Insurance industry observers are likely spending their Friday the 13th poring over the recently released, long-delayed and heavily anticipated report on modernizing the system of US insurance regulation by the Federal Insurance Office. The 71-page report makes the case that more federal regulation of the industry would prevent incidents like the credit default swap debacle at AIG that partially spurred the 2008 financial crisis.
At the same time, the report is careful to leave many areas of regulation in the hands of the states. In a release announcing the report, Treasury wrote: "...insurance regulation in the United States is best viewed in terms of a hybrid model, where state and federal oversight play complementary roles and where the roles are defined in terms of the strengths and opportunities that each brings to improving solvency and market conduct regulation."
One area of particular interest to insurance technologists is the FIO's recommendations around the regulation of data collection and use. Focusing mostly on credit-based insurance scores, FIO writes: "States should develop standards for the appropriate use of data for the pricing of personal lines insurance [and] states should extend regulatory oversight to vendors that provide insurance score products to insurers."
So while data collection and use standards are likely to be left up to the states, it's clear that FIO wants regulators to keep a close eye on them. And that's not just a concern for insurers, but also for vendors that are planning to serve the industry with new data sources and scores:
The technical evolution of insurance pricing has been driven by advances in data mining and technological capability, and responsible use of these techniques that imposes higher prices on truly risky behavior should be permitted. However, simply because data may be available regarding consumers does not mean that any data is relevant in determining the insurance premiums they should pay … In addition to developing and articulating standards concerning the proper use of data and methodologies of risk classification, state regulators should develop protocols for oversight of vendors — or insurers if the insurer develops the protocol for its own use — that provide the algorithms and data that render insurance scores and affect eligibility, tier and price of coverage.
Credit-based insurance scores are going to be the highest-profile tool affected by this attention in the short term. Just this week, the controversy around their use was stoked once more by the Consumer Federation of America, which asserted in a report that the scores "clearly show disparate treatment of low-and moderate-income drivers by major auto insurers." But with the expanding universe of usage-based insurance, some vendors and insurers have posited that consumers could eventually port their driving scores from insurer to insurer as they wish, rather than having to restart with each new insurer's telematics program. Vendors and groups establishing standards for their scores should be aware of regulators' increased attention on these kinds of programs.