Tech: A double-edged sword for insurance regulators

Regulators are being challenged to enhance consumer protection as insurers rapidly expand their technological capabilities, while at the same time upgrading their own market conduct and compliance systems to keep pace with the carriers they oversee.

The Deloitte Center for Financial Services recently surveyed senior staff and leadership at U.S. insurance departments about the development of InsurTech and RegTech. Half of the 56 member jurisdictions of the National Association of Insurance Commissioners responded. The goal was to examine the difficulties of regulating insurers in an increasingly digital environment, while also gauging where regulators are and where they expect to go when it comes to their own digital journey.

The shifting landscape

Deloitte’s “Insurance Regulator Technology Adoption Survey” found respondents keenly aware of both sides of the automation coin. They are paying close attention to how insurer-consumer relations may be affected by robotic process automation, advanced analytics, predictive models, mobile technology, artificial intelligence and a host of other emerging innovations. At the same time, more than half of the respondents said insurers’ use of new technology could be a motivation for using the same emerging tools to regulate their licensees.

Those surveyed expect their use of technology to increase, improving oversight of insurers and their ability to respond to market changes. They also anticipate taking advantage of the latest technologies to give them a more comprehensive yet granular view of the market and its particular products and companies, according to Deloitte’s analysis of the results, “Insurance regulators in an era of advanced technologies: Challenges and opportunities in oversight.”

“Regulators could look at the entire market activity for a particular product type and compare its performance across various parameters, such as demographics, time of sale, or geography,” according to the report, authored by my Deloitte colleagues, Andrew Mais, Nikhil Gokhale, and Alexander LePore, Jr. “Real-time monitoring would replace the retroactive nature of current insurance regulation. Sensing technologies, predictive analytics, and other tools could enable rapid regulatory action, even before a concern would otherwise become noticeable… Imagine a future in which regulators do not just have data on every single insurance transaction, but the ability to act upon that information.”

Rough terrain

The authors warned the industry that “how insurers respond in turn may well be crucial to their success in tomorrow’s marketplace,” adding that compliance departments “need to continue to be diligent and attentive” in the wake of such transformative changes in their own operations and those of their overseers.

Meanwhile, regulators are losing a bit of sleep over the potential implications of new technologies for consumer protection, although their anxiety appears to be more or less confined to individual consumers in the personal lines market, rather than about the impact on more sophisticated commercial insurance buyers. Data privacy was a prime concern for everyone surveyed. About half were also uneasy about insurers “using data without a customer’s consent” for claims settlement. Nearly two-thirds are concerned about potentially unfair pricing models in an age of predictive analytics and new black box algorithms.

Regulators realize they have to up their games to protect consumers in an increasingly digital insurance world, the survey indicated.  Nearly all respondents expect increased scrutiny over insurer use of technology for pricing, underwriting, and claims settlement. Eight in 10 consider it either likely or very likely that enhanced data reporting and customer notification requirements will be required, while nearly nine of 10 expect more approval mandates for underwriting and pricing models.

Bright spots

On a more positive note, two-thirds of respondents believe personal lines buyers could actually benefit from having “better product choices and customer service” with the help of technology enhancements. The report’s authors speculate that in this instance, “regulators may be anticipating that the increased use of technology by consumers could help level the playing field by making information more easily accessible to consumers, thus increasing their ability to comparison shop for coverage.” Another possibility, they noted, is that “regulators may believe their own increased use of technology will help improve consumer outcomes.”

Regulators are facing many of the same challenges as those they oversee when it comes to staying ahead of the curve on tech development. For example, 40% of respondents cited the availability of talent as a major obstacle in getting up to speed technologically. We’ve heard similar complaints in our studies of fintech development and cybersecurity in financial services.

“Regulators may need to innovate internally and perhaps dramatically to attract the necessary talent,” according to Deloitte’s report. In the end, however, “for regulators, embracing that tech-enabled vision of tomorrow may lead to a stronger industry bolstered by even greater consumer confidence.”

For more details about the state of regtech, download “Insurance regulators in an era of advanced technologies: Challenges and opportunities in oversight.”

Former NUPC Editor in Chief Sam J. Friedman (samfriedman@deloitte.com) is insurance research leader with Deloitte’s Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn. These opinions are his own.

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