All Things Newz
Law \ Legal

California Restricts Insurers’ Use Of AI And Big Data – Insurance Laws and Products

To print this article, all you need is to be registered or login on

On June 30, 2022, the California Department of Insurance (the
“Department”) released Bulletin 2022-5 (the
“Bulletin”), which places several limitations on the use
of Artificial Intelligence (“AI”) and alternative data
sets (“Big Data”) by the insurance industry. The Bulletin
states that the Department is aware of recent allegations of racial
discrimination in marketing, rating, underwriting and claims
practices by insurance companies and reminds all insurance
companies of their obligations to conduct their businesses “in
a manner that treats all similarly-situated persons alike.”
The Bulletin goes on to describe recent examples of alleged unfair
discrimination being investigated by the Department, including (1)
subjecting claims from certain inner-city ZIP Codes for special
scrutiny, (2) using facial recognition in claims decisions, and (3)
collecting personal information that is unrelated to the risk being

The six most significant aspect of the Bulletin are:

1. Restrictions on Both AI and Big Data: The
Bulletin provides that insurance companies must avoid
discrimination that can result from the use of artificial
intelligence, as well as Big Data, which is described as
“extremely large data sets analyzed to reveal patterns and

2. Restrictions Beyond Underwriting: Insurance
companies must avoid discrimination when using AI or Big Data for
underwriting, as well as marketing, rating, processing claims, and
investigating suspected fraud relating to any insurance transaction
that impacts California residents.

3. A Focus on Proxy Discrimination: The
Department notes a growing concern in the use of purportedly
neutral individual characteristics as a proxy for prohibited
characteristics, which include sex, race, color, religion,
ancestry, national origin, disability, medical condition, genetic
information, marital status, sexual orientation, citizenship,
primary language, or immigration status. Potential proxies listed
in the Bulletin include ZIP Codes, biometrics, facial recognition,
geographic data, homeownership data, credit information, education
level, civil judgments, court records, consumer retail purchase
history, social media, internet use, condition or type of an
applicant’s electronic device, and how a consumer appears in a
photograph. This list has many of the same inputs the New York
Department of Financial Services described as potentially suspect
in underwriting for life insurance in its Circular Letter No. 1 (2019).

4. Concerns Over Lack of Actuarial Nexus: The
Department likely views the above list of suspect characteristics
as non-exhaustive because it goes on to state that any input used
for AI models and Big Data that lacks a sufficient actuarial nexus
to the risk of loss has the potential to unfairly discriminate.

5. Transparency and Explainability
: The Bulletin provides that when insurers use
complex algorithms in a declination, limitation, premium increase,
or other adverse action, the insurer must provide the specific
reason or reasons for that decision to the consumer.

6. Due Diligence Requirements: The Bulletin states that
before utilizing any data collection method, fraud algorithm or
rating/underwriting or marketing tool, insurers “must
their own due diligence to ensure full compliance
with all applicable laws.”

Takeaways. The Bulletin is part of an emerging
patchwork of state laws and regulatory pronouncements placing
significant obligations on insurers’ use of AI applications and
Big Data, which includes recent developments in Connecticut,
Colorado, and New York, as well as guidance from the NAIC and
NCOIL. Insurance companies seeking to comply with these new
developments should consider taking some of the following

  • AI/Big Data Inventory: Assembling a list of AI
    models and Big Data uses that could be subject to these regulations
    will help insurers prioritize which applications may require
    immediate attention.

  • Risk Rating: Creating an AI risk-management
    framework that includes a list of high-risk factors for AI and Big
    Data uses (e.g., use of potentially suspect inputs in underwriting
    algorithms). Those criteria can then be used to identify the
    highest risk AI and Big Data applications for review and possible

  • Mitigation: Identifying mitigation options for
    high-risk AI applications, including testing suspect inputs,
    additional transparency, human oversight of decisions, ensuring
    data quality, and increasing the diversity of the teams designing
    and operating the AI/Big Data applications.

  • Training: Conducting trainings on AI and data
    compliance, governance, and risk management for employees and
    contractors involved in designing and operating the AI/Big Data
    applications, as well as certain members of senior management,
    legal, compliance, risk, and business functions.

  • Governance: Creating a cross-functional AI
    Oversight Committee to review certain high-risk AI/Big Data
    applications and recommend mitigation. The Committee can also
    implement AI/Big Data Polices, including Guiding Principles and
    Codes of Conduct.

  • Vendor Risk Management: Many AI/Big Data
    applications are at least partially developed by third parties.
    Insurers should consider whether their diligence and contractual
    procedures are sufficient for vendors that are providing services
    that may be covered by the Bulletin.

  • Documentation: As the risk of regulatory exams
    and civil litigation over insurers’ use of AI and Big Data
    increases, so does the need for robust documentation of efforts to
    meet regulatory compliance obligations. This may include review of
    data inputs, results of model testing, assessment of actuarial
    risk, implementation of mitigations, who received training, and how
    concerns about models or particular decisions were resolved.

  • Examinations of Business Practices, Algorithms, and
    : The Bulletin also states that the California
    Department of Insurance may use market conduct examinations or
    Special Investigative Unit examinations to audit and examine all
    insurer business practices, including their marketing, rating,
    claim, and underwriting criteria, programs, algorithms, and

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Insurance from United States

Warranties In Marine Insurance: USA

STA Law Firm

It was in the 18th Century that, Lord Mansfield attempted to separate the concept by mentioning that warranties are a part of a policy that is written;

Source link

Related posts

Letícia Marques Trata Sobre Aprovação Da PEC Da Relevância Em Entrevista Ao Conjur – Environmental Law

Farm succession – Wills/ Intestacy/ Estate Planning

Breaching trade sanctions can lead to jail – Export Controls & Trade & Investment Sanctions