More proxy discrimination state laws are on the way, panel agrees

Data privacy and proxy discrimination are far from settled issues for insurance companies.

Executives agreed during a risk appraisal forum at NAILBA 43 that future state-based regulations are sure to impact underwriting.

The entire insurance underwriting landscape changed with the introduction of big datasets, explained Dr. Thomas Ashley, senior vice president and chief medical director for Gen Re.

“Regulators were fine with risk assessment according to what they're now defining as traditional underwriting – medical, many non-medical things,” he said. “People could connect the dots fairly readily between multiple DUIs and higher risk of mortality, or a heart attack and a higher risk of mortality.”

“Big Data comes along, and now it's opaque. I have a high score, and that means that I’m paying a higher premium. Well, why is that? What's the connection? And there's no way to define the connection.”

High standard in Colorado

Colorado set a high standard for compliance with its 2021 law restricting what insurers can do with “external consumer data and information sources” in rating algorithms and predictive models. The law attempts to head of discrimination, particularly on race.

Insurers are required to develop a risk-based governance and risk management framework, including documentation, oversight and regular reviews.

“The regulations are still being formed, but it's clear that in Colorado, every insurer who writes policies in Colorado will have to submit a report showing their racial distribution results,” Ashley explained.

Many consumer advocates and regulators turned their attention to proxy discrimination during the summer 2020 following the murder of George Floyd by a Minneapolis police officer. Proxy discrimination occurs when a facially neutral trait is used as a stand-in for a prohibited trait.

Consumer advocates want to see greater protections for victims of proxy discrimination, or unintended “disparate outcomes” that can accompany the collection of personal data. For example, for decades some financial institutions used ZIP codes and neighborhood boundaries in place of race to avoid lending to neighborhoods that were predominantly African American.

“There's so many problems with this guessing at race, really simple problems,” Ashley said. “Like many women no longer have the name that's associated with their ancestry because they got married. Just things like that. If your zip code is 90% Black, the algorithm is going to say you're Black no matter what your name is.”

The National Association of Insurance Commissioners established a Special Committee on Race and Insurance after Floyd’s death, and it continues to meet regularly. Regulators also guidance for accelerated underwriting and use of artificial intelligence.

'It's too simple'

Life insurance companies are in a difficult spot in some respects, Ashley noted. Age discrimination is part of the product and life insurers wouldn’t make any money if they couldn’t charge older consumers more money. Likewise, Black Americans have a life expectancy of about 73 years, or four-and-a-half years less than whites.

“But it's too simple to say that Blacks have a higher mortality rate than whites, because there are a lot of things that go into that,” Ashley explained. “Blacks have higher rates of many diseases, and if you control for disease, and if you control for socioeconomic status, I think that there no longer is such a clear case that race, per se, affects mortality.”

On the heels of the Colorado legislation, the New York Department of Financial Services issued a circular letter to all state insurers in order to identify its expectations on the management and use of artificial intelligence systems and other predictive models in underwriting.

Absent a strong model regulation from the NAIC, states are likely to pursue different rules, which could create problems for insurers.

John Jonassen is senior vice president, chief underwriter and head of claims at Security Mutual Life Insurance Company of New York. As different states come out with regulations, “we'll just look at all the commonalities and address those,” he said. “Hopefully there'll be more commonalities than not.”

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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 [email protected]. Follow him on Twitter @INNJohnH.