Navigating AI Regulations in the Insurance Sector: A Comprehensive Guide

At the annual InsureTech Connect event in Las Vegas last month, AI won the prize as the most trending topic preoccupying the entire industry. From carriers to brokers, from reinsurers to investors, from starry-eyed startups to peppered pros, the AI acronym, sometimes followed by additional letters like ML and LLM, was everywhere. 

Every few decades, the world experiences a technological disruption that changes our lives. AI is the latest disruptor. For the skeptics out there, let’s set the record straight. 

This.is.not.a.fad. 

The bald, genderless trademark AI face has been casting a pupil-less global gaze and putting every industry under its spell. The insurance industry is no exception. 

The insurance industry is built on handling our own and everyone else’s risks. As artificial intelligence shatters glass ceilings, the risks it introduces present a new paradigm to the insurance market in many different areas. 

Artificial Intelligence in the Insurance Market

Let’s talk about some futuristic AI use cases in the insurance market:

• AI in Life Insurance: Life insurance companies can aggregate medical records and other personal information to predict the probability of someone being diagnosed with a chronic disease. 

• Preventive Health: With this knowledge, preventive programs are offered to better the client’s chances at a healthy life. 

• Asessing Likelihood and Impact of Natural Disasters: When underwriters write up insurance policies, AI combines satellite imagery with other geo-factors to predict survival chances in an earthquake, hurricane, or other geo-specific natural disasters. 

Generative AI vs. AI As We Knew It

Generative AI differs from the AI we used to know (or thought we knew). It has the uncanny ability to summarize and abstract information and repurpose it based on simple text. A good use case of this model would be the underwriting industry using a ChatGPT-like bot to process insurance claims.

Picture it in your mind or watch it live in the nearest insurance company: The old-school underwriter poring over seven hundred pages of documentation sitting next to a futuristic claims adjuster who engages Calmy in a dialogue with a bot through simple text-based queries. She types these seven words: “Is the claim covered by the policy?” and promptly receives a comprehensive response from the bot, which verifies coverage and highlights any pertinent exclusions or limitations.

Large insurance companies like Brown and Brown, AXA, Allstate, and State Farm have already taken the first steps in integrating generative AI models. 

Examples of applications that are set to disrupt the insurance market: 

• policy production in minutes
• personalized insurance coverage
• claims reimbursement in hours or minutes
• fraud detection. 

In short, the AI wave is already transforming how insurance companies do business. The steep, continuous rise of generative AI has demonstrated that what we see today is just the beginning.

A Look at Some Numbers

31% of the participating European insurance firms were utilizing AI across the entire value chain, and another 24% were in the “proof of concept” stage, according to EIOPA’s 2018 thematic study on the use of big data analytics in health and auto insurance. 

Ready for some more numbers?

According to McKinsey’s calculations, the productivity boost that generative artificial intelligence might bring about “could add the equivalent of $2.6 trillion to $4.4 trillion annually across the 63 use cases”; this could potentially surpass the $3.1 trillion GDP of the United Kingdom in 2021. Furthermore, “four areas: customer operations, marketing and sales, software engineering, and R&D” account for three-quarters of that value. Because of this, the insurance sector has a great opportunity to boost profitability by implementing artificial intelligence and innovations in its distribution and operational systems. 

“More numbers Please?” No Problem

According to Bloomberg Research, the generative AI market could reach $1.3 trillion over the next ten years, up from $40 billion in 2022.

Governance of Artificial Intelligence in Insurance

Like many areas of regulatory governance, we see a ripple effect that starts in the EU, spreads to California, gets sprinkled across the U.S. in milder form, and is adopted by a handful of countries around the globe. AI Regulations are following this route like good little bots.

A List of 2023 Regulatory AI Initiatives in Insurance

The EU AI Act

On December 8, 2023, EU policymakers agreed to the AI Act, setting global standards for AI regulation. The law aims to harness AI benefits while mitigating risks.

The AI Act recognizes that AI is rapidly evolving and aims to be future-proof, allowing for adaptation to upcoming developments. The AI Act does not specifically target the insurance sector. It is ‘horizontal,’ which means it tries to cut through all relevant sectors simultaneously. The cross-sectoral feature means highly regulated industries like the insurance AI-regulated market must work hard to integrate its provisions. 

Based on the positions taken by the European Parliament and the Council, some life and health insurance use cases will likely be regarded as high-risk.

The final extent and scope of the measures still need to be clarified, but these will have real impacts on the insurance and pensions sectors.

U.S. Initiatives

NAIC Model Bulletin

In December 2023, the NAIC’s Innovation, Cybersecurity, and Technology (H) Committee adopted the Model Bulletin on the Use of Algorithms, Predictive Models, and Artificial Intelligence Systems by Insurers. This is a guidance template for insurers to ensure AI usage aligns with existing laws in insurance regulation and AI.

State Initiatives

DORA Regulations: (not to be confused with EU’s DORA).  Effective November 14, 2023, the Colorado Department of Regulatory Affairs (DORA) promulgated regulations governing the use of external consumer data and information sources, algorithms, and predictive models by life insurance carriers. These regulations aim to protect consumers from unfair discrimination in insurance practices.

SEC Proposed Rules

In July 2023, the Securities and Exchange Commission proposed rules to address conflicts of interest associated with broker-dealers’ and investment advisers’ use of predictive data analytics and similar technologies.

FTC Compulsory Process

On November 21, 2023, the FTC authorized a compulsory process for AI-related products and services to address potential issues such as fraud, privacy infringements, and unfair practices.

Insurance AI in the News

A recent news report from the insurance industry confirms that Coalition, a leader in cyber insurance, has added a positive endorsement for artificial intelligence (AI) to its cyber insurance plans for the US and Canada. The endorsement expands the definition of a security failure or data breach to include events caused by artificial intelligence. This means that AI is now recognized as a possible cause of security failures in computer systems.

It also changes how funds transfer fraud (FTF) can happen. For example, requests made using deepfake technology or any AI-powered system are now considered FTF.

Coalition’s head of insurance, Shawn Ram, talked about how important the update was, saying, “As threat actors change their attack strategies by using AI, Coalition’s affirmative AI endorsement brings important clarity to how incidents are covered when AI is involved.”

Coalition’s research head, Tiago Henriques, discussed AI’s two-sided effect on cybersecurity. He said, “AI is revolutionizing and supercharging technology around the world. While it’s giving attackers the confidence to make more personalized attacks on a large scale, we believe AI has huge potential to empower defenders and strengthen cyber and insurance protections.”