10 Imperative Regulatory Trends for Insurers in 2020
Complying with constantly evolving regulations at global, federal and state levels presents a perennial game of catch-up for U.S. insurers.
With the risk landscape evolving at a faster rate than ever before, insurance regulators now know the feeling.
The world is in the grip of a host of big new challenges, from social polarization and political turbulence to technological and climate change, many of which are not adequately addressed in insurance laws, and regulators and insurers are busy developing frameworks within which the sector can work to close the protection gap.
This year, the insurance sector is likely to face a raft of issues that test the limits of coverage and existing legal constructs, warned Jeffrey Ellis, partner with Clyde & Co.
He suggested that changes in technology, social media and the environment have comfortably outpaced the insurance and legal constructs that were previously in place.
“As political solutions remain absent, the courts will be forced to deal with these issues,” he told Risk & Insurance®.
While ongoing issues such as medical cost control remain a top priority for state insurance regulators, risks relating to new technology and data security have become existential threats to be addressed, warned Gary Anderberg, senior vice president, claims analytics for Gallagher Bassett.
“Major companies could be put out of business or forced to make expensive and disruptive changes to long-established business practices, depending on what happens in these legal areas.”
Collaboration between industry and regulators is crucial to ensure insurance laws adequately recognize and address these and other emerging issues and, in several cases, is already underway in the form of both official working groups and informal initiatives.
Below are 10 regulatory themes that will feature heavy discussions in the year ahead.
1) Data Security Regulatory Reform
The California Consumer Privacy Act of 2018 (CCPA) took effect on January 1, signaling the start of a new era of accountability in the way U.S. companies secure and manage their customer data.
The CCPA is “a harbinger of things to come,” EY’s Simon Plummer said, with similar reforms likely to sweep through the U.S. that will change the game for insureds and insurers.
According to Kathryn Ashton, partner at Clyde & Co, “The CCPA, as one of the first major data privacy laws in the U.S., will no doubt lead many businesses to query whether their present insurance program provides coverage for the consumer claims and regulatory actions brought under the Act. However, insurers of all types of policies should be prepared to address policyholder demands for coverage in response to CCPA claims.”
Insurers must also get their own cyber security protocols in order.
New York’s Cybersecurity Regulation for Financial Services Companies and the National Association of Insurance Commissioners (NAIC) Insurance Data Security Model have laid much of the groundwork.
However, Prakash Paran, partner and global co-chair of DLA Piper’s insurance practice, warned that with “no consistency or coordination globally or even between U.S. states with respect [to] data privacy requirements,” the cost and difficulty for insurers of compliance with myriad laws is “staggering.”
He added that the risk of class action litigation in the wake of data privacy breaches is also a growing concern.
2) Property Resiliency
Losses from extreme weather events are on the rise, yet many property owners remain underinsured and are often unaware that their policies do not cover specific perils such as flood, wildfire or earthquake.
To address the protection gap and encourage improved property resiliency, regulators are incentivizing insurers to provide more coverage while rewarding buyers that mitigate their risk.
Regulators are particularly keen to attract more private insurance participation in flood risk and reduce property owners’ reliance on the National Flood Insurance Program.
“I’d like to see the NFIP as the market of last resort. Consumers are served best by a competitive private market,” said NAIC president and South Carolina Department of Insurance Director Ray Farmer.
Several states, he explained, have already lowered fees and removed certain regulatory hurdles for companies selling flood insurance through the admitted or surplus lines marketplace, with statutes allowing insurers to offer premium discounts of up to 40% in some cases for insureds that take measures to protect their properties against storm and flood damage.
Expect more states to adopt similar schemes in 2020.
3) Embracing Parametric Coverage
Parametric products may provide valuable cover for insureds struggling to renew or obtain affordable property coverage areas exposed to extreme weather.
As parametrics are not recognized as insurance under prevailing laws, there has been little concrete legislative activity from state insurance departments — and many traditional insurers and parametrics providers are happy to keep it that way for now.
However, according to Clyde & Co partner Vikram Sidhu, members of the insurance industry are in discussions with regulators over how to increase the provision of parametric covers.
“The traditional claims process can be very lengthy and expensive, and regulators recognize that they need to inject funds quickly into their communities when there is a natural catastrophe,” he said.
Parametric product offerings have been launched in California and Florida against earthquake and hurricane risks, respectively. And it may not be too long before other state departments encourage parametric offerings, particularly for consumers.
“Both insurers and insurance regulators will need to be increasingly innovative to help U.S. insureds prepare for the consequences of climate change,” said Sidhu.
4) Artificial Intelligence
In January, the White House issued a draft memo proposing the principles that would shape the future oversight of artificial intelligence across a range of key industries.
AI is playing an increasing role in all areas of insurance, from underwriting to marketing and claims. While there is not yet any hard and firm regulation of the use of this technology, the NAIC’s Innovation and Technology Task Force is working to develop high level guidance.
In 2019, New York’s Department of Financial Services raised concerns that AI could lead to unlawful discrimination and lack of transparency — issues insurers and regulators must tackle in 2020.
“AI is critically important to the insurance business and is developing faster than any regulator can keep up with,” said DLA Piper’s Paran.
“The difficulty is that AI decisions may be so complex or involve so many rating factors that the ultimate decision may be inexplicable. Regulators are asking reasonable questions, such as ‘How do you monitor a computer for bias or discrimination or does the output of AI need to be explainable and if so to whom?’ Insurers do not always have answers that are sufficiently transparent.”
According to the NAIC’s Farmer, regulators are doing all they can do to facilitate the use of new technology in the insurance space — some, such as Connecticut and Kentucky, have even set up Insurtech incubator programs — though consumer protection is still the primary concern.
“I encourage every company with a new tech product to come and sit and talk.”
5) Long-term Care Insurance Rates
This is an oldie, but long-term care insurance rates still top of most regulators’ agendas.
With the cost of long-term care sky rocketing, heavy losses are forcing insurers to sharply up rates. While some states have given insurers free reign, others have attempted to restrict them and others have blocked the hikes altogether.
In an attempt to preserve the balance between insurers’ solvency and the provision of adequate care, and to bring some clarity and consistency to the marketplace, a 40-state NAIC working group has for the past 18 months been honing guidelines for regulators and insurers to work from.
“This remains the number one issue in my state and for at the NAIC level as well,” said South Carolina’s Farmer. “Hopefully by the end of 2020, we will have a clear path forward for companies, regulators and consumers.”
6) Opioids for Injured Workers
Prescribing rates of opioids are falling; according to the California Workers Compensation Institute, the percentage of all prescriptions of opioids to injured workers fell from 30.5% in 2009 to 18% in 2017.
However, the country remains gripped by an opioid addition ‘crisis,’ which remains a top priority for lawmakers across the land.
According to PwC, there are currently more than 90 bills in state legislatures relating to opioid prescribing, though at a federal level, “the John S. McCain Opioid Addiction and Prevention Act [which would limit initial opioid prescriptions to seven days’ supply] will be the one to watch as we move into 2020.”
Given the huge relevance of opioid prescriptions to long-term health care and workers’ compensation claims, insurers and employers will be keeping a close eye on legislation being penned across the country in 2020.
7) Health Data
A crucial subclass within the broader theme of data security is the management of health data, particularly when transferred via emerging channels such as telehealth.
A new bill in Congress, the National Health Strategy and Data Advancement Act, aims to align all federal telehealth programs. However, Gallagher Bassett’s Anderberg pointed out that health industry regulations, including recent updates involving electronic communications to the Health Insurance Portability and Accountability Act (HIPAA), do not apply to P&C claims handlers and other insurance vendors that may deal with much of the same sensitive patient data.
“We deal with patient data in virtually every workers’ compensation claim we touch, and in auto liability claims involving personal injury,” he said.
“While comp is not included under HIPAA, what about other P&C lines and the new, rather tight, HIPAA communication requirements? We have to be on our toes and show good faith in compliance.”
8) Wearables Claims Data
A related issue concerns the growing use of wearables in various sectors to track and measure employee safety and performance.
Rules around the correct handling and protection of data derived from wearables during the claims process are yet to be clarified.
Anderberg warned this data could bear on the AOE/COE determination in comp claims and one such case has already gone to the courts.
“Are we going to get batted back and forth from one court decision to another or can we look for some useful legislative assistance?” he asked.
He also questioned whether certain data from wearables such as vital sign readings, for example, should be considered private personal health information.
“The technology is running way out ahead of the regulation,” he warned.
9) Conduct and Reporting Standards
Updates to conduct, governance and accounting regulations continue to come thick and fast for insurers, an ongoing challenge complicated by the quirks of a 50-state regulatory system.
Globally, the implementation deadline for IFRS 17, while delayed, is still a concern for some insurers, EY’s Plummer told Risk & Insurance. Meanwhile, Global Capital Insurance Standards (ICS), if implemented in the version currently being proposed, will also have a major impact on variable annuity and complementary pension products for U.S. life insurers in particular, he noted.
Life insurers also need to prepare for accounting changes under Targeted Improvements to the Accounting for Long Duration Contracts (LTDI).
“While LDTI has now been delayed to 2022–2024, these changes are likely to impact core systems and processes. Insurers don’t have much time to lose in preparing for these changes,” Plummer explained.
In addition to financial reporting becoming more stringent, recent regulatory actions and proposals have also focused on sales practices.
Complying will require considerable management attention, and with margins and growth rates under pressure, additional investment in compliance will feel burdensome to many insurers.
“A better approach is to define where investments to meet regulatory requirements can also generate meaningful performance improvements,” Plummer suggested.
10) Captive Regulation and Taxation
The perennial scrutiny of captive arrangements continues in 2020, with questions lingering over the state of Washington’s contrarian stance.
Last year, Washington levied taxes on two large captives it deemed to be writing business within its borders without a license. While unusual, this could set a worrying precedent for captives that write across state lines.
“It’s too early to tell if this is an isolated incident as litigation is yet to be opened,” said the NAIC’s Farmer.
Meanwhile, the hardening of the traditional insurance market should keep captive regulators busy as corporations consider writing additional lines of coverage through their captives.
Changes in the U.S. tax rate have introduced structures that take on foreign risk, adding further complexity, while captive owners themselves face increasing requirements regarding reporting, auditing, non-insurance activities and inter-company arrangements.
“Regulators are looking at whether captives have adequate processes and procedures in place to govern in an ever-increasingly complex world,” noted Mikhail Raybshteyn, deputy leader of EY’s Americas Captive Insurance Services.
“The [current focus] is enabling captive growth while making sure appropriate guidelines and regulations are in place to support it.” &