The swift development of AI has resulted in the increasing integration of AI technology in insurance claims management and insurance underwriting.
In certain cases, AI has been used by insurers to streamline administrative work to improve efficiency, especially for day-to-day claims handling. Insurers have also begun incorporating AI capabilities into other facets of the business, such as underwriting and the investigation of suspected fraud. As AI continues to impact how insurers are conducting business, various states are responding with regulatory frameworks to address purported risks.
Specifically, regulators have expressed concern that the use of data sets and the algorithms developed to process them in marketing, underwriting and claims handling may knowingly or unknowingly lead to systemic denials or discrimination and other disparate impacts to consumers. Accordingly, a patchwork of guidance has emerged, focused on governance, oversight and disclosure regarding the use of consumer data and AI technology.
As at the time of writing, four states, including California and New York, have issued their own regulatory guidance and 16 others have adopted the model regulatory framework issued by the National Association of Insurance Commissioners (NAIC) to address the growing implementation of AI in insurance practices.
While the various regulatory approaches have some notable differences, they share a common objective of mitigating the purported risk of unfair treatment to policyholders and consumers.
As the regulatory landscape concerning the use of AI by insurers evolves, there is an expected trend of class action lawsuits alleging unfair business practices or bad faith liability for insurers’ use of AI in areas such as underwriting and claims handling.
For insurers that have already integrated or plan to implement any form of AI technology or use of consumer data in their insurance practices, some suggested actions are as follows.
• Examine the requirements and suggestions of any applicable regulatory framework against already-existing policies and procedures concerning the use of consumer data and AI platforms to identify potential gaps in compliance.
• Review existing laws prohibiting discrimination in the context of insurance rate-making, claims handling, processing of insurance applications, and other insurance practices to ensure ongoing compliance.
• Where disclosures to policyholders and potential insureds are required, draft clear, concise and compliant disclosures concerning the use of AI technology and/or consumer data in insurance decisions.
• Maintain documentation relating to all aspects of the implementation of AI technology, including any assessments, testing, maintenance, monitoring and oversight of said programs.
• Adopt a mechanism for assessing the quality of data relied upon and performance of algorithms to identify any risk of systemic adverse decisions and outcomes.
• Consider retaining outside counsel to perform a comprehensive compliance review or to support compliant implementation at the outset, helping to mitigate future litigation risk and strengthening attorney-client privilege arguments.
