Get to know insurance advisory organizations, statistical agents

Regulators and industry alike have relied on insurance advisory organizations and statistical agents to aid them in setting and evaluating rates for insurance products.

These organizations and agents have evolved — along with the rest of the insurance sector — to make use of increasingly sophisticated data and computer programming models to perform their missions.

At the same time, other entities with expertise in analyzing and using “big data” also have developed computer software programs and algorithms that inform the rate making and setting processes.

This article discusses how this technological evolution has blurred the lines between regulated and unregulated enterprises, and some reactions to these new business models.

A story of evolution

“Advisory organizations” and “statistical agents” are defined differently, although, like many things in insurance, the exact definition (and terminology) depends on which state’s law applies.

In 1997, the National Association of Insurance Commissioners (NAIC) drafted a model regulation defining a statistical agents as:

An entity that has been designated by the commissioner to collect statistics from insurers and provide reports developed from these statistics to the commissioner for the purpose of fulfilling the statistical reporting obligations of those insurers.

This model has been adopted by about half of the U.S. jurisdictions.

The NAIC defines an advisory organization to mean:

Any entity, including its affiliates or subsidiaries, which either has two (2) or more member insurers or is controlled either directly or indirectly by two (2) or more insurers, and which assists insurers in ratemaking-related activities…

The how and the why

Currently, there are national (e.g., ISO Data, Inc., National Independent Statistical Service), regional (e.g., National Flood Insurance Program: Bureau & Statistical Agent Regional Support Offices) and special purpose (e.g., Workers’ Compensation Insurance Rating Bureau of California) statistical agents collecting insurers’ data for the vast majority of states, although the lines of business for which data is collected may vary. Statistical agents are licensed or registered in many states. Similarly, there are national (e.g., ISO, Inc., AAIS) and regionally (e.g., ACORD) licensed advisory organizations.

Regulators use statistical data to evaluate the rates and rating structures used by insurers in a state. Statistical agents collect data pursuant to statistical plans that they have filed with Departments of Insurance.

The statistical agent’s aggregation of the data from all subscribing insurers allows for more accurate predictions of future loss experience and costs. Having a filed plan allows Departments to understand the type of data being collected by a given statistical agent, and even to request changes in the way in which data, or the type of data that is being collected.

In addition, collecting data pursuant to a filed statistical plan means that the data that the insurance carriers must report to the statistical agent is based upon a uniform set of standards.

As a further means of ensuring consistent data reporting, the NAIC’s Statistical Handbook instructs agents on how to screen and check their data.  And, statistical agents are subject to examination by the Departments of Insurance in the states where they operate.

Going state-by-state

Advisory organizations must file their organizational documents and membership lists in the states where they intend to operate. Once the organizational filing is in place, advisory organizations may file rates, a multiplier for use with rates already on file and prospective loss costs.

An advisory organization’s rate-related filings are derived from the data of its members and other sources. Advisory organizations’ filings are subject to regulatory review and may even be disapproved by a Department, but once the advisory organization’s filing is approved, the advisory organization’s member insurers may use those rates, multipliers and loss costs.  In addition, the C Committee of the NAIC has a working group that is dedicated to the examination oversight of advisory organizations.

Thus, advisory organizations perform some of the same functions as statistical agents (i.e., developing statistical plans and collecting statistical data from insurers), and both advisory organizations and statistical agents are subject to examination and other oversight by state insurance regulatory officials.

In this way, both entities give the transparency necessary for regulators to verify the structures and the processes of these entities and therefore rely upon the data that has been collected through these entities. And, because of the federal McCarran-Ferguson Act, entities involved in the business of insurance may pool data and develop advisory loss costs under an exemption from the federal anti-trust rules.

Lest we forget: The tech

As advancements in technology have opened new possibilities for the use and gathering of data, these entities have also continued to evolve their processes.

For example, AAIS has been instrumental in the development of OpenIDL, an opensource blockchain network that is designed to provide the industry with a new way of reporting its data to regulators while still allowing insurers to maintain control over the data.

There also are companies that are neither statistical agents nor advisory organizations, and that partner with these entities for purposes of sharing information. In 2009, for instance, Verisk Analytics, which is a data analytics and risk assessment firm, acquired Insurance Service Office (ISO), a statistical agent and advisory organization. This acquisition allowed Verisk to partner its technological platform with ISO’s state licensures and registrations.

There are other businesses that also collect and aggregate data that may be used in the setting of insurance rates. Consider credit scores, which are based on data about consumers that has been aggregated and analyzed by consumer reporting agencies, and many catastrophe event risk models are also based upon data that has been gathered and analyzed by a variety of firms, ranging from engineering to risk consulting services businesses and InsurTech startups.  In many states, credit scores are used as a rating factor, and for some lines of business, the modeling for certain catastrophes are used to help determine rates. Yet many of these other entities are not subject to regulation by state insurance departments.

Consumer representatives have argued that absent the sanction of state regulation, these entities are in violation of anti-trust rules. And some of the licensed entities themselves believe that these other organizations should be subject to the same controls as the traditional statistical agents and advisory organizations: “Regulators must be able to verify the structures and processes used by data gathering entities to ensure that the rates generated from that data are fair and that the data is reliable. The existing framework for statistical agents and advisory organizations permits this regulatory oversight, however, as stat reporters and advisory organization, we have a duty to look at using better technology and processes to facilitate the expanding world of data,” says Robin Westcott of AAIS.

What lies ahead

The current regulatory appetite for exercising greater control over these unlicensed data gathering entities is not completely clear. However, as more and more entities with valuable data gathering and analytical abilities enter the insurance marketplace, creating “black boxes” that elude regulatory scrutiny, regulators and the NAIC may be called upon to reconsider what controls — if any — they want to impose over these entities and their processes.  And, if state insurance departments do want to push an agenda of greater regulation and oversight of these entities, the existing structure for statistical agents and advisory organizations is an obvious starting point.

Elizabeth Tosaris (etosaris@lockelord.com) has nearly 30 years of insurance regulatory and insurance litigation experience, and assists clients on a broad range of issues arising out of the regulation of the insurance industry. Ms. Tosaris’ clients include a wide variety of insurers and other regulated entities.

See also: How big data bolsters insurance customer, employee relationships