United States: A Look At The Impact And Insurance Regulatory Challenges Of InsurTech Innovations, AI, Machine Learning, Blockchain, And Smart Contracts

Last Updated: March 28 2019
Article by Robert M. Fettman

Hogan Lovells counsel Robert Fettman discusses the challenges and opportunities that InsurTech innovations and technologies like blockchain, distributed ledger technology (DLT), and smart contracts present to the U.S. insurance industry.

What are some of the potential insurance regulatory issues implicated generally by InsurTech? 

Fettman: The last several years have seen a new crop of digital products and services enter the lexicon of the insurance industry such as: usage-based insurance, peer-to-peer insurance, machine learning, robo-advisory, and the emerging phenomenon known as the Internet of Things, to name just a few. InsurTech has permeated virtually every aspect of insurance, from customer service, products, underwriting, and pricing, to marketing and distribution.

On the marketing and distribution front, the InsurTech industry has been grappling with questions like: do digital marketing and advertising activities trigger insurance producer licensing requirements, does the provision of value added services to insureds or potential insureds implicate states' anti-rebating laws, and how can an entity be compensated for insurance referrals without being subject to insurance regulation? We have seen companies offering a digital platform allowing developers and businesses to integrate insurance services directly into their websites or apps (so-called Application Programming Interfaces, or APIs) having to navigate these issues following several high-profile regulatory actions. 

According to a 2018 survey by IBM, more than 50 percent of InsurTechs use AI and machine learning. The ability of AI and machine learning to analyze data at a very granular level has regulators concerned about various consumer protection issues such as data privacy, fairness, discrimination, and cybersecurity. For one thing, algorithms may use geographical data or other individual attributes, creating outcomes that implicitly correlate with sensitive characteristics such as race, religion, gender, etc., which insurance laws generally prohibit in the sale of insurance. In addition, while deployment of machine learning to price risk could help insurers reduce the degree of moral hazard and adverse selection inherent in selling insurance broadly, regulators worry that the increased tailoring of risk and issuance of highly customizable policies reflecting the unique characteristics of each insured could undermine the risk pooling function of insurance and lead to large groups of people or risks becoming uninsurable in the private insurance marketplace. 

InsurTech firms getting involved in underwriting and pricing must appreciate the insurance regulatory landscape governing product development or risk potentially running afoul of various insurance regulations. A company that has a model that impacts rate filings, for example, may be acting as an advisory or rating organization and may require licensure under state insurance laws. And even where state law is unclear whether licensing requirements extend to such firms, we have seen regulators insist on some degree of oversight or review of third-party data providers and telematics as a condition to approving the utilizing insurer's policy rate filings. 

Regulators are also now scrutinizing anti-competitive issues with vendors supplying similar data and models to multiple insurers as well as whether the use of nontraditional data sources may be a proxy for prohibited discriminatory factors in the sale of insurance. New York, for example, recently issued guidance to life insurers regarding the use of unconventional sources of external data, citing the duel risk of unlawful discrimination and a lack of data transparency. At the same time, the National Association of Insurance Commissioners (NAIC) is working on developing best practices for regulators reviewing insurance company filings containing predictive models, with the current draft setting out 16 best practices and 92 pieces of information a regulator should be scrutinizing.

As computing power grows exponentially, it has opened the insurance actuarial modeling world to new and sophisticated forms of data collection and analysis, including data mining, statistical modeling, and machine learning. These evolving techniques have made it increasingly challenging for insurance regulators to evaluate filed rating plans that incorporate complex predictive models. To address this issue, insurance regulators, through the NAIC, are considering various methods of field testing such technologies in a controlled environment similar to the "sandbox" concept adopted in the UK and other countries. Several U.S. states, including Connecticut, Arizona, and a handful of others, have indicated they believe their insurance laws contain sufficient flexibility to permit the issuance of regulatory variances and waivers (e.g., no-action letters) to InsurTech firms seeking to test new products without fear of regulatory action, and have encouraged firms to come talk to them. In our experience, InsurTech firms that partner with receptive insurance regulators early in the developmental stage of their products or services are the ones most likely to find success in the highly regulated marketplace of insurance. 

What are some of the regulatory issues that might arise from the use of blockchain technology in insurance?

Fettman: Blockchain, as a form of distributed ledger technology, provides multiple parties with access to the same information at the same time and allows for the transfer of information, and possibly assets, among the participants. Many see tremendous potential for this technology in the insurance industry. Although for now, people see the greatest value in its ability to bring efficiencies and cost savings to existing processes in the industry — rather than seeing it as a disruptive force in the development and distribution of insurance products. 

Use cases of blockchain adoption by the insurance industry are still very much in the exploratory stage. A logical starting point for insurance companies looking to leverage the benefits of blockchain is the efficiencies that the technology could deliver to the oftentimes consuming and costly methodologies associated with data management and claims administration. The opportunity for insurers to streamline such internal processes is highly attractive to the industry.

However, there are a number of features inherent to blockchain that may be inconsistent with, or at best, ambiguous under, current state insurance laws. In many cases, these laws were written decades ago, before the advent of most of today's technologies. 

As with any new mode of data storage, regulators want to ensure that policy information and personal customer data residing on a blockchain complies with existing privacy and data protection regulations. State insurance laws generally require an insurer's books and records to be maintained in the particular state and be available to the regulator for inspection and audit. Can these requirements be satisfied by providing regulators with a node on the blockchain? Time will tell, but discussions with regulators have been encouraging.

What is the potential for smart contracts in the insurance industry?

Fettman: A smart contract is essentially software that checks for specified transactions in the network and automatically executes certain actions conditional on certain prespecified conditions being met.

Smart contracts offer great promise to the insurance industry. For insureds it could remove the pain points in navigating the frequently time consuming claims filing process, while insurers see the potential for significant saving in claims handling expenses. A good example of smart contracts' potential is a relatively new product designed as a fully automated flight delay insurance policy that runs on a blockchain. It allows customers to receive a payout as soon as they arrive at their destination following a delay that exceeds a certain length of time. The process is fully automated, with a smart contract deciding whether customers are eligible for indemnification.

Some in the industry believe insurers may ultimately be able to charge a premium for smart contract policies over comparable coverages utilizing traditional paper due to the claims-free, guaranteed-payout features embedded in smart contracts, to which insureds may ascribe added value. Furthermore, as smart contracts and blockchain technology reduce administrative and claims handling costs, insurers may begin offering previously financially unviable products such as microinsurance.

What are some of the challenges with existing insurance regulation as it relates to smart contracts?

Fettman: The self-executing nature of smart contracts could face various regulatory hurdles under existing insurance laws. For example, state laws prescribing claims handling procedures could be implicated where an insured asserts that a claim denial was inappropriate or where there is a bug in the smart contract that causes the contract to fail to perform as intended.

The immutable and irreversible nature of smart contracts could also pose a challenge in the context of an insurance delinquency proceeding, where for example, a court-appointed administrator may seek to cut off or delay future claims payments or seek to recoup previous improper payments.

Another area of insurance regulation that could be impacted by smart contracts is reserving methodologies prescribed by state insurance laws, which may need to be tweaked to accommodate automated claim payments, particularly if funds are to be escrowed, such as for certain parametric smart contracts.

Lastly, there may be a question as to whether certain smart contracts with insurance-like features are in fact actually "insurance" contracts as defined under (and hence subject to) state insurance laws. New York, for example, issued an insurance department opinion that certain weather derivatives do not constitute insurance contracts under the New York insurance law because the terms of the instrument in question did not provide that, in addition to or as part of the triggering event, payment to the purchaser was dependent upon that party suffering a loss, i.e., the issuer was obligated to pay the purchaser whether or not the purchaser actually suffered a loss. As neither the amount of the payment nor the trigger itself bore a relationship to the purchaser's loss, the New York department determined that the instrument was not an insurance contract.

For now, utilization of smart contracts and blockchain technology in insurance is limited, but look for regulators to seriously consider the issues described above as their uses expand.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions