The Wall Street Journal reported that the New York Department of Insurance sent a letter to insurers requesting more information about the evolving practices being used to underwrite and issue life insurance. The letter comes as life insurance companies have been grappling with how to get away from traditional methods of medical evidenced based underwriting that typically require blood and urine samples and utilize advanced databases such as credit scores, property ownership, and motor vehicle records to gain a sense of an individuals well being.
The article also reports that CB Insights counts over $1.7 Billion invested by venture capital firms in 179 “insurtech” deals in 2016 as new firms seek to transform the stodgy business of insurance. While the industry has sought to move away from traditional techniques in order to make life insurance underwriting less intrusive, the data sources and associated algorithms being utilized have nothing to do with individual’s health. For example, RGA Reinsurance Group of America, one of the largest life insurance reinsurers, has aggressively worked to develop underwriting algorithms based on credit scores for purposes of pricing and issuing life insurance. This apparently raised the concerns of the New York Department of Insurance to ensure that underwriting is based on sound actuarial principles and whether these algorithms will result in higher rates for certain consumers.
Technology will revolutionize the underwriting process of life insurance – and it will also lead to product innovation. Ultimately technology allows insurance underwriting to be more precise, which in turn should make insurance cheaper for some and more expensive for others. Hopefully, however, the resulting gains in efficiency through the application of technology will more than offset the fact that insurance will be more expensive for others. Thus, the net increase experienced by some individuals should result in an overall decrease in the cost of insurance.
This is a key aspect of what regulators should keep in mind as it grapples with unprecedented change and innovation now underway in the industry it regulates. Think, for example, how much cheaper life insurance could be overall if the departments of underwriting, fraud prevention, and claim disputes were replaced by intelligent machines that can crunch more data with more precision than their human counterparts. Of course this fact may not sit well with tens of thousands of employees that occupy these departments or the bureaucracy that supporting them. This, however, is the reality and opportunity of change afoot within the insurance industry. New insurance technology firms aim to deliver new products, at lower costs, with greater ease – and in doing so attract consumers, who long ago abandoned the products and services offered by the industry.
So as regulators grapples with the unprecedented change now occurring within the industry they regulate, we should all keep in mind that the goal of technology is to improve the products and reduce the costs. The New York Department of Insurance support “innovations that reduce the overall time and expense of obtaining life insurance coverage” which supports this overarching goal. I am challenged to think of an example where technology applied to an old industry did not results in the goals supported by the New York Department of Insurance.
Along those same lines, we have seen additional progressive movement by insurance regulators approach towards product development. In July 2017, the National Association of Insurance Commissioners (NAIC) adopted adopted a progressive policy statement on product innovation in support of private market options for financing long-term care services. The challenge to shed decade old practices in favor of adopting new ideas and technologies that are modern and current is great for the incumbent industry. Incumbents will need to be open-minded, creative, and bold enough to apply technology and progressive ways of thinking to the product needs of consumers. This is a bold challenge for an industry that historically has made maintaining long-standing beliefs and traditions a core aspect of its business.