Policymaker Perspectives: Balancing Innovation and Protection

Pete Miller [0:38]: Insurance regulation is evolving rapidly as new technologies and climate challenges reshape the insurance and risk management landscape. The balance between fostering innovation and protecting consumers has never been more critical—or more complex.

The Institutes Griffith Insurance Education Foundation serves public policymakers by providing non-partisan resources and programs designed to enhance understanding of insurance and risk management. With that mission in mind, I’ve invited Frank Tomasello, executive director of the Griffith Foundation, to host today’s episode featuring a timely conversation with a regulatory leader navigating these very challenges.

Frank brings invaluable expertise in bridging the gap between industry innovation and regulatory oversight, so I know you’ll be in excellent hands. Take it away, Frank!

Frank Tomasello [01:26]: Thank you, Pete, for the kind introduction.  The Institutes and its affiliates have been exploring opportunities to combat some of the biggest risk challenges facing society today by leveraging innovation and technology to better predict, prevent, or mitigate loss, and so too of public policymakers. In this edition of the Predict and Prevent podcast, I sat down with the honorable Scott A. White, Commissioner of the Virginia State Corporation Commission’s Bureau of Insurance, and President-elect of the National Association of Insurance Commissioners, often referred to as the NAIC. He shared his perspective on regulatory efforts to encourage innovation aimed at better predicting, preventing, and mitigating loss.

To begin our conversation, Commissioner, from a macro perspective, how would you describe the efforts of the regulatory community to better predict and prevent loss? And would you care to respond by focusing on a specific risk or risks in particular?

Scott White [02:24]: Well, thanks, Frank. It’s great to be here and talk about these very important topics. I think when it comes to regulatory efforts to address risk mitigation, it’s really following and understanding what the industry is doing in terms of predictive analysis. They’ve really become more refined over the past several years. And that requires us to be on top of that and better understand both what they’re doing and the impact of that.

Of course, as regulators, we’re focused on consumer protection. And so that raises a number of issues in terms of data that’s used for their predictive analyses, making sure it’s both secure and protected, but also how it’s used and the validity of the data. So we’ve had to get up to speed rather quickly in terms of learning and understanding this.

So we’ve had a lot of collaboration with the industry to better understand how they’re using it in what areas, what their governance is, how they’re mitigating the risks. I think the basic message I would give from the regulatory community, Frank, is we want to encourage this type of innovation. We know it has a lot of benefits to consumers in a wide range of areas.

But we have to make sure that there are what I would say guardrails in place to protect consumers. And so we’ve been kind of on a journey as we’ve seen the advances in this technology to learn what that is again and make sure we have the tools to protect consumers.

Frank Tomasello [04:00]: I’m curious, with emerging AI technology helping to advance loss prediction, one would imagine, given your comments, that ensuring transparency and avoiding discriminatory outcomes are likely top of mind for the regulatory community. Could you share your thoughts there and perhaps how the NAIC might be approaching some of those issues and tackling them?

Scott White [04:25]: Yeah, I think it helps to think of an example of where we’re seeing that predictive rate modeling. We touched on that just a minute ago. That’s an area that first came to our attention where we need to focus our time and attention because there are a number of different risks there. In fact, when you’re talking about technological innovation, I break it into three components. The consumer protection piece, which I mentioned, and that gets into unfair discrimination. We want to make sure the data is being used in a way that doesn’t discriminate unfairly against consumers from an actuarial standpoint. Then data privacy, of course, which we’re also working on with NAIC, and then protecting against the risk of cyber threats, another area we’ve been spending a lot more time on.

But when it comes to predictive rate models, we’ve seen growing use of these by companies, particularly on the property and casualty side, when developing rates for their personal lines, auto programs or homeowners. And so when we get a filing, in a lot of our states, the way our rate review process works, we don’t actually necessarily approve those rates, but we make sure they adhere to certain standards, that they’re adequate, not excessive or unfairly discriminatory. So we will look to see how they’re using that data.

And the concern there is around proxy discrimination. They may use a factor that they believe reflects a certain risk and adjust the premium accordingly, but that could intentionally or not implicate certain protected classes or just not be aligned with treating similarly situated risks the same way when it comes to pricing. So we’ve had to dig into that. We do that two ways. A lot of us either have an actuary who is able to analyze some of these filings or a consultant, but it really has to do with asking the right questions.

We’re not experts and it’s very time consuming given the number of filings we have. So we do have a number of questions we can ask in terms of where they got the data, the hygiene they used, how they developed the risk factors and came up with these variables. It’s a process that has improved significantly over the years and I expect it will continue to be something that we get better at.

Frank Tomasello [06:56]: Is it fair to say that transparency is of utmost importance as we think about model design and model outputs and perhaps about the dovetailing of industry, consumer, and regulatory voices?

Scott White [07:09]: That is absolutely a great thing to focus on. I would highlight three areas when it comes to looking at AI and machine learning models from a regulatory perspective. We want to make sure it’s transparent. We want to make sure that the insurer is accountable for how they’re using these AI systems. And we want to make sure they’re fair, as I’ve touched on before.

So to emphasize the fairness piece, we have to know how they’re using it. We haven’t really focused at the NAIC when it comes to regulating AI and the use of these systems on an outcome-based approach in terms of testing these systems. We really look at the process and whether governance is in place. And so that requires us to have a very firm understanding of how these models are being used, whether they’re being used directly by the company or they’re relying on a third-party vendor.

There’s been a tendency to have a black box approach when it comes to some of these filings given the proprietary nature traditionally. And we’ve really had to work through that issue. I think the industry understands our need to look at how these systems are used and run through the processes, run through the governance in place. And so that’s been something we’ve worked on.

And I think we’re there, although we still have a lot to learn. One thing we’re noticing is how rapidly the shifts are in terms of how companies are using them and in what areas. And when we go back and ask for an update, we find it completely different six months later. And the other piece that you mentioned is that there needs to be transparency to consumers in terms of how their data is being used.

We’ve been trying to update our privacy models to make sure they reflect the current state of where we are. Some of these privacy regulations in many states haven’t been updated in over 30 years, and they don’t really account for how data is collected by insurance companies, used, and in some cases sold. And so that’s been a project at the NAIC that we’ve been working on for almost five years with the industry, and we hope to get something completed there by the end of this year.

Frank Tomasello [09:22]: Thank you, Commissioner. I want to switch gears from the discussion we’ve had around predictive modeling, its promise, and some of the privacy considerations, among other things that we’ve talked about, to the notion of resilience strategies. Opportunities for mitigation, no doubt, are important. What is the thinking amongst NAIC leaders regarding encouraging insurers to offer incentives to policyholders who adopt preventative and/or more resilient measures? I’m thinking about things like flood proofing and fire mitigation, that kind of thing. Could you share some insight there for us?

Scott White [09:56]: Yeah, I think you’ve hit on, I think one of the more interesting things going on in the regulatory community and industry wide. If you had asked us three or four years ago about resilience or mitigation efforts on the part of the industry, I’m not sure we would have been in a great position to talk about that. if you go to any meeting today, it’s top of mind. It’s almost the first thing we discuss, not only given the need to address some of the issues in the property insurance market that have become more acute in the last several years, but just shifting our overall idea of what the role of insurance should be, right? Or emphasizing the part that is not just indemnification, payment of claims, but also stretching into loss prevention, right? And the need to really focus on that in terms of bending the cost curve.

We often cite a study that shows for every dollar that’s put into mitigation or resiliency, that can save up to six, seven dollars on the back end when it comes to claims. So it’s in everyone’s interest to put in place measures that prevent losses, lower claim costs. That’s going to help the cost of the actual insurance for the consumer. And it’s also going to create an environment where companies are more favorable and inclined to write business.

Frank Tomasello [11:21]: Commissioner White on the consumer side, is the NAIC thinking about or involved in promoting public awareness campaigns perhaps to encourage risk prevention and mitigation on the part of consumers? Are there efforts underway perhaps there or perhaps within your state in particular, anything you want to share on that front?

Scott White [11:41]: Yeah, it’s a good question because you’re seeing a lot of these programs develop in a number of different states. We like to tell the story of this originating in Alabama with strength and Alabama program. And what this is, is it provided grants to homeowners if they rebuilt or built their roof to a fortified standard developed by the IBHS, which is an industry supported group that has developed this very strong building code. And there was an idea that incentivizing this program through grants and helping facilitate that through staffing within the department in coordination with the industry and consumers would do exactly what I said a few minutes ago, would be strengthen their market and make insurance more affordable, particularly in those coastal areas in Alabama that are subject or prone to hurricanes.

And that’s exactly what we’ve seen. Of course, in the US, the state-based system, we talk about the laboratory of ideas among the states, and this was an idea that other states saw as working. They saw similar issues in terms of the risks in their own markets, and it’s been widely adopted. think if you talk to the NAIC, they’ve hired staff to do nothing but assist states in standing up these programs legislatively or otherwise, and as many as over 40 states are in some stage looking at this, program. And I believe about 15 to 20 have actual legislation or the process of legislation passing. So, the one thing to consider is each state faces its own unique risks.

Again, this emphasizes the appropriateness of the state-based system, the local markets and conditions. We’re more able to respond to those and address those, but also zooming out, working collaboratively with the other states to ensure best practices will lead to the right solutions. so I know Minnesota has one that deals with the major threat in their state, right? Which is, think, hail storms. You go out west and, of course, wildfire risk, and you have a lot of states building up those programs.

You can do it in one of two ways, Frank. A lot of times it’s a grant program, or offering through the product design in the form of deductible, lowering the deductible or other features to incentivize the use of that. We’re in a period where funding is more at risk or more uncertain. So we’re all trying to figure out how to sustain these important programs because they’ve really gotten hold in the industry and the regulatory wants to do everything it can to support those. But when comes to education, consumers need to be aware of these things. And that’s where we find we have a real job to do, right?

It’s one thing to provide these grants or make sure folks can go to companies that are offering these discounts, but they have to know about those first. So we have a lot of discussions about what can we do in our role as regulators? What can the industry do? What can other stakeholders do? It’s a key piece of this whole puzzle that doesn’t often get as much attention. But what we found is it’s tough to get through to the consumer who’s buying a home, for example, or sustained a natural disaster to focus on that piece of it. It may not be top of mind.

Frank Tomasello [14:55]: Commissioner, undergirding insurance and risk management in the U.S. is, and you referenced this a bit earlier, a decades-old regulatory framework, a state-based framework of regulation here in the U.S. And I thought we might spend some time exploring strengths and challenges through the lens of efforts to better predict, prevent, and mitigate loss. Do you foresee a need to adapt that regulatory framework to keep pace with the rapid advance of technology that’s focused on prediction, prevention, mitigation, or in your view is the framework sufficiently malleable? You’ve talked about a number of successes and efforts underway, but just curious to get your view there.

Scott White [15:35]: Yeah, I think that, you as we look at how the regulators have approached, just focused on what we’ve been speaking about, how do we regulate properly the use of AI systems? How do we address the more acute risks in the property markets raised by natural catastrophes and other factors? I think it’s proved to stand the test of time. It’s certainly not perfect. But what I think we look at in terms of its strengths are the state lab approach that I touched on, developing unique solutions and then those being adopted by other states if they’re market tested solutions that are in response to local conditions, you can adapt accordingly. But it’s the idea of being able to draw on the creative approaches by other states to come up with better solutions. It would be much more difficult to develop at a federal level. I think our approach from a standpoint of how we regulate is it’s very flexible, it’s risk-focused, it’s principles-based. And what that means is when you have emerging risks like AI systems, you don’t have to create a brand-new framework.

In fact, for example, when we decided the best approach to coming up with a framework, we didn’t develop a model law, or model regulation, we developed a guidelines, a paper that basically said we have the laws in place to regulate AI systems in terms of market practices or consumer protections, and we adjust those accordingly without any need to wholesale create a new framework. Now there may be gaps and if we identify those gaps, may need to be changes, but generally we have found it to be sufficient and strong.

And I would say the same thing with another quote unquote emerging risk with cybersecurity. We used our existing laws, created some adjustments to those laws in terms of notices, but within the framework of how we handle notices generally. And we found it to be very effective. I think taking a risk-based approach that’s flexible, that addresses proportionality where you have large insurance companies versus smaller insurance companies and the materiality of risk has proven very durable. And so, you know, I’m very supportive of how it works. Now, some of the challenges are when you have 56 jurisdictions, you face the potential for a lack of consistency.

The process can be much slower than we would like. And in some of these areas, achieving consensus is more difficult than it might be with a more top-down approach. But I think the benefit you have at the NAIC is you have lot of transparency in the process. You have a great amount of stakeholder involvement that’s oftentimes lacking at the federal level. And so what comes out of that, I think, is very durable and strong. And it’s something that we’re very proud of in terms of how our regulatory frameworks get developed.

Frank Tomasello [18:55]: Commissioner, you just mentioned the federal level, so maybe a opportunity for us to talk a little bit about and obtain your views on the importance perhaps of collaboration and information sharing between state insurance departments and federal agencies, agencies for example like FEMA, I’m not excluding others obviously, but could you talk a little bit about that through this lens of loss prediction, prevention, mitigation?

Scott White [19:18]: I think it’s very important to develop and sustain good working relationships with federal agencies, regardless of which administration is in place. They have their own expertise, they have their own resources. And when you combine those, it’s better for our markets and it’s better for consumers. And so we have really worked hard to collaborate and coordinate with a number of different agency or groups at the federal level. You mentioned FEMA, the NAIC and FEMA have an advisory group where we collaborate and share information. And it’s become increasingly critical to have these efforts given, you know, again, the state of the property insurance markets and the increasing burdens on both the states and the federal government when it comes to responding to these and keeping the federal flood program in place. So that’s a key one.

But I would also mention when those efforts might be a challenge, we’re seeing that with NOAA. And right now, the current state of things, information that was readily available maybe a few months ago, it’s less clear whether it’s available now. And that raises concerns from our standpoint in terms of needing that information both as regulators and as the industry in terms of developing rating and claims information. So it’s something we’re working with the federal government to make sure that continues.

Frank Tomasello [21:07]: Thank you, Commissioner. Shifting gears a bit and looking ahead, perhaps three years and then five years from now, what do you foresee? How will efforts of the risk management and insurance ecosystem to better predict, prevent, mitigate loss? How will they have evolved?

Scott White [21:23]: That’s a great question because it’s hard to predict what’s going to happen six months from now, much less five years ago. But I think if you look at trends and where things are headed, obviously the industry is becoming much more sophisticated in how it uses data. And as a result, there are many benefits which I like to focus on. It’s going to be more responsive to consumers when you have better data.

You have better models, you have better collaboration tools. We’re going to see real growth and acceleration and use of AI systems. AI systems rather, I think that’s fair to predict. You might see things like real time risk monitoring, which get you again, it matches more accurately the cost of that insurance to the actual risk. And in most cases, that will lead to lower premiums for a lot of policyholders. And it will lead to a healthier balance sheet for a company that’s able to have that certainty in terms of developing its rates and its reserving. You’re going to see much more dynamic pricing models, much more predictive analytics becoming much more mainstream.

An area we should focus on is the climate modeling, which is obviously extremely important. I think we’re seeing that become much more sophisticated. We’ve moved from relying on historical data to using scenario analysis and other more sophisticated tools to better protect the risks. Hopefully that will lead to more discussion and involvement on resiliency infrastructure, which gets to the need to scale up all the efforts where we are on that are ongoing in terms of private public collaboration in areas such as risk-based land use planning is something we’re hearing more about.

In other words, address this issue holistically and really get to the core causes of why the industry is suffering losses more than it’s bringing in premiums. At the end of the day, I think there should be an understanding that regulation isn’t just about protecting consumers after the loss, as I said at the beginning. Again, it’s about working together with the industry, with other stakeholders, and try and prevent more of those losses in the first place.

Frank Tomasello [23:52]: Commissioner, is that notion of a holistic approach, is it fair to say that that in many ways may essentially be a pivot from perhaps a more traditional approach of transferring risk through insurance to a broader approach of risk management, a more holistic risk management approach? And if so, one would imagine that includes stakeholders from various positions within the insurance ecosystem, including consumers as well. That essentially what you’re suggesting there.

Scott White [24:23]: That’s a great way to put it. Risk management is something the industry does better than anybody. And again, developing that and sharing that information, sharing that knowledge with say a community that’s trying to address rising sea level as we are here nearby in North Norfolk, Virginia. I’m actually traveling to Washington in a couple of days to talk in front of the National Realtors Association.

And again, they’re quite interested in understanding the impact of insurance on the cost of buying a home is something that we talked about earlier. It’s not something that consumers necessarily factor in and they can’t afford not to with the rising cost of insurance in many cases. that’s an area of identifying the risks and managing those risks. And that requires, again, like you said, there’s a wide ecosystem of stakeholders that need to be operating under a similar framework. And I think that’s where the industry can lead with its data, with its practices that have developed over centuries. And they can play a real leading role in this area. And I think they’re excited about that. think they understand that they do have a role to play when it comes to addressing this issue. And we as regulators do as well. So it’s an optimistic message to get out during a time where there are real problems that need to be addressed.

Frank Tomasello [25:57]: Thank you, Commissioner. Any parting words for our audience here on the Predict Prevent podcast? Anything else you’d like to share?

Scott White [26:04]: I think I would just say, I think you hit on all the issues that are top of mind. You must be going to our meetings because there’s a real sense that we have moved into a different period where again, we’re focusing more on the more sophisticated risk management practices that the industry is bringing to bear to create positive solutions. But that also puts a real challenge on us to again make sure that those guardrails in place are in place. We want to encourage innovation. We want to encourage resiliency and mitigation efforts. But we have to make sure that they’re done in compliance with our laws that are designed to protect consumers. So I think the industry and the regulators are aligned with this approach. And so we continue, we look forward to continuing working together with the industry and other stakeholders as we move forward.

Frank Tomasello [27:04]: Commissioner White, thank you very much for visiting with us today on this episode of Predict and Prevent.

Scott White [27:09]: Thank you. It’s been great.