Insurtech & Insurance Regulation

Technology is bringing change to the insurance industry and regulation may not keeping up with the pace of technology change.  Maybe.  Insurance regulations have been developed over many years for a reason.

Insurtechs are looking to build their businesses as fast as possible, and may view regulations as unnecessary and applicable only to older and more traditional insurance organizations.

Regulators understand that technology driven change can be good for the industry and policyholders.  Some insurance departments are working hard to keep up with technology advances and making reasonable accommodations for innovation, and some are not.  However, the primary purpose of the state-based insurance regulatory structure is to protect insurance buyers, to ensure insurer solvency and to promote a vibrant and competitive insurance market.

The objectives of fast moving technology-driven change and regulators reticent to change in order to protect policyholders can be in direct conflict, and will require time to work through.

The NAIC (National Association of Insurance Commissioners) is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators in each state and territory.  The NAIC has formed Innovation and Technology (EX) Task Force to inform regulators on Insurtech developments.

State insurance regulators do not wish to stand in the way of these [Insurtech] innovations. Instead, they want to work closely with innovators to make sure laws and regulations are being followed and consumers are not being harmed. (see here.)

A few regulators are making changes to be accommodating.  For example, Kentucky has created a regulatory sandbox (see here), which allows insurance organizations to test innovations in a supervised environment.  Lloyds has created an incubator structure (see here).  It is too early to assess how these approaches are working.  However other regulators believe the current system allows adequate flexibility for innovation.

As one practitioner points out, regulators cannot lose sight of their primary purpose, and regulations have worked effectively for many years:

[But] regulators are loath to make wholesale changes to insurance laws they believe have served the industry well for decades, if not longer, particularly when the case for why existing regulations cannot be tweaked to accommodate emerging technologies has not, in their view, been well articulated. (see here.)

History would indicate that it is not wise for Insurtech organizations to take an aggressive approach towards insurance regulation.  A few startups have disregarded insurance regulation, with drastic consequences.  Zenefits, founded in 2013, skirted insurance regulation in the sale of health insurance to employers, and paid a steep price – $11.0 million in settlements to state insurance regulators, including $7.0 million in California & $1.2 million in New York (see here & here).  The company suffered, replaced its management team, and after significant change is on the road to recovery (see here).

Another firm, Health Insurance Innovations (dba), a cloud-based technology platform & distributor of health insurance products, was fined $1.5 million for violations of state insurance regulations in the state of Washington.  Violations included the sale of unauthorized products and the sale of products without being properly appointed.  Health Insurance Innovations voluntarily suspended business in Washington and six producers suspended their licenses. (See here.)

What is the best way forward for innovative Insurtech companies?  Work within the current regulatory structure and with regulators, and keep in mind the regulators’ primary objective of protecting insurance buyers.  If adjustments might be necessary, inform regulators of technologies and new approaches to underwriting and selling insurance, and find ways forward that are within the current or an adjusted regulatory framework.

Innovate Insurance – Innovation & Entrepreneurship in Insurance


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