How will insurance regulators evaluate AI/Black Box underwriting decisions?

There is quite a bit of auto insurance industry discussion about using AI machine learning models to identify bad risks during the underwriting process. The idea is that AI tools can tease out subtle variations in customer status and behavior that make a significant financial difference. But there's a catch.

The Legal and Regulatory Risks of AI Machine Learning
Given that insurance rates are tightly regulated, using AI machine learning to evaluate customer risk means AI models will be used to deny coverage to customers that do not 'measure up'. Which is a problem. Because customers expect carriers to have a rational reason for why they are being rejected. And regulators and courts become concerned when certain groups, for example minority customers, are rejected at higher rates than others. Unfortunately AI machine learning models cannot explain why they make a particular decision because they are 'black box' solutions. Their creators literally cannot explain how the machine arrives at its decisions, they can only judge the results.
This means relying on AI models to sort the 'good' customers from the 'bad' ones carries large potential regulatory and legal risks should its decisions result or even just be suspected of resulting in disparate impact for a disadvantaged class.

How VeracityID Uses AI
We use AI models to help carriers sort between good and bad customers too. But we only use them as a 'Tip and Lead', as an indicator that a given customer may pose a greater than normal fraud risk. We then use our other tools such as graph analytics, business rules, mobile documentation apps and automated interaction with the customer to identify and resolve specific real risks. When a carrier using VeracityID tools declines to cover a customer they can give a specific reason that makes sense to both customers and regulators:

• "they told us address A was their home but we discovered address B was"
• "they claimed their truck was a personal vehicle but these specific images of it show commercial gear and signage"
• "they quoted a policy with their 17 year old son and then without him and then refused to either add him to, or exclude him from the policy"

Doing so both eliminates legal and regulatory risk and improves customer satisfaction because instead of simply rejecting a customer with no explanation, VeracityID allows carriers to engage in an automated interaction that gives the customer the opportunity to modify their application and still receive coverage. This means that customers who made a mistake or for whom the purchased, 3rd party data is wrong, have the opportunity to correct the record and get back on the path to coverage.

Our motto is 'stop fraud before it starts' but it's also "stop legal problems before they start". 

www.veracityid.com  Twitter: @veracityid.com 

Are Mandated Auto Premium Reductions Justified?

Policymakers in many states - notably including California, Michigan and Louisiana in recent weeks - are considering aggressive steps to drive down auto insurance premiums in the wake of the Covid-19 pandemic and changes in driving behavior.  Even as they contemplate this, many leading carriers have already taken temporary action to reduce rates during the pandemic – both because it was the right thing to do and to forestall damaging policy changes.

On the surface, those initial reductions make some sense.  According to the US Energy Information Administration, gas sales were down 20% in March 2020 over March 2019 – and we all saw the roads were pretty empty.  Gas sales were very likely even lower in April during the height of the shutdown.  With reduced gas sales and empty roads came fewer claims.  And lower claims should drive down premiums in normal circumstances.

But will this still be true as the economy is re-opened in the weeks and months ahead?  Maybe not.

Early data from refineries and distributors suggest gas sales are quickly returning to ‘normal’.  Instead of continued relief from traffic, some experts predict that gridlock is coming to our cities as people choose to return to work by car instead of mass transit.  One forecaster suggests a 30% increase in commute traffic is coming this fall – and that our highways will soon be congested even more than before the virus hit (https://abc7news.com/bay-area-commute-covid-19-coronavirus-traffic/6248486/).  But other forecasters suggest that 25-30% of office employees will continue to work from home at least several days a week – and thereby skip the commute altogether (https://globalworkplaceanalytics.com/work-at-home-after-covid-19-our-forecast).  

At the same time, leading travel analysts observe that 30% of travelers have already switched from flying to driving for work and vacation.  And of course, there is the fear that a second wave could trigger renewed shutdowns.

So, what should we make of this?  How will the shift from bus to car and commute to vacation travel play out in terms of insurance economics?  Will these changes be transitory or permanent? Should policymakers act now – or wait for this settle out before making any dramatic moves?

At VeracityID, we think:

• The pressure to offer mileage-based insurance will increase – at least until there is clarity about driving patterns in the post-Covid economy.  But this may accelerate an adverse selection problem – with low mileage drivers switching from conventional to mileage-based coverage, and high mileage drivers sticking to conventional coverage with unreasonably low estimated miles.  Carriers need to monitor vehicle use in both cases – or will get burned.
• Policymakers should tread lightly for a few more months, at least.  If mileage increases significantly, a forced premium reduction could induce market failures.  If mileage falls, competition will soon drive down rates or risk intervention.  But if traffic gridlock happens, we will likely see a drop in claims severity in the near-term and an acceleration toward alternative work and commute patterns in the mid-term.  But none of this is clear today.
• Carriers should use this period to look for ways to increase customer retention by focusing on improving the customer experience across channels and striving to reduce rates by eliminating fraud, manual work and transaction costs.

Eliminating Underwriting Fraud Can Save Consumers and Carriers Up to 20% of NPW.  

Website: veracityid.com   Twitter: @VeracityID