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Consumer advocates dominate NAIC call on insurers' use of big data, citing lack of transparency

Consumer advocates are pressing en masse for state insuranceregulators to require insurance companies to disclose their use of big data inall aspects of the relationship with policyholders, from marketing to claimsadjustment.

"There needs to a sense of urgency on this issue,"economist Birny Birnbaum said during a May 9 NAIC working group conferencecall. He said that insurers' use of big data is a revolutionary change in theirrelationships with consumers and with state regulators. Its use, which includestext mining and social networking analysis as tools for marketing,underwriting, fraud detection and claims adjustment, is radically differentfrom past actuarial and analytical practices.

Birnbaum, a former regulator and NAIC-funded consumeradvocate and director of the Center for Economic Justice, and three otherconsumer advocates dominated the call, organized to discuss process issues intackling regulatory treatment of the use of big data. All repeated increasinglyblunt concerns about the use of big data even as the NAIC scrambles to definethe term.

Consumer advocates over the past year have submitted toregulators presentations noting examples of big data's use. They show vendors pitchinghow they can help insurers set the right level of servicing for claims anddetermine whether there is a need for in-person contact to reduce the durationof claims, and highlight social media for use in scrutinizing policyholders,including examining unspecified clusters of relationships that might indicatefraud. They have raisedissues of so-called black box applications, civil rights issues andpatents on intrusive techniques designed to glean health information from suchthings as biological readings on steering wheels and other car and householdinstruments. That information can then be analyzed to predict current andpotential lifestyle choices or health outcomes, which could be used forratemaking, underwriting and claims adjustment purposes.

Insurers and their state regulators are still debating thedefinition of big data and how regulators should prioritize examining thevarious platforms in which it is used. For example, they indicated on the calla desire to look at big data applications to rates, underwriting and claims.They said they would table discussion of its use in marketing for later.

There is "a complete lack of transparency,"Brendan Bridgeland, director for the Center for Insurance Research, said on thecall. "Big data is the big gold rush now." The NAIC's Big DataWorking Group regulators should be aggressive in addressing policyholdertransparency issues with respect to big data, the Boston-based NAIC-fundedconsumer advocate said.

Peter Kochenburger, a fellow NAIC-funded consumer advocate,also expressed concern for the lack of transparency in what factors are beingused for claims, including a person's shopping habits. Consumers need to know"if that data is being used, and if so, how," the University ofConnecticut School of Law insurance law professor told state regulators on thecall. Kochenburger has called for more NAIC public hearings on big data.

Insurance industry representatives agreed on the call and inrecent comment letters to the working group regulators that there is no commonunderstanding of what constitutes big data or what a regulatory analysis wouldtarget. However, they stressed the ultimate need for confidentiality forinsurance company proprietary risk assessment systems and the need for insurersto get better insights into the risks they carry.

"The focus areas regarding insurers' use of 'big data'in various contexts appears to start off with an assumption that all insurersare using 'big data' in the same way and for the same purposes. This is not ourunderstanding. Insurers have made investments to cull out specific riskinsights proprietary to them," stated a May 4 letter to Tim Mullen,director of market regulation for the NAIC, from American Insurance Associationcompliance and legal representatives.

"First and foremost, we would reiterate the point …that 'Big Data' is not a precise term with a single agreed-upondefinition," Paul Tetrault, state and policy affairs counsel for theNational Association of Mutual Insurance Companies, wrote in a May 4 letter toLaura Cali, who chairs the working group. Tetrault also urged the regulators toadopt a working definition of the term big data.

One way to address insurers' concerns about protecting theirproprietary information "may be to invite individual companyrepresentatives to present to the Working Group in regulator-onlysessions," Tetrault suggested.

Such confidentiality concerns were brushed aside by onevocal consumer advocate. Regulators must consider the consumer, NAIC-fundedconsumer advocate Sonja Larkin-Thorne said on the call. Consumers cannotunderstand the rating on their policies anymore, have no idea what data isbeing collected or how it is being collected, or even whether the informationcollected is accurate, she told regulators. Insurers cannot, she said, continueto hide behind big data to create rates. And, she added, if regulation violatesconfidential or proprietary insurance company systems, "so be it."

Cali, the Oregon insurance commissioner, acknowledged thepoints made by the consumer advocates on transparency. Cali noted that, at aminimum, regulators need to understand the data use and make sure thattransparency of data is useful and meaningful so regulators can do their jobsand consumers can understand how data is being used.

However, one state insurance regulator from Pennsylvaniasuggested that regulators' hands might be tied by state legislation, notingthat sometimes regulators don't have a choice as to what they can or cannotaccept in terms of the use of big data.

Another state regulator from Vermont, advocating for moresharing of information among the states, told the working group that whenVermont sees a new, apparently inscrutable rate filing, "what we do iscall George Bradnor," the Connecticut Insurance Department's property andcasualty filings point person. "I like the idea that we as a groupcoordinate efforts to look at filings," the regulator said.

The discussion is far from over. On May 19, the NAIC willhave a three-hour meeting in Kansas City on the insurance industry's use of bigdata. At the summit, the NAIC will hear from vendors and insurance companies onhow data is being collected.