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Existing regulations are generally seen as sufficient and flexible enough to oversee the emerging and expanding use of insurtech, but the trend does raise a host of questions that regulators and stakeholders in the insurance industry must grapple with.
This includes striking the right balance between encouraging and facilitating innovation and protecting consumers from possible adverse effects, such as discriminatory practices in insurance sales, experts say.
“Early on, there was a belief that we needed extra protections,” said Stephen Clarke, vice president of government relations for Jersey City, New Jersey-based Verisk Analytics Inc. “Now, people have become comfortable that we don’t need to overregulate insurtech.”
“I think we’re seeing a shift in the paradigm,” said Ray Farmer, director of the South Carolina Department of Insurance in Columbia. “Those companies that don’t keep up with the new advances in technology will be dinosaurs fairly soon. I think regulators have to also keep up with advances in technology to help the new companies, the new products come to the marketplace. This is certainly an exciting time to be a regulator.”
Innovation was a major theme at the National Association of Insurance Commissioners’ summer meeting in Vermont in August and will continue to be a priority for the organization as the NAIC figures out the best way to support its regulators tasked with evaluating new insurtech products and concepts, according to regulators.
Patrick McPharlin, Michigan insurance commissioner in Lansing and chair of the NAIC’s innovation and technology task force, said he sees no need to change existing regulations and has challenged industry trade associations to speak up about what regulations would need to be waived to foster innovation. However, none have yet cited any particular rules, with the exception of regulations that ban or limit rebating by insurers.
“I think the biggest barrier is the companies being willing to come and talk to us,” Mr. McPharlin said.
But that means that only the insurtech companies who directly engage with regulators receive the regulatory flexibility that they need, said Vikram Sidhu, a New York-based partner in the insurance transaction and regulatory practice with Clyde & Co US LLP.
“The wholesale rethink that insurtechs are clamoring for is just not even on the discussion table,” he said. “We need to have clear sets of rules because the flexibility that they are always touting doesn’t provide a clear framework that everyone can then use to innovate.”
While existing regulations were not written with insurtech in mind and “may not jibe with what insurtech wants to do in every way, I think the bedrock of solvency and market conduct — that is, making sure insurers pay when they’re supposed to pay — that’s going to be the guiding principle for regulators,” said Scott Fischer, a New York-based partner with Morgan, Lewis & Bockius LLP and former executive deputy superintendent for insurance at the New York State Department of Financial Services. “As long as those two things are kept at forefront of the insurtech people’s minds, then everything else can get dealt with — slowly and painfully, but can get dealt with.”
But for insurtech companies, the state-based system of U.S. insurance regulation can be tricky to navigate, with 56 jurisdictions regulating insurers and any of these jurisdictions still reluctant to adopt the sandbox concept designed to allow insurtech companies to experiment with new ideas for products and solutions through a supervised process with regulatory requirements waived in some situations to facilitate innovation, experts say.
“In terms of the complexity of regulation state by state, there’s no easy answer,” said Julie Sherlock, head of insurance strategy for insurtech development platform Boost Insurance USA Inc. in New York.
One approach could be to try to develop a principles-based regulatory approach, as has been adopted for capital reserving, versus a rules-based approach to ensure some level of uniformity, said Ben Seessel, a Hartford, Connecticut-based shareholder with Carlton Fields Jorden Burt PA.
“There’s a big hurdle in terms of regulation,” he said. “You can have the same law or virtually the same law and the same regulation in two different states, but it’s interpreted by the insurance commissioner in a different way. It’s a challenge for innovators to innovate in this state-based environment.”
Insurtech companies are also concerned about protecting their intellectual property, which they fear could be made public under open record laws without the right legal protections, while incumbent insurers are concerned about them receiving preferential treatment and not being subject to the same transparency requirements, experts say.
Meanwhile, regulators are asking many questions about the use and safeguarding of individuals’ data gathered through insurtech innovations. For example, there is significant concern that the data would be used in a discriminatory manner similar to the use of credit checks that disadvantaged poor people in the purchase of insurance policies.
People may assume that artificial intelligence and algorithms will provide nonbiased answers and information, but that is simply not true, Mr. Fischer said.
“In reality, there’s a huge amount of biases that can be baked into the system, because the algorithm doesn’t write itself,” he said.
In addition, there are questions about whether consumers are being properly informed about how their data is used and who owns the data, experts say.
“Many of those issues are legitimate issues and concerns that I think we can address,” Mr. McPharlin said. “But … I think the best thing we can do for consumer protection is to make insurance more available and easier to purchase, especially for the under-30 set.”
Regulators appear to be more flexible when it comes to regulatory changes on the commercial side, particularly for large commercial policyholders, Mr. Sidhu said. “I think the biggest issue there will then lie with ‘where do you draw the line for commercial insurance?’” he said. “From the regulatory perspective, they see the small and maybe even medium-sized enterprises falling closer to the consumer side and needing more protection compared to the large commercial insureds.”
In a follow-up email, Mr. McPharlin said the NAIC task force has not considered consumer protection issues for commercial issuers nor has it received any comments on this issue, to his knowledge.
Regulators say they do not need additional staffing or funding resources to manage insurtech regulation.
“I don’t think just because a new sector like technology comes along that you automatically need to change the way you do business,” Mr. Farmer said.
“We definitely have the people with the expertise and the knowledge to assess any company,” Mr. McPharlin said. “Resources are not an issue, at least in Michigan.”
But stakeholders disagree, given the rapid expansion of insurtech in the sector.
“That’s a tough question because it’s not really my place to say go hire people, but they need to hire people,” Ms. Sherlock said. “They need to bring in people who understand the technology, maybe not necessarily understand all the ins and outs of it, but speak the lingo (about) the different tools.”
“There’s millions and millions and millions of dollars … being poured into insurtech, but there’s not exactly millions and millions and millions being poured into regulation,” she added.
“They all need more resources,” Mr. Fischer said. “Period. Because it’s just getting more and more complicated and the budgets don’t seem to match.”
From the thousands of insurtechs looking to transform insurance, here is a sampling of startups focused on commercial insurance applications. All of the companies have been recognized by Insurance Thought Leadership Inc..as an “Innovator to Watch.”