select
This is a tooltip for the edit command button
Fred E. Karlinsky, Esq.
GREENBERG TRAURIG, P.A.
(954) 768-8278
Christian Brito, Esq.
GREENBERG, TRAURIG, P.A.
(954) 768-8279
Timothy F. Stanfield, Esq.
GREENBERG TRAURIG, P.A.
(850) 425-8547

BALANCING INNOVATION AND REGULATION IN AN INSURANCE MARKET DRIVEN BY ARTIFICIAL INTELLIGENCE

Artificial intelligence (AI) is revolutionizing all industries, and the insurance sector is no exception.  With AI's immense potential for improving efficiency, reducing costs, and enhancing customer experience, insurance companies are increasingly infusing AI technology in their processes.  However, as AI becomes more prevalent in the industry, regulators face the challenge of ensuring that AI remains appropriately governed and regulated to protect consumers and maintain market stability.  Unraveling the complexities and shedding light on the key aspects of AI driven transformations helps to shape the insurance industry and allows insurers to keep pace in this ever-evolving landscape.

The adoption of AI in the insurance industry has revolutionized how insurers operate and serve their customers.  According to a report published by Precedence Research, the value of AI in the global insurance market was estimated at 4.59 billion (USD) in 2022.  Precedence’s projections indicate the market will be worth 79.86 billion (USD) by 2032, growing at a compound annual growth rate (CAGR) of 33.06%, with North America projected to dominate the market during the forecast period.  Simply put, the projected growth is fueled by AI’s capabilities to analyze data, including historical data to make inferences about the future, perform tasks, and generate insights.  With AI-powered automation, insurers can streamline complex tasks such as underwriting, claims processing, and risk assessment.

Moreover, AI enables insurers to gain valuable insights from vast amounts of data.  By leveraging machine learning algorithms, insurers can analyze historical data patterns, customer behavior, and market trends to make data-driven decisions and enables insurers to develop more tailored insurance products, pricing models, and risk mitigation strategies.  Also, AI-powered chatbots and virtual assistants have revolutionized customer service in the insurance industry.  These intelligent systems can provide instant support, answer customer queries, and guide them through policy purchases and claims processes.  Another significant benefit of AI adoption in insurance is the improved fraud detection capabilities.  AI algorithms can detect unusual patterns, anomalies, and suspicious activities to help insurers effectively identify and mitigate fraudulent claims.  AI also contributes to better risk assessment and pricing accuracy.  Through analyzing extensive data sources, including social media, IoT devices and external databases, insurers can gain a deeper understanding of individual risks and accurately price ultra-personalized policies.

As the insurance industry continues to embrace technological advancements and AI integration becomes more prevalent, the use of AI also presents risks and challenges that insurers must not ignore.  One of the main concerns surrounding AI in the insurance industry is the potential for bias.  AI algorithms are trained on historical data, which may inadvertently contain biases.  These biases, if they go unchecked, can lead to discriminatory practices in underwriting and pricing decisions.  Regulations will focus on ensuring that the AI systems used by insurers are fair and unbiased.  AI algorithms, particularly those driven by deep learning, can be complex and difficult to interpret.  This opacity raises concerns about accountability and the ability to explain the rationale behind AI-driven decisions.  Regulators are working towards establishing guidelines or standards that require insurers to provide transparency in their AI models and decision-making processes.  Data security and privacy are among the most significant concerns in the AI era.  Insurers also collect and store vast amounts of sensitive customer data, which is crucial for training AI algorithms.  However, this data is oft targeted by cybercriminals, leading to breaches and the potential for data misuse.  Insurers must have robust data protection measures in place to safeguard customer information, work to prevent unauthorized access, and stage protocols for breaches.

The rapid pace of technological advancements and the complexity of AI systems pose challenges for regulators to ensure that fair and ethical practices are used.  In the pursuit of establishing the configuration for a control environment, governmental bodies and regulatory authorities encounter the challenge of disparate and frequently inharmonious approaches.  Consequently, insurance organizations face obstacles to effectively navigate through these discrepancies, thereby fostering significant levels of uncertainty.

On July 4, 2023, the European Parliament gave its seal of approval to two laws: the Digital Markets Act and Digital Services Act.  The Digital Markets Act focuses on anti-competitive behavior and is expected to enter into force in the coming months.  The regulation aims to establish explicit guidelines for major platforms, outlining prohibited, and recommended actions to prevent them from enforcing unjust terms upon both businesses and consumers.  Examples of these practices include prioritizing the gatekeeper's own services and products over comparable ones from external parties on the platform and denying users the option to remove any preinstalled software.  Comparatively, the Digital Services Act addresses content considered illegal in Europe.  The Digital Services Act aims to create a secure and safe online environment for everyone by implementing a framework that restricts the dissemination of illicit content on the Internet.  In extreme cases, the aforementioned laws carry significant weight, as they can impose fines on noncompliant companies of up to 20% of their annual worldwide revenue.  Together, the Digital Markets Act and Digital Services Act represent the most extensive efforts in the Western world to control technology companies.  The approval of sweeping digital regulations by European Union lawmakers sets the stage for potential confrontations between regulators and major tech giants regarding the implementation of these rules. These laws further the European Union's ambition to assume a leading role in global technology regulation.

Although global AI implementation continues to expand steadily, there is currently no all-encompassing United States federal legislation established regarding AI.  Instead, the United States relies on a patchwork of different existing and potential AI regulatory frameworks.  On October 30, 2023, President Biden issued an Executive Order "to ensure that America leads the way in seizing the promise and managing the risks of artificial intelligence."  The Executive Order introduces novel guidelines aiming to safeguard the privacy of American citizens, propel fairness and equal rights, champion the interests of consumers and workers, foster innovation and competition, and propel American leadership on the global stage.

Due to a lack of federal action, during the 2023 legislative session, there was a notable increase in the number of AI laws introduced within the various states.  Numerous states suggested the creation of task forces to examine the impacts of AI, while others raised apprehensions regarding AI's influence on areas such as healthcare, insurance, and employment.  Notable active legislation in the United States includes: Connecticut's AI Bill S 1103 and Colorado’s Senate Bill 21-169, which resulted in the enactment of Colorado Insurance Regulation 10-1-1.  Connecticut’s bill provides government oversight regarding responsible use of AI.  Beginning on February 1, 2024, as mandated by the bill, the Connecticut Department of Administrative Services must initiate an inventory of all artificial intelligence systems currently utilized by state agencies.  Regular assessments of these AI systems must be conducted to ensure compliance with anti-discrimination laws and to prevent any form of disproportionate impact.  Connecticut’s bill also stipulates that the Office of Policy and Management is responsible for establishing comprehensive policies and procedures governing the entire life cycle of AI systems within state agencies, including development, procurement, implementation, utilization, and ongoing assessment.  Further, Colorado’s Senate Bill 21-169 resulted in a regulation on the use of consumer data and algorithms and machine learning by life insurance companies.  The regulation, effective on November 14, 2023, aims to address biases in using consumer data in various types of algorithmic models and machine learning processes.  The regulation monitors the use of algorithms and data in general “insurance practices,” which includes “marketing, underwriting, pricing, utilization management, reimbursement methodologies, and claims management in the transaction of insurance.”

The National Association of Insurance Commissioners (NAIC) has also acted in regard to AI.  As a way to keep up with technological advancements in the industry, the NAIC created the Innovation Cybersecurity and Technology (H) Committee.  Lately, like the various states, the H Committee turned their focus to regulating AI.  In an effort to address AI in a uniform manner, the H Committee drafted a model bulletin on AI, algorithms, and AI systems.  Adopted on December 4th, 2023, the bulletin offers guidance to insurance departments on regulating the use of AI by insurers.

Regulatory bodies are collaborating with industry experts and stakeholders to develop best practices and standards for AI adoption in insurance.  In particular, regulators are targeting the insurers ability to explain their algorithms and those algorithms interpretations.  Insurers must be able to explain how AI algorithms arrive at their decisions, especially in cases where such decisions significantly impact policyholders.  This ensures that customers have a clear understanding of how their insurance premiums are calculated and have the opportunity to identify any potential disparities or biases in the process.  Striking the right balance between encouraging innovation and safeguarding consumer interests is paramount.  To do so, regulators should collaborate with industry players, technology experts, and legal professionals to establish comprehensive regulations and guidelines that protect consumers while fostering AI-driven advancements in the insurance industry.

In conclusion, the current regulations and guidelines for AI in the insurance industry primarily revolve around data protection, transparency, fairness, and accountability.  Insurers must stay proactive and responsive to the evolving technology and its impact on the industry. Understanding the intricacies of AI, addressing biases, safeguarding data privacy and security, and fostering collaboration are key considerations for the insurance sector and regulators alike. A collaborative approach will enable regulatory bodies to keep up with emerging AI trends and assist in the design of effective regulations. By striking the right balance between innovation and regulation, insurers and regulators alike can harness the potential of AI to improve the products and experience for the consumer.

References