United States: DFS Issues Guidance To Life Insurers On Use Of "External Data" In Underwriting Decisions

On January 18, 2019, New York's Department of Financial Services (DFS) issued Circular Letter No. 1 (2019) to advise life insurers regarding the type of data that they may use when underwriting policies. The guidance was released after the DFS conducted an investigation into insurers' underwriting practices, which followed reports that it had received of the emergence and use of "unconventional" data sources within the industry. The guidance—summarized below—will be of particular interest to insurtech start-ups, as well as established carriers seeking to use new sources of data to underwrite risks.

Circular Letter No. 1 identifies two primary areas of concern regarding the use of "external data" (e.g., data—such as a credit card rating—that is not directly related to an applicant's medical condition), algorithms and predictive models in the life insurance space. First, the use of such tools might unlawfully discriminate against protected classes of consumers. Second, such tools often lack transparency for consumers.

1. Unlawful Discrimination

New York Insurance Law Article 26 prohibits the use of, among other things, race, color, creed and national origin in underwriting.

The DFS's investigation uncovered that life insurers used the following sources of external data in connection with underwriting policies: geographical data, homeownership data, credit information, educational attainment, licensures, civil judgments and court records. According to the DFS, all of these sources of data have the potential to reflect "disguised and illegal race-based underwriting." The DFS stated that other external data that it found in use, such as retail purchase history, social media or Internet activity, geographic location tracking, condition and type of applicant's electronic devices (and software), and an applicant's appearance in photos, also have a "strong potential to have a disparate impact on the protected classes identified under New York and federal law.

In light of these issues, the DFS provided, among other guidance, the following principles:

  • An insurer must determine that external sources do not collect or utilize prohibited criteria.
  • An insurer may not simply rely on a vendor's claim of nondiscrimination or the proprietary nature of the third-party process.
  • An insurer may not use an external source, unless it can establish that it is not unfairly discriminatory. In so doing, an insurer should consider the following questions:

    • Is the underwriting supported by generally accepted actuarial principles?
    • Is there a valid explanation for the differential treatment of similarly situated applicants reflected by the underwriting guideline that is derived (in whole or in part) from external data sources?

2. Consumer Disclosure/Transparency

Pursuant to New York Insurance Law Section 4224(a)(2), insurers must notify the insured or potential insured of the right to receive the specific reason(s) for a declination, limitation, rate differential or other adverse underwriting decision.

The DFS reiterated that an insurer may not rely on the proprietary nature of a third-party vendor's algorithmic processes to justify a lack of specificity related to an adverse underwriting action, and also that insurers must also provide notice to, and obtain consent from, consumers to access external data, where required by law or regulation. According to the DFS, the failure to adequately disclose to a consumer the material elements of an algorithmic underwriting process (and the external data sources upon which it relies) may constitute an unfair trade practice under New York Insurance Law Article 24.

Conclusion

On the one hand, insurers are in the business of discrimination—a healthy 20-year-old will expect to pay less for life insurance than an ailing 90-year-old. On the other hand, there are legally mandated limits to the nature and type of discrimination allowed. Within this framework, the boundaries of permissible discrimination are often far from clear. The DFS's latest guidance indicates that not only is it closely monitoring companies' compliance with underwriting rules, but also that it believes that insurers may run afoul of the law by using criteria that has a "disparate impact" on a protected class—an issue that has received significant attention in the homeowners' insurance industry, but comparatively less with respect to other lines of insurance. This development highlights the need for companies to review their underwriting models to ensure that they are actuarially sound and do not unfairly discriminate against a protected class.   

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions