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(Article from Insurance Law Alert, January 2024)

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This month, the New York State Department of Financial Services issued proposed guidelines regulating the use of artificial intelligence systems by New York insurance companies. The circular, titled “Use of Artificial Intelligence Systems and External Consumer Data and Information Sources in Insurance Underwriting and Pricing,” would apply to any insurer domiciled or licensed to conduct business in New York. The proposed framework includes requirements relating to numerous areas of concern implicated by the use of AI systems, including the following: violations of state insurance law, unfair discrimination, the implementation of sufficient internal controls and oversight, and transparency to policyholders. The proposed circular requires insurers to engage in comprehensive reviews of AI systems used in the underwriting and pricing contexts in order to ensure against “disproportionate adverse effects” on protected classes of policyholders. Further, the proposed guidelines include qualitative testing requirements that provide justification for the use of AI systems in risk assessment. The proposed circular also incorporates a list of documentation requirements, such as a the maintenance of materials describing the operations of the AI system and any monitoring or testing mechanisms, among other things.

Notably, the circular not only requires an insurer to comply with all regulations with respect to its own direct use of AI, but also as to third-party vendors with whom an insurer may contract. The guidelines warn that insurers may not “rely solely on a vendor’s claim of non-discrimination” and should institute meaningful oversight of such third-party AI usage. One important limitation of the proposed circular is that it pertains to the use of AI in the pricing and underwriting contexts, but does not reference AI systems for marketing or claims management purposes.

The full text of the circular is available here. The deadline for comment is March 17, 2024.