New York State Department of Financial Services Circular on Use of Artificial Intelligence in Insurance Underwriting and Pricing
New York State Department of Financial Services Issues Final Circular on Use of Artificial Intelligence in Insurance Industry
On July 11, 2024, the New York State Department of Financial Services (NYSDFS) made a significant move by adopting a final circular regarding the “Use of Artificial Intelligence Systems and External Consumer Data and Information Sources in Insurance Underwriting and Pricing.” This circular, aimed at providing guidance to the insurance industry, imposes substantial obligations on insurers utilizing artificial intelligence systems (AIS) or external consumer data and information sources (ECDIS) for underwriting and pricing.
The issuance of this circular signals NYSDFS’ enforcement priorities and underscores the importance of compliance for insurers operating in New York. The circular applies to a range of entities, including insurers authorized to write insurance in New York, Article 43 corporations, health maintenance organizations (HMOs), licensed fraternal benefit societies (FBSs), and the New York Insurance Fund.
NYSDFS acknowledges the potential benefits of using ECDIS and AIS in simplifying and expediting insurance underwriting and pricing processes. However, the department also expresses concerns about the possibility of unfair adverse effects or discriminatory decision-making resulting from the use of these technologies, especially when involving third-party vendors. Of particular concern is the potential impact on vulnerable communities and individuals, as well as the overall integrity of the insurance marketplace in New York.
The circular defines AIS as any machine-based system designed to perform functions associated with human intelligence, such as reasoning, learning, and self-improvement, when used in connection with underwriting or pricing insurance policies. ECDIS, on the other hand, refers to data or information used to supplement traditional underwriting or pricing processes.
To ensure compliance with the circular, insurers are advised to maintain existing practices, establish a corporate governance framework, have board and senior management oversight, conduct adequate assessments and testing of ECDIS and AIS, implement a third-party vendor review program, and be transparent with customers about the use of these technologies.
The enforcement of these requirements is expected to be rigorous, with regulators potentially conducting audits, investigations, examinations, or enforcement actions to ensure compliance. Insurers operating in New York must be prepared to demonstrate their adherence to the circular’s guidelines and other AI-applicable legal requirements.
The issuance of this circular by NYSDFS follows similar actions taken by other states, such as Colorado, California, and Texas, indicating a growing trend towards regulating the use of artificial intelligence in the insurance industry. Insurers across multiple states are now required to comply with stringent guidelines to prevent unfair trade practices and ensure the responsible use of AI systems in insurance operations.