I. Introduction
“Big data” has recently emerged as a topic of interest to the National Association of Insurance Commissioners (NAIC) and insurance regulators around the country.[1] The NAIC formed the Big Data (D) Working Group, which held its first meeting at the Spring 2016 National Meeting to address issues raised by the insurance industry’s use of big data.[2] During 2016, the NAIC took several actions to address the issue of “big data,” including attempting to develop a working definition of the term.[3] While there is currently no agreed-upon definition, the NAIC has stated that “the term refers generally to the use of large data sets to discern patterns or trends that can be used by insurers in a variety of ways, including to market, price and underwrite policies and prevent fraud.”[4] This regulatory update provides an overview of the activity that has taken place in recent months and provides a status of the current discussions of this issue.
II. Background and Activity at NAIC
In August 2015, the NAIC issued a white paper, “Big Data and Insurance,” drafted by Eric Nordman, Director of Regulatory Services and The Center for Insurance Policy and Research.[5] This white paper noted that the “Age of Big Data is upon us” as well as the disruptive effects it might have on the industry.[6] It also discussed the potential “amazing insights” that big data might provide the industry, if information systems were appropriately designed and the resulting data effectively stored,[7] and the topics of telematics, big data analytics vendors, the enterprise risk management process, and price optimization.[8] According to the white paper, big data is here to stay and has the potential to be a differentiator for insurers who use the data appropriately, although consumers are both cautious and concerned about how insurers are using big data to make decisions.[9]
In November 2016, the Market Regulation and Consumer Affairs (D) Committee (the “NAIC D Committee”) established its 2016 Charges, a yearly requirement for each NAIC Committee,[10] which include the following:
Explore insurers’ use of big data for claims, marketing, underwriting and pricing. Explore potential opportunities for regulatory use of big data to improve efficiency and effectiveness of market regulation. If appropriate, make recommendations no later than the 2016 Fall National Meeting for 2017 charges for the Committee to address any recommendations identified by the 2016 exploration.[11]
The Big Data (D) Working Group was formed to address that charge.[12] Its first order of business was to convene a public hearing on April 3, 2016, at the NAIC Spring National Meeting.[13] After the Working Group Chair, Oregon Insurance Commissioner Laura N. Cali, provided opening remarks,[14] Georgia State University Professor Harold Weston presented “Academic Perspective on the Use of Big Data in Insurance.”[15] Weston conceded that no universal definition of the term “big data” exists in academia, but provided perspectives on the sources of big data and the ethical considerations to keep in mind. Industry representatives from the American Insurance Association (AIA), Insurance Services Office, Inc., National Association of Mutual Insurance Companies, and Property Casualty Insurers Association of America next gave an industry perspective on the benefits and concerns raised by the use of big data.[16] The Working Group then heard from a panel of representatives on behalf of consumers, which included Birny Birnbaum, the Executive Director of The Center for Economic Justice.[17] The final panel consisted of representatives from the Missouri, Pennsylvania, and California Departments of Insurance who addressed how insurance regulators use big data to help them oversee the industry and discussed issues and concerns regarding the use of big data by the industry.[18] Commissioner Cali concluded the Public Hearing by noting that a follow-up call would be held to flesh out tasks for the Working Group.[19]
The Working Group next met in person in San Diego, at the NAIC 2016 Summer National Meeting,[20] where Birnbaum again spoke and expressed the need for regulatory oversight to address what he asserted was the insurers’ uncorrelated and biased use of data.[21] The Working Group also heard a presentation from a representative of TransUnion, who discussed the benefits to regulators and consumers of several insurance tools that TransUnion developed.[22] The Working Group also discussed defining big data, its potential charges for 2017, and its focus going forward.[23] On October 13 and 27, 2016, the Working Group held conference calls, with the main agenda item each time the establishment of the Working Group’s 2017 charges.[24]
III. Industry Opportunity and Challenges
Insurers have the opportunity to use big data in a number of areas of their operations, including underwriting, claims, and pricing. The challenge to the insurance industry will be to effectively manage the collection and storage of the vast amounts of data it acquires while making consumers comfortable with the manner in which the industry is using that data. Many insurers have claimed they have “cradle to grave” information regarding their customers, but many do not have the IT infrastructure to effectively analyze and mine that data. Collecting more data without appropriate analytical tools will not advance the industry’s interests.
An example of a tremendous opportunity for auto insurers in big data is telematics, which is defined as the use of technology that measures “the precise performance of the vehicle and individual driver” and results in “a premium calculated accordingly.”[25] The data gathered from telematics could be provided to drivers to assist them in improving their driving habits and potentially justify reductions in their insurance premiums. In addition, since 2008, all new automobiles are equipped with an event data recorder (EDR) that records information regarding the movements of the vehicle. Insurers’ use of the EDR data may reduce instances of fraud while, at the same time, providing better information to investigate accidents and determine fault. To date, insurers have not significantly availed themselves of EDR data.
VI. Conclusion
Big data is not a new concept to the insurance industry, but its potential to benefit the industry and consumers, and to assist regulators, has recently emerged as a topic of interest to the NAIC and state departments of insurance. Regulators continue to address how they review industry filings and data, and the industry continues to develop ways to use big data to seek a competitive advantage. Disruptors such as Lemonade and Metromile will continue to emerge, finding ways to utilize big data to better segment and price the market. The Working Group will continue to refine its definition of “big data” and determine what parameters and limitations it might recommend to the industry. Insurance companies will need to continue to monitor developments in the big data field and act to ensure that they can justify actions based on the big data they are collecting and analyzing, whether it is in underwriting or claims handling. 2017 likely will see further guidance from the Big Data (D) Working Group and state insurance regulators in the big data arena.