INNOVATION AND THE REGULATOR JANET SILVERMAN NEW YORK INSURANCE DEPARTMENT CASUALTY ACTUARIAL SOCIETY SPRING MEETING MAY , 2000

RATEMAKING APPROVAL PROCESS Innovator Insurer Regulator

CREDIT REPORTS - PROPOSALS Used as a rating variable Algorithm used to determine rating can have “black box” nature Reasons for unfavorable outcome can be kept from insured

SOME ACTUARIAL REACTIONS The case for statistical correlation has been made. Potential for unfairness is a problem, whether actual or perceived. –“Black Box” Lack of intuitive connection to driving experience

SOME ACTUARIAL REACTIONS Underwriting factors are not on file at the Department; perceived unfairness is not so much a problem here. A $20 billion market attracts a lot of attention.

CREDIT REPORTS - APPROVALS Discount based on credit characteristics No “black box” approvals Reasons for declination must be made known to insured.

VERY PRELIMINARY REACTION What will the proposal look like? What kind of support will there be? Will there be a transition period? What is the effect on the insured population? Will our approval be the last word?

WHAT WILL THE PROPOSAL LOOK LIKE How will data from the black box enter into the rate? –At introduction will the data collected be used for the following year? –Will there be something like a credit based on assumed experience to be changed if the results are not as expected? What will happen to the people who do not want to be part of this?

WHAT WILL THE PROPOSAL LOOK LIKE Will there be a “black box” aspect to the algorithm connecting the technology to the premium paid? Will the variable be used as a replacement for the current system or an addition too it?

WHAT KIND OF SUPPORT WILL THERE BE Will the supporting data be comparable to that of New York? Can we be sure that the data cannot be manipulated? Will we see correlation to loss experience? Will correlation to other rating variables be recognized?

WILL THERE BE A TRANSITION PERIOD Will there be a cost to installing the system; if so who will pay? Will there be a problem for people with old cars? Will there be a problem for people with cheap cars?

WHAT IS THE EFFECT ON THE INSURED POPULATION Some insureds will benefit; some will not; what is the worst case scenario? –We must be assured that the rate will not be prohibitive for some insureds. If there is a voluntary aspect to this, won’t people who choose this probably be better risks? Couldn’t its acceptance be used as an underwriting variable?

WHAT IS THE EFFECT ON THE INSURED POPULATION Could this have an unfortunate effect on claims handling? Will the ultimate market be those who are part of the system and an assigned risk population? Because of the costs involved will that left- over segment contain an abundance of poor people?

WHAT IS THE EFFECT ON THE INSURED POPULATION PRIVACY ISSUE –How much do you want your insurer to know about you? –Is this degree of information really necessary to underwrite or to rate? –Can this data be retrieved by law enforcement entities? –Will the information be able to be subpoenaed?

WILL THE APPROVAL BE THE LAST WORD The other approval process –Public –Politicians –Regulator

The Insurance Department welcomes innovation in any form and values companies that put in the time and expense to improve the insurance market. We take seriously our responsibility - effecting positive change with a minimum of disruption to the system.