At a fast-paced Joint Industry Forum session called Insurance Vision: Seeing Beyond 2020, the subject of artificial intelligence (AI) was bound to come up. Insurers are leveraging AI and machine learning (ML) as part of the data-driven revolution transforming the industry.
Sixty-two percent of top 100 U.S. carriers say they have adopted AI and ML initiatives.
Session moderator David Sampson, President and CEO, American Property Casualty Insurance Association, asked about how U.S. regulators are likely to react as carriers add data analytics to pricing toolkits.
In response, V.J. Dowling, Managing Partner, Dowling and Partners, predicted that “one of the biggest topics of the next 10 years” will be regulatory focus on disparate impact as insurers introduce AI into underwriting and claims handling.
Disparate impact refers to the disproportionate impact of an insurance rate structure on the premiums paid by protected minority classes. Dowling explained that while personal lines insurers 30 years ago might have put customers into broad risk buckets to set a price for each, “technology and data has allowed the number of buckets to increase until, arguably, you get to a point where each individual person has their own price based on their specific characteristics. And what that means is, you get a much bigger dispersion of rates from high to low. The subsidization starts going away.”
Dowling recommended that everyone interested in the subject read this blog post by Lemonade CEO Daniel Schreiber. In the post, Schreiber says “algorithms we can’t understand can make insurance fairer.” Addressing regulators directly, he proposes a “uniform loss ratio test” for pricing outcomes.
To get an idea about how regulators are reacting to the increasing use of consumer data, Dowling points to this letter to life insurance companies from the New York State Department of Insurance.
“It basically says, you can do this, but if it has a disparate impact on the end result, you can’t do it. To me, there was a double negative. You effectively can’t do it,” he concluded.
Sampson asked the other panelist, Hayley Spink, head of global operations at Lloyd’s, to describe the hurdles insurers encountered to complying with the general data protection regulation (GDPR) that went into effect in 2018. GDPR governs how European Union companies handle, collect, and process personal data.
“Especially in our industry, we deal with personal data all the time and we share that personal data between ourselves and third parties, so this has had a big, big impact across the EU,” Spink said.
Insurers could face fines of up to €20 million for noncompliance with the GDPR. In the U.S., California and New York are working to implement similar consumer data privacy laws.
Turning to insurers’ innovative uses of technology, Spink spoke about the use of drones to assess damage after catastrophes and the use of parametric insurance to trigger payments of flood claims in the UK. Lloyd’s runs an innovation accelerator in which pioneering start-ups are partnered with mentors from managing agents across the market.
The panelists also discussed social inflation, third-party capital, and adapting to the skills and interests of the modern workforce.