On January 17, 2024, the New York Department of Financial Services (“DFS”) issued a proposed assurance circular regarding insurers’ use of external consumer information data and sources (“ECDIS”) and systems of artificial intelligence (“AIS”) in underwriting and pricing. Recognizing that the use of ECDIS and AIS in underwriting and pricing can be beneficial to insurers and the public by speeding up and increasing underwriting and pricing accuracy, DFS also recognized the risks associated with such practices. DFS noted:
At the same time, ECDIS may reflect systemic biases and its use may reinforce and exacerbate inequality. This raises significant concerns about the potential for unfair adverse effects or discriminatory decision-making. ECDIS may also have variable accuracy and reliability and may come from entities that are not subject to regulatory oversight and consumer protection. Moreover, AIS’s self-learning behavior increases the risks of inaccurate, arbitrary, capricious, or unfairly discriminatory results that could disproportionately affect vulnerable communities and individuals or otherwise harm New York’s insurance market.
Based on this, the DFS articulated its expectations that insurers would develop and manage their use of ECDIS, artificial intelligence systems and other predictive models in the underwriting and pricing of insurance policies and annuity contracts.
DSHP has proposed guidelines for insurers to meet the department’s expectations.
An insurer must not use ECDIS or AIS for underwriting or pricing purposes unless the insurer can demonstrate that the data source or model, as the case may be, does not use and is not based in any way on any protected class in accordance with the of Insurance, Article 26. Furthermore, an insurer must not use ECDIS or AIS for underwriting or pricing purposes if such use would result in or permit any unfair discrimination or otherwise violate the Insurance Law or any regulation announced on its basis. Included among these obligations, the DSHP highlighted the following:
- Data and actuarial validity: insurers must be able to demonstrate that the ECDIS is supported by generally accepted actuarial practice standards and is based on actual or reasonably anticipated experience, including, but not limited to, statistical studies, predictive modeling and risk assessments .
- Unfair and illegal discrimination: the insurer must not use the ECDIS or AIS in underwriting or pricing unless the insurer has determined that the ECDIS or AIS does not collect or use criteria that would constitute unfair or unlawful discrimination or an unfair trade practice under state law or federal. A comprehensive assessment of whether a signature or pricing guide derived from ECDIS or AIS unfairly discriminates between similarly situated individuals or unlawfully discriminates against a protected class should include at least the following steps:
- Assessing whether the use of ECDIS or AIS produces disproportionately adverse underwriting and/or pricing effects for similarly situated policyholders, or policyholders of a protected class. If there is not a prima facie disproportionate adverse effect, then the insurer may terminate its assessment.
- If there is a prima facie showing of such a disproportionate adverse effect, further assessing whether there is a legitimate, legal and fair explanation or justification for the differential effect on similarly situated insureds. If no legitimate, legal and fair explanation or justification can explain the differential effect for similarly situated insureds, the insurer must modify the use of this ECDIS or AIS and evaluate the modified use of the ECDIS or AIS.
- If a legitimate, legal and fair explanation or rationale can explain the differential effect, further conducting and appropriately documenting a search and analysis for an alternative variable(s) or less discriminatory methodology that would satisfy the reasonably legitimate business needs of the insurer. If a less discriminatory alternative is available, the insurer must modify its use of ECDIS or AIS.
In analyzing potentially unfair or unlawful discriminatory practices, insurers should properly document the processes and rationale behind their testing methodologies and analyzes for unfair or unlawful discrimination related to the use of ECDIS and AIS and the complexity and materiality of these ECDIS and AIS. Insurers must be prepared to make such documentation available to the DSHP.
Before AIS is put into production, it must administer testing and analysis for unfair or illegal discrimination. Such testing and analysis should be done whenever updates or changes are made to ECDIS or AIS materials. In addition to testing, qualitative and quantitative assessments by insurers must also be carried out.
In addition to the testing and analysis components, insurers will also be subject to corporate governance and risk management requirements. These requirements include the Board’s oversight and management of the use and implementation of ECDIS and AIS by insurers. Insurers using ECDIS or AIS must formalize their development and management of ECDIS and AIS in written policies and procedures in accordance with the DFS Circular.
Insurers should remember that they are responsible for understanding any tools, EDCIS or AIS used in underwriting and pricing insurance that are developed or deployed by third party vendors to ensure that such tools, EDCIS or AIS are compliant with all applicable laws and regulations. , and regulations. To ensure proper oversight of third-party vendors, DFS has stated that insurers must develop written standards, policies, procedures and protocols for purchasing, using or supporting ECDIS and AIS developed or deployed by a third-party vendor. third. In addition, insurers should establish procedures for reporting any inaccurate information to third-party vendors for further investigation and updating, as necessary. Insurers must also develop procedures to correct and eliminate inaccurate information from their AIS that the insurer has identified or reported to a third party.
Finally, the DSHP Circular makes it clear that transparency is required in communication with insured or potential insured. Where an insurer uses ECDIS or AIS, the reason or reasons given to the insured or potential insured, or a designated medical professional, must include details of all information on which the insurer has based any denial, limitation, tariff differentiation or other unfavorable underwriting. decision, including the specific source of information on which the insurer based its adverse insurance or pricing decision.
The DSHP is seeking comment on the Circular. Insurers wishing to submit comments or feedback may do so on or before March 17, 2024.