GAO Identifies Challenges, Risks of “Insurtech”

The Government Accountability Office (GAO) released a report today that examines challenges and potential risks for consumers and regulators of insurance company technology, or insurtech, as insurance companies have begun to leverage artificial intelligence (AI), mobile applications, big data, and other technologies into their services.

GAO found that as of mid-2018, there were more than 1,000 insurtech firms in over 60 countries, with more than half of those launched in the United States since 2008. While GAO said that insurtech can potentially improve customer experiences and lower insurer costs, the office indicated that data collection, licensing, and compliance with regulation are difficulties insurtech firms should keep in mind.

Insurtech insurers have, for instance, used AI and big data to underwrite models for determining premium rates, but that AI could also make it challenging for insurers to ensure that regulatory factors, such as race, are not used in their models.

“Data scientists who develop rating models may not fully understand insurance-specific requirements, such as setting premium rates that are not unfairly discriminatory, and may struggle to measure the impact of new variables used in the models,” GAO said. “Furthermore, data scientists may be unfamiliar with insurance rules and regulations and may not understand how to communicate their work to state insurance regulators.”

When insurers use AI to collect and use consumer data, they can also face complications in “collecting consumer data in large quantities and from multiple disparate sources, including social media,” making it hard for insurers to validate that data.

Licensing is another challenge insurtechs face, since some sell coverage through non-admitted insurers – which are not required to have a license in each state in which they sell insurance and receive less regulatory oversight of their policies and rates.

“An industry representative said the nonadmitted market is not appropriate for most consumer products because of the lower consumer protections as compared with the admitted market,” GAO said.

Although GAO did not issue any recommendations in the report, it cited actions the National Association of Insurance Commissioners (NAIC) and state regulators have taken to address the identified challenges. NAIC created an Innovation and Technology Task Force, for instance, to tackle discuss technology in the insurance industry and educate regulators on how technology might affect consumer protection and privacy.

Furthermore, the European Union (EU)-U.S. Insurance Dialogue project started discussing challenges and opportunities relating to cyber risks, use of big data, and AI in November 2018, “which will help ensure effective coordinated supervision of cross-border insurance groups for the benefit of the policyholders.

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