Nature abhors a vacuum, and the New York Department of Financial Services filled a big one with Insurance Circular Letter No. 1 (2019), which was issued on January 18. The circular letter addresses the use of external consumer data and information sources in the underwriting of life insurance. It grew out of an investigation of life insurers’ underwriting guidelines and practices that began in 2017.

Don’t be deceived by the circular letter’s brevity; it is a must-read for any insurer that is using big data and algorithms. Here are some key takeaways:

• The Department has determined that insurers’ use of external data sources in underwriting has the strong potential to mask prohibited forms of discrimination.
• Accordingly, an insurer should not use an external data source, algorithm or predictive model in underwriting or rating unless the insurer has determined that the external tool or data source does not use and is not based in any way on race, color, creed, national origin, status as a victim of domestic violence, past lawful travel, sexual orientation or other prohibited factors. An insurer must independently determine compliance with the anti-discrimination laws and may not rely on a vendor’s claim of non-discrimination or the proprietary nature of a third-party process.
• In addition, an insurer should not use an external data source, algorithm or predictive model in underwriting or rating unless the insurer can establish that the underwriting or rating guidelines are not unfairly discriminatory. Even if statistical data supports an underwriting or rating guideline, there must still be a valid rationale or explanation supporting the differential treatment of similarly situated applicants.
• Where an insurer is using external data sources or predictive models, the reasons for any declination, limitation, rate differential or other adverse underwriting decision provided to the insured or potential insured should include details about all information upon which the insurer based such decision, including the specific source of such information.
• The Department reserves the right to audit and examine an insurer’s underwriting criteria, programs, algorithms, and models, including within the scope of regular market conduct examinations, and to take disciplinary action, including fines, revocation and suspension of license, and the withdrawal of product forms.

Keep your eye on New York, as Linda Lacewell, who is Governor Andrew Cuomo’s nominee to be the Department’s new Superintendent, has a strong prosecutorial background. But don’t lose sight of what’s happening elsewhere, as the ripple effects of the circular letter undoubtedly will be felt throughout the country, including by insurers writing other types of insurance.

Like we’ve been saying, big data and algorithms are cool, but they should only be used with care. Let us know if this message starts to get annoying.