2016 Summer National Meeting Minutes

2016 Summer National Meeting Minutes

Attachment B

Request for Comments – Deadline of Jan. 12, 2018

Draft: 11/28/17

Regulatory Framework

Proposed Structure and Issues for Discussion

Charge A of the Working Group: “Review current regulatory frameworks used to oversee insurers’ use of consumer and non-insurance data. If appropriate, recommend modifications to model laws/regulations regarding marketing, rating, underwriting and claims, regulation of data vendors and brokers, regulatory reporting requirements, and consumer disclosure requirements.”

The Working Group wants to balance consumer protection with industry innovation.

The document “Background Information for Discussion of Regulatory Framework” distributed at the NAIC Summer National Meeting provides a summary of NAIC models addressing the use of data in rating and claims for Property and Casualty Insurance. The document also summarizes some unfair trade practice considerations and consideration regarding the use of specific data variables. Finally, the document primarily focused on the standards from the following three NAIC models: (1) NAIC Property and Casualty Model Rating Law – File and Use Version (#1775); (2) NAIC Unfair Trade Practice Act (#880); and (3) NAIC Unfair Claims Settlement Practices Act (#900).

Based upon the Working Group’s review of the document, there was a general recognition for the need to first identify the scope of issues to be addressed. After the scope of issues is identified, a matrix could be created to (1) identify the regulatory issues; (2) identify the regulatory framework/standard applicable to each issue; and (3) identify whether revisions to the regulatory framework/standard need to be made.

The following issues have been identified through the Working Group’s prior discussions and comments submitted by interested parties.

Issues Raised by Consumers

  1. Are there adequate privacy standards for the use of consumer data?
  2. Do consumers have data ownership rights?
  3. Should insurers be required to notify consumers regarding the use data about them, similar to notification requirements of the Fair Credit Reporting Act?
  4. Should consumers have the right to contest data and request corrections to data?
  5. Are there issues specific to a particular line of insurance?

Issues Raised by Industry

  1. Do insurers and data vendors have appropriate confidentiality protections of intellectual property when submitting models to regulators?
  2. Are there regulatory standards that are barriers to the use data by insurers?
  3. Are there issues specific to a particular line of insurance?

Issues Raised by Regulators

  1. Do regulators have appropriate access to insurers’ models through the current rate filing process?
  2. Are there any data variables that should be prohibited?
  3. Should there be specific levels of correlation and/or causality for rating variables?
  4. Are regulators seeing additional risk segmentation and is this having a positive or negative impact on consumers?
  5. Is there a need for additional regulatory oversight of data vendors?
  6. Are there issues specific to a particular line of insurance?

Preliminary Discussion Draft

Big Data (EX) Working Group

Background Information for Discussion of Regulatory Framework

Charge A

The first charge of the Big Data (EX) Working Group is to “review current regulatory frameworks used to oversee insurers’ use of consumer and non-insurance data. If appropriate, recommend modifications to model laws/regulations regarding marketing, rating, underwriting and claims, regulation of data vendors and brokers, regulatory reporting requirements, and consumer disclosure requirements.”

To begin this discussion, the Working Group requested NAIC staff to identify existing state authority, NAIC model laws, model regulations, and guidelines addressing insurers’ use of consumer and non-insurance data. The initial focus of this review is on insurance companies’ use of data for rating and claims in personal lines Property and Casualty insurance.

Part I: Rating

General Insurance Rating Framework

Pursuant to the established regulatory framework found in the NAIC’s Model Rating Laws (Property and Casualty Model Rating Law – File and Use Version (#1775); Property and Casualty Model Rate and Policy Form Law Guideline (#1776); Property and Casualty Model Rating Law – Prior Approval Version(#1780), rates shall not be excessive, inadequate or unfairly discriminatory. With the exception of prohibiting any risk classification from being based upon race, creed, national origin, or the religion of the insured, the models do not prescribe what data cannot be used for rating.

The following guidance is set forth in Model 1775.

A rate in a competitive market is presumed not be excessive and a rate in a noncompetitive market is considered excessive if it is likely to produce a profit that is unreasonably high for the insurance provided or if expenses are unreasonably high in relation to services rendered.

A rate is not inadequate unless the rate is clearly insufficient to sustain projected losses, expenses and special assessments in the class of business to which it applies and the use of such rate has or, if continued, will have the effect of substantially lessening competition or the tendency to create monopoly in any market.

A rate is unfairly discriminatory if, after allowing for practical limitations, price differentials fail to reflect equitably the differences in expected losses and expenses. A rate is not unfairly discriminatory if it is averaged broadly among persons insured under a group, franchise or blanket policy or a mass marketed plan.

In determining whether a rate is excessive, inadequate or unfairly discriminatory, the following criteria are to be applied:

  1. Basic factors in rates. Due consideration shall be given to past and prospective loss experience within and outside this State; to the conflagration and catastrophe hazards; to a reasonable margin for profit and contingencies; to dividends, savings, or unabsorbed premium deposits allowed or returned by insurers to their policyholders, members or subscribers; to past and prospective expenses both countrywide and those specially applicable to this State; and to provisions for special assessments and to all other relevant factors within and outside this State.
  2. Classification. Risks may be grouped by classifications for the establishment of rates and minimum premiums. Classification rates may be modified to produce rates for individual risks in accordance with rating plans which establish standards for measuring variations in hazards or expense provisions, or both. Such standards may measure any differences among risks that can be demonstrated to have a probable effect upon losses or expenses. No risk classification, however, may be based upon race, creed, national origin or the religion of the insured.
  3. Expenses. The expense provisions included in the rates to be used by an insurer shall reflect the operating methods of the insurer and its anticipated expenses.
  4. Profits. The rates may contain provision for contingencies and an allowance permitting a reasonable profit. In determining the reasonableness of the profit, consideration shall be given to all investment income attributable to the line of insurance.

After setting forth the standards for whether or not a rate is excessive, inadequate or unfairly discriminatory, Model 1775 sets forth information that should be included in a rate filing as follows:

Every insurer shall file with the commissioner, except as to inland marine risks which are not written according to manual rates or rating plans, every manual, minimum premium, class rate, rating schedule or rating plan and every other rating rule, and every modification of any of the foregoing which it proposes to use.

Every insurer shall file or incorporate by reference to material which has been filed with or approved by the commissioner, at the same time as the filing of the rate, all supplementary rating and supporting information to be used in support of or in conjunction with a rate. The information furnished in support of a filing may include or consist of a reference to: (a) the experience or judgment of the insurer or information filed by the advisory organization on behalf of the insurer; (b) its interpretation of any statistical data it relies upon; (c) the experience of other insurers or advisory organizations; or (d) any other relevant factors. In addition, insurers utilizing the services of an advisory organization must provide with their rate filing, at the request of the commissioner, a description of the rationale for such use, including its own information and method of utilization of the advisory organization’s information.

Within this framework, insurance companies have been permitted to use rating variables that are predictors of risk based upon actuarial judgement, which includes “assumptions on the input and assessments on the accuracy of the results.”(NAIC Price Optimization White Paper – Page 4)

Examples of State Laws

Provided below are some examples of state laws that address filing requirements to adjust for the use of new data and predictive modeling.

New Hampshire Law (55:8 Property and Casualty Insurance; Rate Filings)

Every insurer shall file with the commissioner every manual, predictive models or telematics models or other models that pertain to the formulation of rates and/or premiums, minimum premium, class rate, rating schedule or rating plan and every other rating rule, and every modification of any of the foregoing which it proposes to use. Personal lines filings shall include underwriting rules used by insurers or a group of affiliated insurers to the extent necessary to determine the applicable rate and/or policy premium for an individual insured or applicant. An insurer may file its rates by either filing its final rates or by filing a multiplier and, if applicable, an expense constant adjustment to be applied to prospective loss costs that have been filed by an advisory organization on behalf of the insurer as permitted by RSA 412:23. Every such filing shall state the effective date, and shall indicate the character and extent of the coverage contemplated. Information contained in the underwriting rules that does not pertain to the formulation of rates and/or premiums shall be identified by the filer as proprietary and shall be kept confidential by the department and shall not be subject to the provisions of RSA 91-A.

Nevada Regulation (Regulatory Activity Bulletin 17-001)

The Division issues this bulletin to remind insurers that any mathematical model used inunderwriting or rating of any personal line of property and/or casualty insurance, or other line ofproperty and/or casualty insurance subject to regulation of rates pursuant to NRS 686B.030, mustbe filed with the Division for prior approval pursuant to NRS 686B.110.

Among the information required to be filed with the Division pursuant to NRS 686B.070(1) is“Supplementary rate information,” which is defined in NRS 686B.020(4) as including any“rating rule” or “rule of underwriting relating to rates.” By definition, any underwriting rule ormodel used in underwriting that affects the premium that any insured would pay is a “rule ofunderwriting relating to rates.” Calling a model an underwriting model rather than a rating modeldoes not affect the applicability of this requirement.The following are examples of underwriting rules and predictive models that must be filed withthe Division and are subject to the Division’s prior-approval authority:

  • Models and rules that determine placement of an insured within a tier where the tier placement is considered as a variable within the insurer’s rating plan. Tiering is considered to be rating by definition since tiering is merely an intermediate step between the underlying characteristics of the risk and the rating treatments ultimately assigned based on those characteristics.
  • Models and rules that determine placement of an insured within one of several affiliated companies within a group, where each company would have a different rating plan andwould possibly charge different rates to otherwise identical risks. Because company placement directly determines the insured’s premium, such underwriting models are also necessarily considered to be rating models.
  • Models that compute any manner of score or index used as either a direct rating variable or a determinant of eligibility or company placement, in whole or in part, if there is a possibility for such models to affect the premium that the insured is charged. Examples include, but are not limited to, models based on credit information, geographical location, peril-specific risk estimation, or any demographic information. Any model that utilizes a mathematical algorithm to calculate a score or index for eligibility purposes, and that is capable of being utilized for rating by any insurer, is also considered a rating model since the decision to reject a risk based on a score or index is considered to be a more extreme variant of a decision to surcharge that risk based on the same score or index. Rejecting any risks based on numerical indices would also affect the composition of the ultimately insured risks and thus would have an impact on the insurer’s loss experience and actuarially indicated rates. Furthermore, the Division is concerned that rejecting risks solely based on certain location-based indices would constitute a prohibited form of imposed unavailability of insurance in some areas of Nevada, and would thus be unfairly discriminatory. Use of particular location-based indices for the purposes of territorial rating may be approved if appropriately filed and justified by relevant supporting data as determined in the course of the Division’s review.
  • Models that determine the extent to which an insurer relies on an actuarially indicated change to a base rate or relativity. These would include any “price optimization” models that an insurer might use to determine the extent to which a selected relativity moves toward the indicated relativity. Such models may not utilize any non-risk-based attributes such as price elasticity of demand or consumer tendency to complain or shop for insurance. All risk-based attributes that such models use must be fully disclosed to the Division along with the specific quantitative treatments of each of those attributes.

The Division considers all of the aforementioned to fall under the purview of long-standingstatutes and precedents. However, the proliferation of complex predictive models that someinsurers have termed “underwriting models” has led to the necessity to reiterate suchrequirements. Nevada’s filing and prior-approval requirements continue to apply irrespective ofthe complexity of the algorithms utilized by insurers or the labels given to those algorithms.

Texas Regulation (Commissioner's Order No. 2691, dated August 7, 2013)

The amendments to Rule VI add section M (Modeled Rating Factor), which provides an explanation of the MRF, describes its application, and lists the insurance carrier's requirements to use the MRF. The commissioner has deleted the word "factor" after "MRF" in Rule VI, new section M.2.c, as proposed, because it is duplicative.

The MRF is an optional factor that insurance carriers can file with TDI and apply when calculating workers' compensation premium. The MRF takes into consideration individual risk characteristics and loss experience of an insured. Insurers may use predictive modeling to determine the MRF. The term MRF can include tier rating and other similar terms.

Under the amendments to Rule III E, an insurer will apply its MRF to the policy in a multiplicative manner, and must not apply or use the MRF in a way that duplicates other rating factors, such as schedule and experience rating factors. Once determined, the MRF will apply during the entire policy period. Insurance carriers will be required to evaluate each policy's characteristics and experience at each renewal to determine the MRF for the renewal policy.

The amendments to Rule VI require insurance carriers to make a filing with TDI under Title 28, Texas Administrative Code, Chapter 5, Subchapter M (Filing Requirements) before using an MRF. The filing must include the MRFs; the characteristics, variables, or criteria used to determine the MRFs; actuarial support for the MRFs; and other supporting documentation.

The commissioner has determined that the amendments to the manual are necessary for insurance carriers to use MRFs in calculating workers' compensation rates or premiums. The proposed filing requirement is necessary to promote transparency and accountability in the use of MRFs. Including an MRF in premium calculations allows an insurance carrier to tailor premiums more precisely to each insured by including an insured's specific risk characteristics and loss experience. With a more precise risk assessment, the insurance carrier can come closer to charging the appropriate premium for the risk each insured actually presents.

Part II: Unfair Trade Practice Considerations

The NAIC Unfair Trade Practices Act (#880)prohibits the following practices if committed flagrantly and in conscious disregard of the Act, or committed with such frequency to indicate a general business practice:

  1. Making or permitting any unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees or rates charged for any accident or health insurance policy or in the benefits payable thereunder, or in any of the terms or conditions of such policy, or in any other manner.
  2. Making or permitting any unfair discrimination between individuals or risks of the same class and of essentially the same hazard by refusing to insure, refusing to renew, canceling or limiting the amount of insurance coverage on a property or casualty risk solely because of the geographic location of the risk, unless such action is the result of the application of sound underwriting and actuarial principles related to actual or reasonably anticipated loss experience.
  3. Making or permitting any unfair discrimination between individuals or risks of the same class and of essentially the same hazards by refusing to insure, refusing to renew, canceling or limiting the amount of insurance coverage on the residential property risk, or the personal property contained therein, solely because of the age of the residential property.
  4. Refusing to insure, refusing to continue to insure, or limiting the amount of coverage available to an individual because of the sex, marital status, race, religion or national originof the individual; however, nothing in this subsection shall prohibit an insurer from taking marital status into account for the purpose of defining persons eligible for dependent benefits.
  5. Terminating, or to modifying coverage or to refusing to issue or refusing to renew any property or casualty policy solely because the applicant or insured or any employee of either is mentally or physically impaired.

6.Refusing to insure solely because another insurer has refused to write a policy, or has cancelled or has refused to renew an existing policy in which that person was the named insured.

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