Maria Vullo Maria Vullo (Photo: NYDFS)

The New York State Department of Financial Services wants life insurers to prove that the new accelerated underwriting programs they’re using are reasonable, fair and transparent.

The department has sent all life insurers authorized to write coverage in the state a letter warning them about their responsibility to vet any “external consumer data and information sources,” or services, they use when looking at applicants for coverage.

(Related: State Regulators Eye Life Accelerated Underwriting Programs)

Officials give their thinking on the matter in Insurance Circular Letter Number 1 (2019), which has the title, “Use of External Consumer Data and Information Sources in Underwriting for Life Insurance.”

The Words

“External consumer data” refers generally to information provided by independent database managers, rather than by the applicants themselves.

For purposes of the circular letter, officials say, the term “external data” includes “any data or information sources not directly related to the medical condition of the applicant that is used — in whole or in part — to supplement traditional medical underwriting, as a proxy for traditional medical underwriting, or to establish ‘lifestyle indicators’ that may contribute to an underwriting assessment of an applicant for life insurance coverage.”

The History

Birny Birnbaum and other consumer representatives have been saying at National Association of Insurance Commissioners meetings for years that insurers and other financial services companies could use new types of data sources, collections of rules for automated data analysis, and artificial intelligence systems to discriminate.

Rep. Maxine Waters, D-Calif., the new House Financial Services Committee chair, has been an outspoken critic of lenders’ use of algorithms and data sources that appear to hurt African-American consumers’ ability to borrow money.

The New York department sent life insurers a request for information about their use of external data sources in June 2017.

The Philosophy

Officials acknowledge in the letter that use of nontraditional data sources and automated “algorithms,” or rules for analyzing the data, may have a place in life insurance underwriting.

“Insurers’ use of external data sources has the potential to benefit insurers and consumers alike, by simplifying and expediting life insurance sales and underwriting processes,” officials write. “External data sources also have the potential to result in more accurate underwriting and pricing of life insurance.”

But officials say they worry life insurers could use their own “algorithmic” underwriting systems, or algorithmic systems from outside vendors, to discriminate, to violate New York state insurance laws in other ways, or to hide the reasons for denials from the applicants.

New York state insurance prohibits use of race, color, creed, national origin, status as a victim of domestic violence, or past lawful travel in any manner in insurance underwriting, officials say.

New York state insurance laws also restrict use of information about physical or mental disability, impairment or disease, unless any coverage access or pricing difference due to one of those factors is “permitted by law or regulation and is based on sound actuarial principles or is related to actual or reasonably anticipated experience,” officials say.

“Other models and algorithms purport to make predictions about a consumer’s health status based on the consumer’s retail purchase history; social media, internet or mobile activity; geographic location tracking; the condition or type of an applicant’s electronic devices (and any systems or applications operating thereon); or based on how the consumer appears in a photograph,” officials say. “At the very least, the use of these models may either lack a sufficient rationale or actuarial basis and may also have a strong potential to have a disparate impact on the protected classes identified in New York and federal law.”

The Standards

Officials emphasize that insurers are responsible for complying with New York state’s anti-discrimination laws.

“An insurer may not use an external data source to collect or use information that the insurer would otherwise be prohibited from collecting or using directly,” officials say.

An insurer must verify that an external tool or data source meets New York state antidiscrimination requirements, and it must determine whether there is a valid explanation or rationale for any differential treatment of similarly situated applicants, officials say.

“Importantly, even if statistical data is interpreted to support an underwriting or rating guideline, there must still be a valid rationale or explanation supporting the differential treatment of otherwise like risks,” officials add. “The second part of this inquiry is particularly important where there is no demonstrable causal link between the classification and increased mortality and also where an underwriting or rating guideline has a disparate impact on protected classes.”

Officials say they are especially skeptical about “data, algorithms, and models that purport to predict health status based on a single or limited number of unconventional criteria.”

In a section on transparency, officials say that an insurer must disclose to consumers the content and source of any external data upon which the insurer has based an adverse underwriting decision.

A life insurer failure to give much information about adverse underwriting actions because of “the proprietary nature of a third-party vendor’s algorithmic processes” may be an unfair trade practice under New York state insurance laws, officials say.

“The department reserves the right to audit and examine an insurer’s underwriting criteria, programs, algorithms, and models, including within the scope of regular market conduct examinations, and to take disciplinary action, including fines, revocation and suspension of license, and the withdrawal of product forms,” officials warn.

Traditional Data Providers

The circular letter could help MIB Group Inc. and some other providers of other data streams traditionally used in insurance underwriting.

“For the purposes of this circular letter,” officials write in the new letter, “external data sources do not include an MIB Group, Inc. member information exchange service, a motor vehicle report, or a criminal history search.”

That means that, if the standards in the circular letter stick, and spread outside New York state, any automated underwriting process that relies only on MIB data, motor vehicle reports, member information exchange information and criminal history searches may have an edge over systems that use other data streams, and especially if the algorithms used to assess those streams are kept secret, for competitive reasons or for other reasons.

How This Could Affect You

If the new circular letter sticks, and if the standards set in the circular letter spread to many other states, the recommendations could cause new headaches for agents and brokers who are using automated underwriting systems in their own practices.

In some cases, the letter could help producers who are trying to help customers with health problems or other underwriting issues navigate the life insurance application process.

The standards could also help live-human producers compete more effectively against web-based life insurance sales programs and other sales programs that depend heavily on automated, nontraditional underwriting processes.

The People

Linda Lacewell, the chief of staff of New York Gov. Andrew Cuomo, is on track to succeed Maria Vullo as the New York state financial services superintendent, but, at this point, Vullo is still the official in charge.

The circular letter was signed by James Regalbuto, the deputy superintendent for life insurance.

The letter lists Peter Dumar, the chief insurance attorney at the Life Bureau, as the circular letter contact person.

Process

Initially, the New York department posted the circular letter to a 2019 circular letter landing page not accessible from any other part of the department website. A sharp-eyed reader spotted the letter and sent it to ThinkAdvisor Life/Health for review.

Resources

A copy of the circular letter is available here.

— Read 5 Questions About Life Insurance for 2019on ThinkAdvisor.

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