The New York State Department of Financial Services (“DFS”) has entered its voice regarding the use of artificial intelligence (“AI”) by insurers by issuing for public comment a proposed circular letter addressing the use of artificial intelligence, specifically external consumer data and information sources (“ECDIS”) and artificial intelligence systems (“AIS”), by licensed insurers (the “Circular Letter”). The Circular Letter defined ECDIS as “data or information used – in whole or in part – to supplement traditional medical, property or casualty underwriting or pricing, as a proxy for traditional medical, property or casualty underwriting or pricing, or to establish ‘lifestyle indicators’ that may contribute to an underwriting or pricing assessment of an applicant for insurance coverage.” Excluded from the definition is “an MIB Group, Inc. member information exchange service, a motor vehicle report, or a criminal history search.” The Circular Letter defined AIS as “any machine-based system designed to perform functions normally associated with human intelligence, such as reasoning, learning, and self-improvement, that is used – in whole or in part – to supplement traditional medical, property or casualty underwriting or pricing, as a proxy for traditional medical, property or casualty underwriting or pricing, or to establish ‘lifestyle indicators’ that may contribute to an underwriting or pricing assessment of an applicant for insurance coverage.” ¶4.

DFS noted that use of ECDIS and AIS could lead to discriminatory outcomes disproportionately affecting “vulnerable communities and individuals.” ¶2. Thus, DFS issued the circular letter to “identify DFS’s expectations that all insurers . . . develop and manage their use of ECDIS, [AIS], and other predictive models in underwriting and pricing insurance policies and annuity contracts.” ¶3.

The Circular Letter set out a series of Fairness Principles for the use of ECDIS or AIS in underwriting or pricing, including: (1) making sure models are supported by actuarial data and standards; (2) ensuring no ECDIS or AIS uses criteria or collects data that would violate state and federal anti-discrimination laws; (3) requiring insurers to create systems for testing their ECDIS and AIS use for unfair or unlawful discrimination. ¶¶10-18.

Further, the Circular Letter addressed governance issues and insurers’ transparency obligations. With respect to governance, DFS offered a number of suggestions for board and senior management to exercise appropriate oversight over the use of ECDIS and AIS consistent with 11 NYCRR § 90.2. These include creating (or adopting from third parties) written policies and procedures to govern the use of ECDIS and AIS, maintaining comprehensive documentation for the use of any AIS, implementing appropriate risk management functions, and creating or adapting an internal audit function pursuant to 11 NYCRR § 89.16. ¶19-33.

With respect to transparency, the Circular Letter proposes that an insurer, using ECDIS or AIS to make an underwriting or pricing decision, must disclose all information upon which any “declination, limitation, rate differential, or other adverse underwriting decision including the specific source of the information upon which the insurer based its adverse underwriting or pricing decision.” ¶37. Additionally, DFS warns that “failure to adequately disclose the material elements of an AIS, and the external data sources upon which it relies” may constitute an unfair trade practice pursuant to Insurance Law Article 24. ¶40.

DFS is seeking comment on all aspects of the Circular Letter by March 17, 2024.

We will monitor and report on further developments regarding the Circular Letter.