Colorado rule bars AI, data discrimination in life insurance

Colorado is leading the way on regulation around insurers’ use of data with its first rules requiring life carriers to ensure the use of third-party data in life insurance underwriting does not discriminate against protected groups.

The proposed data discrimination rule issued in February would impose limits on life carriers’ use of external consumer data and information sources, algorithms and predictive models to ensure it does not result in discriminatory insurance practices.

The insurance company association, The American Council of Life Insurers, contends the rules are unworkable and will not benefit consumers, said Brian Bayerle, ACLI senior actuary.

“At this point, the Colorado approach is extremely prescriptive,” Bayerle said in an email. “The granularity contemplated in the draft regulation appears unworkable and the types and amounts of information required will not lend itself to useful analysis. This will likely cool the ability of insurers to innovate on their own or with the contribution of third parties. It is difficult to discern any consumer benefits being derived from the extensive amounts of data that is contemplated for collection or the mandated governance and testing procedures.”

Consumer data guidance

Any carrier or insurance practice using consumer data besides traditional underwriting factors would have to ensure that they do not detrimentally affect any group defined by race, color, national or ethnic origin, religion, sex, sexual orientation, disability or gender expression.

Traditional factors are medical information that has a direct relationship to the mortality and longevity risk of the individual; and financial information such as income and assets that determine insurable interest, suitability and eligibility for coverage.

The rule defines “external consumer data and information sources” as information sources that supplement or supplant traditional underwriting factors. They include credit scores, social media habits, purchasing habits, home ownership, education, licensures, civil judgments, court records, occupation that does not have a direct relationship to longevity risk and any insurance risk scores derived by the insurer or third party.

In an analysis by global law firm Eversheds-Sutherland the rule “prohibits the Colorado insurance industry (which consists of most large national insurers) from using AI technology and big data to determine insurance coverage and price, marketing targets, and claims settlements if the machine learning results in unfair discrimination against protected classes.”

The rules are the first implementation of a Colorado 2021 law limiting the use of third-party data that fosters discrimination by proxy. The law directed the state insurance department to work with all stakeholders to develop rules to implement the law.

At that time, the Consumer Federation of America and Consumer Reports applauded the law’s passage as a “victory for fairness.”

In the proposed rule, companies would be required to set up a risk management framework that includes: creating a cross-disciplinary committee and teams for model governance; board and senior management oversight of model governance strategy; and policies and protocols addressing all aspects of model governance including purpose, strategy, design, development, testing, access, employee training and consumer inquires and complaints. According to Eversheds-Sutherland, the rule also “explicitly addresses consumer transparency, stating that an insurer must have policies in place to ensure consumers are provided sufficiently clear information to ‘take meaningful action in the event of an adverse decision.’ ”

Carriers will have to issue a status report on the framework and documentation within six months after the effective date and be in compliance within a year. Then carriers will need to report on the use of data, algorithms and predictive data and any changes to their framework every two years.

Other states' data discrimination rules

New York was the first state to set specific data discrimination guidance on life insurers’ use of “nontraditional” sources to set rates in 2019. The state’s financial and insurance regulator is allowing carriers to use the data but they must prove that the information does not unfairly discriminate again protected groups, according to The Wall Street Journal.

Last year, Connecticut adopted rules that insurers using nontraditional information and artificial intelligence ensure that it is not discriminating against protected groups, according to the law firm, Debevoise Plimpton.

“In the Notice, the Department raises concerns about the expanding role of Big Data in the insurance process and the potential that its use could result in unfair discrimination,” according to the firm’s article. “In light of those concerns, the Notice reminds all Licensees of their obligation to ensure that their use of Big Data and AI complies with applicable anti-discrimination laws and requires all Connecticut domestic insurers to complete an annual data certification.”

Carriers have to have an established process for using data and be able to provide to the state all data used to build models or algorithms for rates and underwriting.

Like Colorado, Connecticut is setting a wide tent for what it calls “big data,” including consumer intelligence, social media, credit and alternative credit information, retail purchase history, geographic location tracking and telematics, mobile, satellite, behavioral monitoring, according to the firm.

Unlike other reform efforts, Connecticut, the former capital of insurance, voiced some support for innovation, something that the ACLI stressed in the Colorado case. In its rule, the state said it supports carriers’ use of AI and the opportunities it presents to offer innovative products and services, along with increasing efficiency.

“The Department recognizes the potentially transformative and diverse nature of the utilization of Big Data,” according to the state notice. “Big Data is aiding insurers’ underwriting, rating, marketing, claim settlement practices, fraud, and every other facet of the insurance process life cycle.”

Correction: Quotes in a previous version of the article were incorrectly attributed to Jack Dolan, ACLI vice president of public affairs. The correct attribution for the quotes is Brian Bayerle, ACLI senior actuary.

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].

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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].