Insurance Expert. “Insurers hide behind their algorithms and a hollow promise that they never consider a customer’s race, but their data sources and models can perpetuate and entrench structural racism and other forms of unfair discrimination. This law takes direct aim at insurance practices that have unfair and illegal outcomes, irrespective of the intention behind the practice.”

Although the issue affects all lines of insurance, most of the attention over the past few decades has been focused on auto insurance. The Consumer Federation helped spotlight the issue with a study in 2015 that looked at the non-driving data that it said carriers use to set auto rates -- credit history, ZIP code, gender, education, occupation, homeownership status and marital status.

Using data from Quadrant Information Services, the federation found that those factors tend to have “a disproportionate impact on people of color or other protected classes, and perpetuate systemic biases.”

The review found that:

• A driver with excellent credit pays an average annual premium of $592.11 for basic auto insurance coverage.
• If that driver has fair credit, their premium rises to $785.67, a 33% difference.
• If that driver has poor credit, they see the average annual premium increase by 72% to $1,019.59 for the same coverage, even if they have a perfect driving record.

Michael DeLong, research and advocacy associate for CFA’s Campaign for Fair Auto Insurance, said the federation expects the Colorado Division of Insurance to begin the process of stakeholder engagement to develop rules, aimed at addressing unfair discrimination, which he said will likely mean hearings and opportunities for comments that the CFA will to participate in.

“In the meantime, we are hopeful that other regulators and lawmakers are paying attention to what is going on in Colorado, and will be looking at this new law as a possible model for reform,” DeLong said.

An Emerging Issue

The discrimination by proxy issue gained more traction during last year’s anti-racism protests and national awareness on discrimination. Another factor is the recognition that artificial intelligence can accelerate implicit biases in opaque processes, which extend far beyond auto insurance.

Last summer, the National Association of Insurance Commissioners adopted principles for artificial intelligence that Colorado’s law seemed to follow. According to the analysts Faegre Drinker, the principles require carriers using AI to:

• Take proactive steps to avoid proxy discrimination against protected classes.
• Monitor the operation of its AI system and remediate harmful, unintended consequences.
• Provide responsible disclosures and give consumers an opportunity to inquire about and seek review of AI-driven decisions.
• Take a risk management approach to each phase of the AI system's life cycle.

The American Council of Life Insurers acknowledged the issue at that time and folded those concerns into the association’s objectives late last year. ACLI CEO Susan Neely was definitive about the industry’s commitment to the issue.

“Our belief is that our underwriting practices should not discriminate either directly or indirectly, period,” Neely said. “We support a regulatory framework that eliminates any potential proxy discrimination, direct or indirect, in the delivery of life insurance to the consumer,” she said. “That's our stated position. We are not being mealy-mouthed about that.”

Contacted on Monday, Leah Walters, senior vice president, state relations for ACLI, offered the following statement on the bill:

“It is a significant improvement over its original version, which could have negatively impacted people and families in need of life insurance protection by restricting life insurer access to essential information used in the underwriting process. Depriving life insurers of complete access to an applicants’ medical record and other relevant information to assess risk could prevent life insurers from properly pricing coverage. It could turn an affordable product into an unaffordable one for many, especially middle and lower-income Coloradans.

“Regulations must be developed to implement the legislation. ACLI will be actively engaged to ensure they do not harm the very people the new law is intended to benefit. Life insurers are promoting economic empowerment and racial equality. We need to retain the tools that assist in these initiatives.”

The Independent Insurance Agents and Brokers of America, a property-casualty agents’ association, did not return requests for comment on the Colorado law.

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].