AI Innovations Transforming the Insurance Industry Amid Regulatory Challenges
Insurance companies are rapidly integrating artificial intelligence (AI) into their operations, despite industry uncertainty surrounding potential regulations and responsible parties. Surveys by the National Association of Insurance Commissioners (NAIC) reveal that 92% of health insurers, 88% of auto insurers, 70% of home insurers, and 58% of life insurers are either using or planning to use AI innovations. Meanwhile, over 90% of insurance executives recognize AI as a pivotal focus area. This highlights the growing role of AI in enhancing underwriting and claims processes.
Regulatory Concerns and Compliance Requirements
The surge of AI in the insurance industry escalates regulatory compliance concerns about privacy, discrimination, and possible misuse, underlining the need for oversight. Although the NAIC hasn't swiftly acted on AI regulations, it introduced the Model Bulletin on the Use of Algorithms, Predictive Models, and AI Systems by Insurers in December 2023. This bulletin advises insurers to ensure responsible AI application by establishing robust verification programs and testing for errors and biases.
Developing AI Evaluation Tools
The NAIC's Big Data and Artificial Intelligence Working Group is crafting an AI evaluation tool to aid state regulators in assessing insurer AI applications, with a focus on risk management and consumer protection. Although this tool is non-mandatory, it includes comprehensive questionnaires and checklists for market conduct examinations. A pilot program, scheduled for 2026, will test this AI Systems Evaluation Tool among ten insurers, refining it based on the collected feedback.
Federal and State Regulatory Tensions
At the federal level, an executive order signed by former President Donald Trump, titled "Ensuring a National Policy Framework for Artificial Intelligence," seeks to standardize AI laws, challenging state regulations. This order specifically addresses Colorado’s AI Act, aimed at preventing discrimination in the insurance sector, regarded as one of the most detailed state AI regulations.
State regulators, backed by bodies like the National Council of Insurance Legislators (NCOIL), stress the need for state-level regulation to safeguard consumers and manage AI risks effectively. The NAIC warns that federal preemption might disrupt established regulatory processes and create legal ambiguities, jeopardizing market stability and investment.
While the executive order attempts to override state-level AI regulations, legal experts from Gibson Dunn indicate potential hurdles in preemption and interstate commerce regulation, casting doubt on its successful implementation. As the insurance industry explores AI's transformative potential, it must navigate the complex regulatory landscape to harness AI innovations responsibly.