Insurance Software Development - Competitive Landscape

of one

Third Party Insurance Software Technology Market - Potential Regulatory Issues.

Several types of technological advances are available to third party insurance technology software providers in the life insurance industry. Using these advances may benefit the life insurance companies, though they also come with risk of regulatory and litigation issues. Three such instances of third party insurance technology providers with potential legal or regulatory challenges are smart contracts via blockchain technology, the use of Artificial Intelligence in underwriting technology, and data analytics.

Smart Contracts via Blockchain Technology

  • Smart contracts are used to assist with transparency, accuracy, and automated under-writing. These contracts use a blockchain technology or similar method to allow the contract to be self-executing. Blockchain smart contracts can reduce transaction cost and simplify the acquisition of payment from the customer. Smart contracts also contain concerns for regulation compliance, such as the possibility of variables used in premium calculations being discriminatory.
  • The Blockchain Initiative (B3i) focuses on assisting businesses in solving identified problems, such as developing comprehensive smart contracts. Some smart contract areas B3i assists in navigating are premium management and reinstatement procedures.
  • Additional initiatives are being encouraged and developed to assist policymakers in navigating the use of smart contracts using blockchain technology. Recommendations for government initiatives addressing blockchain technology in smart contracts have been made, though no government initiatives have been publicized at this time.
  • Insurance use of blockchain technology is exploratory at this time. Therefore, very little information about regulatory action or litigation regarding blockchain is available. There are potential legal and regulatory pitfalls facing third party insurance technology software providers, which must be considered in software development using blockchain for smart contracts. Blockchain technology could lead to litigation regarding violations of insurance regulations. This is primarily due to the blockchain sequence being developed by scientists not familiar with regulatory limitations, including confidentiality when allowing information to be shared among multiple agencies.

Underwriting Technology using Artificial Intelligence (AI)

  • Insurance companies have been reluctant to adopt AI in their underwriting technology, primarily due to fear of litigation risk. However, AI is acknowledged as beneficial in portions of underwriting, such as improving efficiency, detecting anomalies, collecting data, and enhancing the experience of the customer.
  • The technology of AI in underwriting for insurance companies is not widely used yet. Little information is available regarding any litigation or regulatory action. Concerns regarding potential regulatory violations are related to scientists, not insurance professionals, writing the AI code. Developers unfamiliar with regulatory guidelines may result in errors such as race being a variable in determining premiums, which would result in litigation for discriminatory practices. Third party insurance technology providers need to choose their developers with attention to their knowledge base to avoid this concern.
  • The White House recently issued an initiative outlining regulation principles for the use of AI, some of which affect the use of AI in underwriting in life insurance. One of these applicable principles states rigorous rules and guidelines are necessary when using AI, such as maintaining transparency, clearly identifying potential outcomes, and mitigating bias. Another applicable principle states risk-based approaches to developing and using AI are necessary, identifying potential risks and benefits to ensure the benefits outweigh the risks of using AI. The White House made it clear the use of AI must be fair and non-discriminatory, safe, and comes with clear disclosures to the customers.
  • Litigation or regulatory complaints against AI technology in insurance have not been publicized at this time. However, experts warn these legal challenges are likely, which makes it essential that AI underwriting policies follow all principles and regulations related to life insurance companies. Third party insurance technology software providers should ensure the software complies with these recommendations and regulations to avoid legal and regulatory pitfalls.

Data Analytics

  • Data analytics are transforming insurance technology by allowing large amounts of data to be simplified and analyzed in cost-effective and efficient manners. Data analytics assist the insurance company in pricing policies, identifying potential fraud, and increasing and retaining customer base by providing convenient access to policy information.
  • Rutgers began a research initiative addressing data analytics in 2015, investigating how data analytics affect the audit process. The update on this initiative in October 2019 noted the initiative is focusing on identification of the data analysis model's place in the audit process and if this can move from experimental to actual use of data analytics. Final results of this initiative have not been attained at this time.
  • An additional data analytic initiative includes using data analytics to develop high-value networks. Insurance technology software providers can use guidance from this initiative to develop processes cultivating strong provider networks while keeping costs reasonable.
  • Insurance companies are just beginning to employ data analytics in their processes. As this process is still new, regulatory and legal complaints have not been publicized if they have occurred. Third party insurance technology software providers should be aware of potential concerns that may lead to regulatory action. These concerns include using multiple tools and processes giving conflicting information, not unifying the analyzed information effectively or appropriately, and data being discarded that may have been crucial to the insurance decision.

Research Strategy

The research began with examination of three sources written by industry leaders addressing insurance technology software. This information was cross-referenced with other sources to identify instances of potential regulatory issues related to the technology examples noted in the research criteria. The technology examples identified are in the beginning stages of use in the insurance realm. Despite an exhaustive search, no information was located regarding specific instances of regulatory action or litigation against third party insurance technology software providers in relation to life insurance or annuities due to the newness of the technology use in this industry. Therefore, research focused on potential legal and regulatory problems for third party insurance technology software providers, based on identified weaknesses and pitfalls of the technology.

  • "The use of AI to create underwriting models for determining premium rates can make it challenging for insurers to ensure that factors prohibited by regulation (such as race) are not used in models. Such models are often developed by data scientists who, unlike actuaries, may not fully understand insurance-specific requirements. "
  • "Smart contracts are innovative contracts that differ from traditional ones in that they are self-executing, as they entail the possibility of representing contract terms in programming code that gets automatically executed on a blockchain or other distributed ledgers."
  • "The immutability and self-execution of code may be considered another weakness; hackers could exploit bugs in smart contracts to steal money, as happened on the Ethereum network in 2016 when $60 million was ‘stolen’."
  • "Insurance-specific blockchain use cases explored in-depth in the report include: Improvement of Customer Experience and Reduction of Operating Costs Data Entry/Identity Verification Premium Computation/Risk Assessment/Frauds Prevention Pay-Per-Use/Micro-Insurance Peer-to-Peer Insurance"
  • "Policymakers can and should do more to support blockchain innovation and adoption, such as ensuring regulations are targeted and flexible, so as to encourage blockchain experimentation."
  • "Governments can and should do more to support blockchain innovation and adoption, including by supporting public sector adoption, creating a flexible regulatory environment to allow experimentation, and using targeted regulatory enforcement."