The New York Department of Financial Services (NYDFS) took a significant step towards shaping the future of insurance underwriting by publishing a Proposed Insurance Circular Letter. The letter addresses the use of Artificial Intelligence Systems (AIS) and External Consumer Data and Information Sources (ECDIS) in the insurance industry, specifically focusing on underwriting and pricing practices. While this Proposed Circular does not introduce new legislation, its finalization will serve as a crucial guide for insurers, reflecting NYDFS’s interpretation of existing laws and regulations.
Purpose and Background
Applicable to all insurers authorized to write insurance in New York State utilizing ECDIS or AIS, the Proposed Circular defines AIS as machine-based systems designed to perform functions associated with human intelligence. ECDIS is described as data or information used to supplement traditional underwriting, act as a proxy for it, or establish lifestyle indicators contributing to underwriting or pricing. The document aims to harness the potential benefits of these technologies while acknowledging and addressing potential biases and inequalities.
Fairness Principles
The Proposed Circular emphasizes that insurers are obligated under existing laws to prevent unfair discrimination in their use of ECDIS and AIS. It stresses that data sources or models should not use protected classes and outlines principles to adhere to fairness.
Actual Actuarial Validity: Insurers must demonstrate that their use of ECDIS is supported by generally accepted actuarial standards and based on actual or reasonably anticipated experience, ensuring it does not serve as a proxy for protected classes.
Unfair and Unlawful Discrimination: Insurers must not use ECDIS or AIS unless they can establish that it does not collect or use information constituting unlawful discrimination. A comprehensive assessment of underwriting or pricing guidelines must be conducted.
Analyzing for Discrimination: The document encourages insurers to regularly conduct discrimination testing, employing both quantitative and qualitative assessments.
Governance and Risk Management
To ensure compliance, insurers are expected to have a corporate governance framework providing appropriate oversight of their use of ECDIS and AIS. The Proposed Circular suggests delegating oversight to specific board committees or senior management, with policies and procedures in place for effective monitoring.
Board and Senior Management Oversight: Oversight responsibilities can be delegated but require proper reporting. Policies and procedures related to ECDIS and AIS oversight should be established.
Policies, Procedures, and Documentation: Emphasizes the importance of well-defined policies, procedures, and documentation, including roles and responsibilities, monitoring, reporting requirements, and comprehensive documentation for AIS use.
Risk Management and Internal Controls: Requires insurers to manage risks throughout the AIS life cycle, either within existing enterprise risk management programs or through independent programs. Internal audit functions should assess the overall effectiveness of the risk management framework.
Third-Party Vendors
Insurers using third-party vendors for ECDIS or AIS must oversee them effectively, ensuring compliance with regulations and implementing procedures for reporting incorrect information.
Transparency, Notice, and Consumer Redress
Insurers must be transparent about the information used in underwriting decisions, specifically disclosing details about ECDIS or AIS. For adverse decisions based on these technologies, insurers must provide notice to the insured, disclosing the use of AIS, external data, and the right to request specific information.
Enforcement
NYDFS retains the authority to audit and examine insurers’ use of ECDIS and AIS, including regular examinations and special reports.
As the insurance industry continues to embrace technological advancements, the Proposed Circular sets the stage for responsible and fair utilization of AI in underwriting. Insurers are urged to adopt robust governance and risk management frameworks, ensuring transparency, fairness, and compliance with existing laws. The finalization of these guidelines will not only shape the future of insurance practices in New York but also serve as a benchmark for the evolving landscape of AI in the global insurance sector.
FAQs: NYDFS Proposed Guidelines for AI in Insurance Underwriting
What is the purpose of the NYDFS Proposed Insurance Circular Letter?
The Proposed Circular aims to provide guidelines for the use of Artificial Intelligence Systems (AIS) and External Consumer Data and Information Sources (ECDIS) in insurance underwriting and pricing, reflecting NYDFS’s interpretation of existing laws and regulations.
Does the Proposed Circular introduce new legislation?
No, the Proposed Circular does not create new legislation. It serves as a guide for insurers, outlining NYDFS’s expectations and interpretation of existing laws related to AIS and ECDIS.
Who does the Proposed Circular apply to?
The guidelines apply to all insurers authorized to write insurance in New York State that use ECDIS or AIS in their underwriting and pricing processes.
How does the Proposed Circular define AIS and ECDIS?
AIS is defined as a machine-based system designed to perform functions associated with human intelligence. ECDIS is described as data or information used to supplement traditional underwriting, act as a proxy for it, or establish lifestyle indicators contributing to underwriting or pricing.
What are the fairness principles outlined in the Proposed Circular?
The fairness principles include demonstrating actual actuarial validity, avoiding unfair and unlawful discrimination, and analyzing for discrimination through regular testing.
How can insurers ensure actuarial validity when using ECDIS?
Insurers must demonstrate that their use of ECDIS is supported by generally accepted actuarial standards and is based on actual or reasonably anticipated experience.
What oversight and governance measures are recommended by the Proposed Circular?
The Proposed Circular suggests board and senior management oversight, well-defined policies and procedures, and risk management and internal controls as part of a corporate governance framework.
How does the Proposed Circular address third-party vendors using ECDIS or AIS?
Insurers must retain responsibility for understanding tools, ECDIS, or AIS used by third-party vendors, ensuring compliance with regulations, and developing written standards and protocols for oversight.
What transparency requirements are outlined in the Proposed Circular?
Insurers must include details about the information used in underwriting decisions, specifically disclosing ECDIS or AIS details. For adverse decisions, insurers must provide notice to the insured and disclose the use of AIS, external data, and the right to request specific information.
How will the NYDFS enforce compliance with the guidelines?
The NYDFS retains the authority to audit and examine insurers’ use of ECDIS and AIS, including regular examinations and special reports as per the Insurance Law.
