Insurance regulators play a vital role in ensuring the industry operates in a way that protects insurance customers when they need it most. From solvency to compliance to underwriting, insurance regulations have served as the guidelines for the insurance industry for hundreds of years. Incumbent insurers all have long histories and entire teams dedicated to compliance, forever keeping up with new regulations and ensuring they remain within those lines. But today’s insurance world is very different than even that of ten years ago.

The insurtech boom, as well as general investment in technology and innovation, is shaping the relationship between insurers and regulators. New insurtechs are finding that, in order to enter the market as a carrier, they need to play catch up to insurers that have decades, or even centuries, of experience in compliance. Regulators are working to become more cooperative and agile as they work to keep up with a constantly changing industry that, until quite recently, was remarkably stagnant. 

We recently spoke to Nick Gerhart, Chief Administrative Officer at FBL Financial Group, who has a long history in insurance regulation, for his take on the ways the industry is changing in response to insurtech, and the ways it’s remaining steadfast.

Q: The insurance industry is under increasing pressure to deliver products and respond to claims digitally and quickly. Has regulation changed to accommodate this shift?

NG: The regulatory industry is inherently reactive, not proactive, and if you ask me, that’s a good thing. Proactive regulation would suffocate innovation without even realizing it, so it’s good to take a ‘wait and see’ approach and work a little slower.

When it comes to new technologies and products, regulators need to be smart enough to know what they don’t know. There’s a need to see how things will play out to ensure regulations are aligned with the market, the product, and what consumers need and want. 

As far as working with insurtechs, there’s a significant difference between a new startup company and an incumbent insurer. With an incumbent, there’s a longstanding history of compliance that newer insurtechs are inherently missing. Insurance in the US is particularly tricky for new companies because there are 56 different states/territories, coordinated through the National Association of Insurance Commissioners (NAIC). In the past three to five years, however, there’s been initiatives and programs geared towards innovation and providing insurtechs with easier access to regulators. Examples include the Innovation and Technology Task Force, which monitors innovation and the use of technologies like AI, as well as many workshops affording insurtechs a chance to meet and work with regulators.

Q: Are existing regulatory frameworks flexible enough to accommodate a significant digital transformation in the industry, or must they adjust to do so?

NG: Customers are at the heart of insurance regulation, and we need to ensure insurance products are available to customers and that customers are protected in their dealings with insurance carriers from policy issuance through claim payment (if applicable). The push towards customer centricity in insurance benefits the entire industry, so long as it’s done correctly, and technologies are used for the benefit of the customer. For example, until regulators get their arms around algorithmic underwriting, there will be challenges. Luckily, many insurers are cautious, which means regulators will be afforded the opportunity to create the proper regulatory framework.  

As far as existing frameworks go, they are flexible enough, but the most important thing remains consumer protection. Solvency framework is first and foremost and non-negotiable. When it comes to collectible data, like wearables, there’s flexibility, but it depends on the state and the market. For the most part, I think regulators are more engaged in this conversation than many expected them to be five years ago. Regulators are interested in the challenges and opportunities that allow the industry to move forward to meet customer needs.  

Q: Are there any notable insurtech trends that you think are particularly challenging or concerning in regards to regulation?

NG: In my mind, it’s all about data; the sources, privacy, correlations and much more.  A major focus will be evaluating the integrity of the data, including accuracy, and then how it will be used.  I see data science converging with actuarial science and that may pose opportunities and challenges.  For instance, we will draw data instead of blood in the purchase of life insurance.   The use of AI algorithms and issues like the AI ‘black box’ will need to be examined and properly understood moving forward. As these technologies mature in the insurance market it’ll be easier to see how they’ll play out, but a major issue right now is simply data privacy, how data is used, and how the algorithms offer predictions.  

Q: What role do regulators play as far as helping or hindering a company trying to push through a particular innovation?

NG:  Regulators should always be focusing on ensuring consumers are protected and that companies can pay their claims, that’s the bottom line. If there are laws that need to be changed that impede innovations or to allow innovations, ideally commissioners can work with their legislators to address that. Additionally, I see regulators working a lot with innovators, entrepreneurs, and carriers to address issues and concerns.  

Finally, I believe regulators should continue to learn what is occurring in the marketplace and execute on the innovation and technology parts of the NAIC State Ahead strategic plan.  Learning about advancements and technological changes will be critical in the overall strategic plan at the NAIC and regulators are obviously engaged in that.    

Q: How would you say different state regulators are working together to respond to industry changes, like insurtech?

NG: It has picked up a lot, specifically in reference to insurtech. However, collaboration is nothing new for regulators as it has always been a very collaborative system. Every state is unique, but in the end all work to coordinate through the NIAC and states want to make sure progress isn’t impeded. What the NAIC is really trying to create is the coordination of a system that transcends states, which is tricky but maximizes collaboration.

Across the states, there’s been an effort to create more sandboxes and opportunities for insurtechs to access regulators, but that’s not always what they really need to do in my view. There are already plenty of opportunities at events like InsureTech Connect or NAIC Financial Summit in Kansas City where insurtechs can access regulators. What states need most are  people at the commissioner’s office who will sit down and look at new products and ideas and provide feedback. I believe most states are more than willing to do that and prepared to do it and I hear commissioners confirm that all the time.  

Q: Do you think insurtechs have an easier time navigating the regulatory environment because they have shorter histories, or is it more difficult?

NG: There’s pros and cons here. There’s ‘welcome to the party, you’ve skipped 100 years of work,’ and there’s ‘you don’t know what people have learned in those 100+ years.’ Depends where you’re sitting in the value chain, depending on whether you’re trying to partner with carriers or be a full stack carrier, it’s very different. If you’re partnering, you can leverage what carriers already know. If you’re a Lemonade for instance, you must have your own team and make sure everything is aligned.   

There are opportunities either way. Ignorance can’t be bliss, so just because you don’t know everything based on experience doesn’t mean you can get away with it. One way or another, you must know what you’re dealing with and that you are working in a highly regulated industry. The industry is critically important to millions of people. We sell people a promise that is important and may impact one’s life greatly, it’s not a quick ticket item. This isn’t Amazon Prime. There are rules that need to be followed, and not following them at the expense of the customer isn’t an option. Companies that ignore regulations, or do not understand them, will find themselves in hot water.  It is best to learn what you do not know and work toward compliant execution.  

Q: From your perspective, what are the most significant ways in which the industry has changed in the past decade and what are some of the biggest challenges going forward?

NG:  There is certainly a shift towards digital engagement and some carriers and insurtechs are moving toward direct online purchasing. In 2013-2014 things started to get very interesting and that is when people really started to pay attention to insurance and the opportunities within the insurance industry in a way they hadn’t before, especially from a VC standpoint. The sheer volume of investment and capital in different insurance verticals increased dramatically in the last decade, which is only continued through the rise and maturity of the insurtech market.  Witnessing all the funds committed to investing in insurance technology has certainly been fascinating to watch.  

There hasn’t been a big shift within big carriers in terms of premiums written, but more and more companies are trying to rise and meet customer expectations by becoming more consumer centric. It’s not always clear how much people want to interact with their insurers, but it’s obvious they want the industry to be more accessible, especially from a digital perspective. Segments like life and health will change dramatically with different medical technologies, but those big changes haven’t come yet.  New products will emerge to meet new needs in life and health and the life industry needs to focus on the needs and demands of the newer generation of consumers. Aligning products that appeal to them will be key in winning consumers in the future.  

P&C carriers were the first part of the insurance industry to be impacted, in my view.  It started with UBI and telematics and is now transcending into connected home, IOT, worker safety programs and distribution.  Agents still drive most sales, and I believe agents will be around for a long time, but every part of the distribution value chain is working on digital engagement and tools. Taking friction out of the insurance purchasing process is vital.  

The challenges are many, and they will play out over time. Use of third-party data, having transparency on algorithmic underwriting, issues concerning DNA; these will dramatically affect insurance underwriting and decisions made in insurance. What kind of data should insurers be able to access, and what shouldn’t they? What does it mean for a consumer to be able to access and create data that an insurer can’t use it? What does the consumer need to know and how are they treated in this process? Implementing an artificial intelligence strategy and ensuring that bias does not infiltrate the model or decision making. One cannot simply say, “we made this decision because the model or AI told us too.” The company needs to be able to communicate and explain it to regulators and consumers. All of these are questions that regulators and insurers are going to have to consider and work through together in order to deliver the best possible products to insurance customers. 

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