The New York Department of Financial Services (NYDFS) continued the steady drumbeat toward regulation of insurers’ use of Big Data on June 29, 2017, when it issued a Section 308 information request to all companies and fraternal benefit societies authorized to write life insurance in New York. Section 308 of the New York Insurance Law authorizes the NYDFS to require New York-licensed insurers to submit written special reports on any topics specified in the NYDFS information request.
The Section 308 request indicates that the NYDFS has become aware of insurers’ use of external data or information sources (i.e., not provided by the consumer) in the underwriting of life insurance policies. Examples of such external information include credit scores, purchasing habits, affiliations, home ownership records and educational attainment. The NYDFS letter notes that such data or information may be used to supplement traditional underwriting guidelines or as an alternative to physically invasive underwriting (e.g., paramedical examinations) as part of an accelerated or algorithmic underwriting program.
Companies that (i) do not offer an accelerated or algorithmic underwriting program and (ii) limit their use of external consumer data sources for supplemental medical underwriting to attending physician statements, prescription drug databases and MIB, motor vehicle and inspection reports may simply indicate as such in their response. For companies that do use accelerated/algorithmic underwriting programs or non-traditional sources of external consumer data, a series of eight detailed questions must be answered. These questions range from technical (providing the policy form numbers that are impacted) to operational (disclosing the “specific” external data being used and explaining “exactly” how it is used, including software input and weights assigned to the data) to the more consumer-focused (describing the disclosures provided to the applicant, recourse available to the applicant for adverse underwriting decisions and use of the data following the underwriting process).
The use of Big Data by insurers has become a key topic of interest for the regulatory community in the past couple of years, and it is drawing increasing regulatory attention from the National Association of Insurance Commissioners (NAIC). While certain regulators began to explore the issue in 2015 with respect to price optimization in the property and casualty (P&C) insurance industry, a uniform approach to examine the use of Big Data in insurance formally began to take shape with the NAIC’s creation of the Big Data Working Group in late 2016. While the charges assigned to the Big Data Working Group expressly contemplate an examination of the use of Big Data in both the P&C and the life sectors, the most recent conference calls of the group in June indicate that its focus will initially be on personal lines auto and homeowners insurance.
Notably, New York is not a member of the Big Data Working Group, so it is unclear whether the impetus behind the Section 308 request stems from New York’s disagreement with the group’s prioritization of the P&C industry’s use of Big Data over that of the life industry or simply a desire on the part of New York to get out in front of the NAIC in potentially reining in the nascent use of Big Data by life insurers that it finds to be inappropriate. In either event, regulators’ interest (be it that of the NAIC, New York or other individual states) in examining the implications of Big Data for the industry at large will continue to be a priority in the months and years to come.
Insurtech startups and incumbent life insurers alike will need to be mindful of this scrutiny by the NYDFS, as any restrictions that might be imposed by regulation could hinder some of their Big Data innovation efforts. Hopefully, the NYDFS will strike a balance between consumer protection and fostering innovation (which is a stated goal of the Big Data Working Group) in the event that the NYDFS seeks to impose any new regulatory restrictions based on the information gleaned from the industry’s responses to this Section 308 request.