INSURANCE MARKETS Benefits and Challenges Presented by Innovative Uses of Technology Report to Congressional Requesters June 2019 GAO-19-423 United States Government Accountability Office United States Government Accountability Office Highlights of GAO-19-423, a report to congressional requesters June 2019 INSURANCE MARKETS Benefits and Challenges Presented by Innovative Uses of Technology What GAO Found Insurtech companies (recently established companies bringing technology- enabled innovations to the insurance industry) as well as established insurers have begun to use technologies, including artificial intelligence (AI) and mobile applications, in an attempt to improve risk assessment and enhance customer experiences. For example: Consumers can purchase insurance products specifically tailored to their situation and needs, such as renters or auto insurance that can be turned on and off as needed using a mobile app. Some insurers have begun to use nontraditional data (such as from social media) to analyze policyholder risk, and use AI and complex algorithms to reduce costs by automating information gathering and risk assessment. However, implementing these technologies can create potential challenges for insurers and risks for consumers, including the following: The use of AI to create underwriting models for determining premium rates can make it challenging for insurers to ensure that factors prohibited by regulation (such as race) are not used in models. Such models are often developed by data scientists who, unlike actuaries, may not fully understand insurance-specific requirements. Insurer collection and use of consumer data not provided by the consumer raise questions about data accuracy, privacy, and ownership. Some insurtechs sell coverage through nonadmitted insurers. As we have previously reported, nonadmitted insurersunlike traditional insurersare not required to be licensed in each state in which they sell insurance, and receive less regulatory oversight of their policies and rates. Also, if nonadmitted insurers became insolvent, state guaranty funds would not be available to help pay policyholder claims. Stakeholders with whom GAO spoke identified challenges they said might affect adoption of innovative technologies. These include paper-based documentation requirements that do not accommodate online insurance transactions, and challenges for regulators in the evaluation of complex rating models. The National Association of Insurance Commissioners (NAIC) and state regulators have initiated a number of actions designed to address such concerns. For example: State insurance regulators, through an NAIC task force, have been examining regulatory areas that may pose obstacles for innovation, such as requirements for paper documentation or signatures. NAIC issued draft best practices for states to use when reviewing complex rating models. NAIC adopted a model law that creates a legal framework for states to use to require insurance companies to operate cybersecurity programs and protect consumer data. Because many of these regulatory initiatives are still in development (or recently developed), the effect on innovation and consumer protection is unknown. View GAO-19-423. For more information, contact Anna Maria Ortiz at (202) 512-8678 or ortizagao.gov. Why GAO Did This Study The innovative use of technology by insurance companies (insurtech) is growing and offers the potential to improve customer experiences while also lowering insurer costs. Some stakeholders have raised questions about how certain uses of insurtech could create both risks for consumers and challenges for regulators, and whether some challenges might slow technological innovation in the insurance sector. GAO was asked to provide information on insurtech activities in the property/casualty and life insurance sectors. This report (1) identifies new uses of technologies and potential benefits and challenges for insurers and their customers; and (2) discusses what stakeholders identified as key challenges that could affect the adoption of new technologies, and actions taken to address those challenges. GAO reviewed available literature; analyzed relevant laws and regulations; and conducted interviews with more than 35 stakeholders, including federal and state regulators, technology companies, insurers, and consumer groups (selected based on literature reviews and recommendations, and for relevance to the scope of GAOs review). GAO is not making any recommendations in this report. Page i GAO-19-423 Insurance Technology Letter 1 Background 3 Emerging Use of Technologies Can Reduce Insurance Costs and Expand Product Choices but Creates Privacy and Other Challenges 9 NAIC and State Regulators Initiated Actions to Address Challenges That Stakeholders Said Could Affect Adoption of Technologies 26 Agency and Third Party Comments 33 Appendix I Objectives, Scope, and Methodology 36 Appendix II GAO Contact and Staff Acknowledgments 38 Figures Figure 1: Examples of How Technology Can Automate the Automobile Claim Process 12 Figure 2: Potential Benefits and Challenges Technologies Present for Insurers and Consumers 14 Contents Page ii GAO-19-423 Insurance Technology Abbreviations AI artificial intelligence app application EU European Union insurtech insurance technology NAIC National Association of Insurance Commissioners Treasury Department of the Treasury This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Page 1 GAO-19-423 Insurance Technology 441 G St. N.W. Washington, DC 20548 June 7, 2019 Congressional Requesters The innovative use of technology by insurance companies (insurtech) is growing and offers the potential to reduce insurer costs while enhancing customer experiences. In recent years, both insurtech companies (recently established companies bringing technology-enabled innovations to the insurance industry) and established insurers have begun to use technologies, such as artificial intelligence (AI), to explore ways in which to improve operations and functions such as risk assessment, marketing, and product development. As consumers, and millennials in particular, have become well-versed in new technologies and taken a more hands- on approach to purchasing insurance, insurtechs have emerged to offer customized insurance products and streamlined customer experiences. 1At the same time, some stakeholders have expressed concerns that certain uses of technology could create risks for consumers, including potential misuse of data. Some stakeholders also have said the current insurance regulatory system slows technological innovation. As we noted in recent reports on data, analytics, and AI, the technologies have produced benefits such as reduced cost and increased accuracy in some areas of business, but also can pose privacy and civil liberties risks and their use could result in undesirable or unexpectedly biased outcomes. 21 According to Census Bureau estimates, by 2014 millennials outnumbered baby boomers as the largest living generation. The baby boomer generation consists of people currently ages 5573 and the millennial generation of people currently ages 1937. 2 See GAO, Data and Analytics Innovation: Emerging Opportunities and Challenges, GAO-16-659SP (Washington, D.C.: Sept. 20, 2016); and Artificial Intelligence: Emerging Opportunities, Challenges, and Implications, GAO-18-142SP (Washington, D.C.: Mar. 28, 2018). Letter Page 2 GAO-19-423 Insurance Technology You asked us to provide an overview of insurtech activities in the property/casualty and life insurance sectors. 3Specifically, this report (1) identifies uses of technologies and the benefits and challenges they might present for insurers and their customers, and (2) discusses what stakeholders identified as key challenges that could affect the adoption of new technologies, and actions that have been taken to address those challenges. To address both objectives, we examined insurtech activities in the property/casualty and life sectors of the U.S. insurance market, including information on personal and commercial insurance where available. We did not include the health insurance sector because of significant differences between that sector and the property/casualty and life insurance sectors in terms of products offered and methods by which they are sold and regulated. 4We conducted background research and a literature review to understand the most prominent, or key, technologies being used in the insurance industry and to identify any analyses of potential benefits and challenges that insurtech products and services may pose. Because insurtech is a fairly new field, we found few academic publications related to our objectives. We also conducted more than 35 semi-structured interviews with and reviewed documents provided by knowledgeable stakeholders to identify and obtain information about (1) current, in-development, and potential future uses of existing or new technology in the insurance industry; (2) stakeholder views on the potential benefits and challenges such technology presents to insurance companies and consumers; (3) which challenges may affect insurers adoption of technology; and (4) actions the National Association of Insurance Commissioners (NAIC) and selected state insurance regulators 3 Advances in technology and widespread internet and mobile device use also helped fuel the rise of fintech (the provision of traditional financial services by non-traditional technology-enabled providers). We issued a series of reports examining fintech and made recommendations to address areas including fintech regulation and use of alternative data sources in underwriting. See GAO, Financial Technology: Information on Subsectors and Regulatory Oversight, GAO-17-361 (Washington, D.C.: Apr. 19, 2017); Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight, GAO-18-254 (Washington, D.C.: Mar. 22, 2018); and Financial Technology: Agencies Should Provide Clarification on Lenders Use of Alternative Data, GAO-19-111 (Washington, D.C.: Dec. 19, 2018). 4 Health insurance is the third-largest sector. It includes products from private health insurers, as well as government programs. Both the property/casualty and life sectors also write some health insurance. Page 3 GAO-19-423 Insurance Technology have been taking or might consider to address these challenges. 5The stakeholders included the Federal Insurance Office, NAIC, selected state insurance regulators, associations representing state agencies, academics, consumer groups, insurance providers and industry associations, actuarial professional associations, consulting groups, lawyers in the field, and technology providers. 6We identified potential interviewees by conducting internet research, reviewing literature search results, and reviewing recommended interviewees from our initial interviews. Finally, we reviewed NAIC model laws and state laws to identify any relevant to the development and implementation of insurtech. See appendix I for more information on our scope and methodology. We conducted this performance audit from April 2018 to June 2019 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Insurance allows individuals and businesses to manage risk by providing compensation for certain losses or expenses, such as those from car accidents, fires, medical services, or inability to work. According to NAIC, as of December 31, 2017, there were 2,509 property/casualty companies and 852 life insurance companies in the United States and its territories. In 2017, premiums written for the property/casualty sector totaled $602.2 billion in 2017 and premiums written for the life and health sector totaled $683.2 billion. 75 NAIC is the standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories (Guam, American Samoa, Puerto Rico, U.S. Virgin Islands, and the Northern Mariana Islands). 6 For our discussion of stakeholder views on benefits and challenges in the primary areas they identified as being affected by technology, we define “some” as stakeholders from three or four categories and “several” as stakeholders from five or more categories. 7 The life and health sector consists mainly of life insurance and annuity products. Most private health insurance is written by insurers whose main business is health insurance, which is not discussed in this report. Premium data are from NAIC. See National Association of Insurance Commissioners, 2017 Insurance Department Resources Report, vol. II (Washington, D.C.: 2018). Background Page 4 GAO-19-423 Insurance Technology As we have noted in recent reports, advances in technology and widespread use of the internet have brought about significant changes in the financial industry. 8For example, in recent years technology has changed consumer expectations and preferences, with younger consumers especially being well-versed in new technologies and looking to take a more hands-on approach to managing their finances. Similarly, over the last 5 years, established insurers and insurtech companies have used technology to offer simpler insurance products and streamlined customer experiences. Insurtech companies have been playing a variety of roles in the U.S. insurance market. Key players in insurtech include the following: Insurtech companies (typically startups) that are licensed insurance companies. Insurtech startups offer innovative products and services and are active in all major insurance products and all lines of business, with concentrations in the property/casualty business. For example, according to its website, Lemonade Insurance Company is a property/casualty insurer that sells products exclusively through mobile applications (apps) and its website. It offers renters, condominium, and homeowners insurance in several states. Another example is Root, which describes it