Insurers operating in New York State will have to reveal by July 25 whether they rely on external data sources to underwrite life insurance coverage, according to state regulators.
The request for the information was initiated by Maria T. Vullo, superintendent of the New York State Department of Financial Services in a letter last month to insurers and fraternal benefit societies.
Vullo’s office wants to know whether insurance companies are using credit scores, purchasing habits, affiliations, home ownership records and even educational attainment as external data points in their underwriting procedures.
“This is, as far as I know, the first inquiry on the subject,” said Mary Jane Wilson-Bilik, a partner with the law firm of Eversheds Sutherland.
“This memo is groundbreaking in that it’s the first time that a regulator has asked about this for life underwriting,” she said.
Use of External Data Not Illegal
As accessibility to data grows and data volumes multiply, insurance companies want to harness that data to be able to issue policies faster and at prices that reflect the risk companies bear when issuing a life policy.
Simplified underwriting, which avoids invasive blood and urine samples, allow insurers to issue life insurance policies in a few seconds.
There’s nothing illegal about collecting outside data sources, so long as the underwriting is actuarially justified, said Wilson-Bilik.
In recent years, with the dissemination of massive amounts of data, some insurers have begun to address underwriting risk at a more granular level by taking advantage of consumer databases and including the data in plan ratings, a technique called “price optimization.”
Critics say price optimization could result in discriminatory rates and unearthing credit histories to help set an insurance premium could even run afoul of the Fair Credit Reporting Act.
Meanwhile, regulators in some states have restricted the use of price optimization in personal lines coverage.
In the case of a life policy, an insurer that collects data from external sources might kick the application over to underwriting, where the applicant could get turned down.
“What if you didn’t get simplified (underwriting) because of your external data factors, then went to fully underwritten and then were denied life insurance?” she said.
Specific Information Sought
New York regulators are looking for insurers that offer accelerated or algorithmic programs and use information other than a doctor’s statement, motor vehicle reports and prescription drug data to supplement medical underwriting, Vullo said. Those insurers must respond.
Regulators want to know how and what specific data elements are being used. Among their areas of interest:
*Which third-party vendors are providing information.
*When information becomes an algorithmic input, what weight is given to data elements?
*How algorithmic underwriting is disclosed to applicants.
*What recourse applicants have for adverse decisions?
*What kind of data security procedures are in place?
Issues surrounding external data sources to use in policy ratings in personal lines were summarized in a 2015 white paper on price optimization by the National Association of Insurance Commissioners, and have been discussed within the industry for many years.
But it’s not clear whether complaints triggered the New York regulator’s request for information or if the Vullo’s office is simply following steps already taken on the property-casualty side, Wilson-Bilik said.