NAIC's AI Model Bulletin Faces Criticism over Regulatory Gaps and Industry Ties

The National Association of Insurance Commissioners (NAIC) adopted the Model Bulletin on the Use of Artificial Intelligence Systems by Insurers in December 2023, marking a significant step in regulating AI in insurance. However, the bulletin does not establish binding rules but offers a consensus framework focusing on transparency and basic compliance, avoiding contentious topics such as proxy discrimination. Proxy discrimination involves using neutral factors that correlate with protected characteristics, potentially resulting in unfair pricing or underwriting decisions, and remains unaddressed in the current regulatory guidance. Consumer advocacy groups like Public Citizen have raised concerns about a close relationship between regulators and the insurance industry, highlighting conflicts of interest and the revolving door phenomenon, where commissioners transition between regulatory roles and industry positions. Despite calls for stronger anti-corruption measures, including pledges to avoid conflicts and lobbying restrictions post-office, no regulators have committed formally to these standards. Kathleen Birrane, who chaired the NAIC's Innovation, Cybersecurity, and Technology Committee and led the drafting of the AI model bulletin, emphasizes the need for a pragmatic approach to regulation given the diverse views among state regulators. Her tenure includes a move between public office and private legal practice focusing on insurance regulatory matters, reflecting common career patterns in this sector. Critics such as Birny Birnbaum from the Center for Economic Justice argue that the NAIC's approach lacks substantive guidance and fails to address key issues like proxy discrimination in AI applications. They point to a regulatory process that appears to prioritize industry interests, calling for more robust consumer protections and clearer insurer guidelines. The NAIC maintains that its members operate under state-level ethical and constitutional laws alongside its own conflict of interest policies aimed at preserving transparency and integrity in regulation. The industry faces ongoing pressure to balance innovation in AI with fairness and compliance, amidst complex regulatory, market, and ethical challenges.