Regulators defend close relationships with industry

The world of insurance regulation is very insular. There isn’t a lot of media coverage, and rulemaking is shared by 50 insurance commissioners, plus representatives from the District of Columbia and U.S. territories.

It all creates an environment in which regulators craft rules in partnership with industry, a relationship that is a little too cozy for some critics. Significant issues like climate change and artificial intelligence are billion-dollar disruptions affecting the industry from end to end.

Consumer advocates point to the process behind creating the Model Bulletin on the Use of Artificial Intelligence Systems by Insurers, adopted by the NAIC in December 2023. While the model bulletin makes no rules for insurance companies, it remains the most significant AI regulation to make it out of the NAIC.

Critics say it is an example of how the industry regularly manipulates regulators to get the rules it wants.

The consumer group Public Citizen traveled to Minneapolis for the NAIC summer meeting in August. Members staged several protests and presented regulators with a petition with over 4,300 signatures calling for increased transparency, elimination of conflicts of interest, and closing the “revolving door” of commissioners joining the industry.

Public Citizen demanded that “every insurance commissioner adopt an Anti-Corruption Pledge that applies to all commissioners and their immediate families.” It called for a ban on gifts, meals, travel, campaign contributions, and job negotiations and offers while in office — and no lobbying for two years after leaving office.

Nobody signed the pledge, said Rick Morris, insurance campaigner with Public Citizen’s Climate Program.

“Regulators are supposed to stand for the public interest over corporate power,” Morris told InsuranceNewsNet. “But as climate change alters the risk landscape, it seems like they’re just handing the pen to the insurance industry to write the rules to suit the insurance industry’s bottom line. This goes well beyond simple regulatory capture. It’s regulatory surrender.”

‘A fundamental disagreement’

Kathleen Birrane chaired the NAIC Innovation, Cybersecurity, and Technology Committee. Her current DLA Piper law firm biography identifies her as “the primary author” of the AI model bulletin.

When discussions got serious, regulators had to get real, Birrane said in a recent interview.

“The practical reality is that we were not going to get a bulletin that would be adopted if we tackled areas like proxy discrimination and those hot-button issues,” she said. “That’s because there is a fundamental disagreement among regulators as to that concept. So, what we did was we developed a document that was a consensus document that would allow us to address a framework.”

The bulletin, Birrane stressed, is “not the last word, just the next word.”

Birny Birnbaum is executive director of the Center for Economic Justice. He pushed hardest for some type of AI regulation that addressed proxy discrimination — defined as the use of a neutral factor as a stand-in for a protected characteristic, such as race, gender or age — in a way that leads to discriminatory outcome.

Addressing proxy discrimination should be easy, Birnbaum said, because it represents both types of unfair discrimination in insurance: the actuarial basis and the protected class basis.

For example, if an insurer used criminal history or consumer credit in pricing or underwriting, the apparent relationship of those data to claims may be proxy discrimination or disparate impact. 

Birnbaum says the NAIC’s lack of progress on developing meaningful consumer protections and insurer guidance on AI rests with Birrane.

“She used her position to stop or bring them to a crawl on virtually every front,” Birnbaum said. “When the NAIC did produce a work product — like the model bulletin — it was devoid of any actual guidance. The key message in the model bulletin to insurers is ‘Obey the law.’ It’s hard to see why it took years for the NAIC to develop so-called guidance that tells insurers what they already know but fails to tell them how to do it.”

Birnbaum noted that Birrane went from DLA Piper to four years as commissioner and back to DLA Piper, where she is a partner and “serves as the firm’s U.S. Insurance Regulatory Practice leader.”

And the NAIC still hasn’t addressed proxy discrimination in insurers’ use of big data or AI, Birnbaum noted.

An important objective at the time was to “put a stake in the ground,” Birrane explained, and show the industry and the federal government that state regulators were on top of AI. She has frequently said that the bulletin is not the end.

“There are next logical steps about having the NAIC develop a more granular regulatory framework,” she said. “They did some of that … with respect to accelerated underwriting last year, in providing a bit more detail about what a responsible program looks like.”

‘I already had a great practice’

Otherwise, Birrane dismisses critics who cite her as an example of a commissioner cozying up to industry. She was appointed by Republican Gov. Larry Hogan in May 2020 and asked to stay on by Democratic Gov. Wes Moore after he took office in January 2023.

“I stayed two years longer than I had been planning to … because I felt really passionate about the work we were doing,” Birrane said.

Her father, Edward J. Birrane Jr., was Maryland’s insurance commissioner from 1976 to 1982. Kathleen Birrane previously served as counsel for the insurance department and had a familiarity with insurance regulation.

“I didn’t go to become the insurance commissioner because I was looking for a gig that would enhance my practice,” she said. “I already had a great practice.”

The NAIC does have a conflict-of-interest policy, but it is silent on regulators leaving public service to immediately lobby their former colleagues. Repeated attempts to speak with NAIC President Jon Godfread, North Dakota insurance commissioner, about the Public Citizen protest and conflict-of-interest issues were unsuccessful.

The NAIC sent this statement instead:

“Every state insurance regulator operates under the ethical and constitutional statutes established by the state in which they serve. In addition, as a member organization, the NAIC has a longstanding conflict of interest policy that applies to the organization, its events and activities. This framework ensures that regulators, whether elected or appointed, are subject not only to the governing laws of their respective states, but also to the commitment of the NAIC to uphold the highest standards of transparency and integrity.”

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.