An Eye on AI: How the Human Element Plays a Role in Today’s Tech

Artificial intelligence is becoming an increasingly important tool for commercial insurers, but ethical concerns remain.

By: Raquel Moreno | April 9, 2022

Artificial intelligence has become an integral part of the day-to-day operations across most industries. And in great part, AI can be credited with condensing vast amounts of data into something more usable.

But as companies come under greater public scrutiny for how algorithms are influencing corporate behavior, the question of how to ethically apply artificial intelligence is top of mind for commercial insurance leaders.

Ethical use of technology is “not a problem that’s exclusive to AI,” Anthony Habayeb, founding CEO of Monitaur, an AI governance company, said.

“Corporations have their corporate governance and need to have their opinion of what sort of ethics and practices they bring into the market as a company. And those principles should be implemented in their AI, software and practices overall,” he explained.

What Determines the Ethical Use of AI?

Anthony Habayeb, founding CEO, Monitaur

The volume, selection and ownership of available data is causing the wider business community to reflect on the decision-making capacity of algorithms. “These AI systems are making decisions of great consequence,” Habayeb said.

“As a result, they feel like more addressable and governable ‘decision makers’ than just nebulous software. And that’s causing our use of the word ‘ethical,’ because we’re humanizing AI in a way we have not approached with other software.”

But concerns around AI’s autonomy need to be measured against the actual amount of data available in the insurance space, according to Tom Warden, chief science and insurance officer for CLARA Analytics.

Unlike the massive pipeline of data that companies like Google have access to, the insurance industry is still dealing with static data, to some degree, Warden said. “We don’t have a continuous stream of information on a claim or even a policy, so there’s just not enough data to really rely on the models themselves.”

Even as the data capacity of the insurance industry continues to expand, and companies rely more heavily upon models to automate decisions, “it’s important to remember that AI doesn’t really reason; algorithms have no ethics; they are just simply algorithms,” Warden said.

“You can’t really program a model to be ethical, but you can make sure that as it’s applied to the decisions that it’s being asked to influence, that the outcomes maintain the ethical standards of the various constituents,” Warden said.

Questions of ethical AI and digital privacy may feel weighty and philosophical, but Habayeb encouraged companies developing these new technologies to consider what their products are trying to accomplish and allow that to guide their practices.

“What is the brand promise that you’re making to the market, to the companies and the small business owners that you’re providing commercial coverage to?” Habayeb asked. “And then how do you effect those brand promises in your AI system?”

Quality Control

As more carriers, especially those with legacy systems, team up with Insurtechs to sharpen the story their data tells with machine learning and AI, regulators will have a greater role to play to encourage greater accountability.

Carriers will have to think through their entire data ecosystem to achieve comprehensive AI governance, including the Insurtech vendors with whom they partner.

“Whether or not a carrier is the ultimate developer of some algorithm or AI system, they will be accountable for the results of that system. It’s important carriers develop strategies and processes to achieve assurances that extend into their vendor ecosystem as well,” Habayeb added.

To support state regulators in the formation of their frameworks for AI, in 2020 the National Association of Insurance Commissioners (NAIC) released guiding principles on artificial intelligence “emphasizing the importance of accountability, compliance, transparency and safe, secure and robust outputs.”

Since then, calls have been made to establish national standards in the U.S. for “acceptable design and behavior of AI-enabled systems,” as well as a certification system to verify that AI-enabled systems are developed in accordance with said standards, according to a 2021 publication of the Journal of Insurance Regulation.

And at the close of 2021, the NAIC voted to form a new high-priority H Committee on innovation, cybersecurity and technology to address the insurance implications of emerging technologies, such as AI, and cybersecurity — with this being only the eighth committee of this level in the history of the NAIC.

External validation is not just for the sake of regulatory compliance. For Warden, AI and data science teams must be willing to be looked at by internal audit teams as well as external verifiers: “I’ve gone through that process in the past and it’s painful. But it’s necessary because you can uncover things that [are] slipping through the cracks.”

Take the Time to Be Thorough

Tom Warden, chief science and insurance officer, CLARA Analytics

Carriers and Insurtechs need not wait for AI regulations to dictate their accountability practices. For both Habayeb and Warden, continuously monitoring the output of algorithms should be standard protocol.

“There’s such a rush to develop and deploy in this space that many companies potentially are not paying as much attention to the ongoing monitoring of the of the model output that they need to,” Warden said. “Companies need well-documented processes for developing, testing and deploying AI.”

Documentation about how models are developed, and the checks and balances implemented throughout development, are essential to make sure they’re being built properly. “And that goes beyond just the ethical use of data,” Warden added.

Checks and balances provide a sense of assurance for insurers and insured alike. “As you think about the impact on people and insured parties, these models are going to have great impact. Those stakeholders would like to know that, when a model has made a decision about them, someone has checked it, someone’s tested it,” Habayeb said.

No Need to Overcomplicate Things

There is no need to reinvent the wheel when it comes to AI risk management. Carriers have corporate governance and risk principles in place.

“We should not overly complicate what AI is [so] that it feels unapproachable to humans,” Habayeb said.

“Instead, a connecting thread can be maintained, recognizing humans built this, humans should be testing this, and humans should be able to establish confidence in the applications’ safety, transparency, trustworthiness,” Habayeb added.

Giving too much credit to AI alone is risky. “Then we’re disconnecting the accountability from the people who built it,” Habayeb said. And people make mistakes in the products that they build all the time.

“I think that we have a tolerance for mistakes,” Habayeb said. “We don’t have a tolerance for negligence.” &

Raquel Moreno is a staff writer with Risk & Insurance. She can be reached at [email protected].

Consistency and Stability

Sandy Bigglestone, Deputy Commissioner for the State of Vermont’s Captive Insurance Division

With the commercial insurance market so unstable, companies are turning to captives to house their exposures. Vermont, a long-time domicile, is getting increased attention because of their strong reputation and their leadership as the top domicile worldwide.

“All stakeholders enjoy the stable political and regulatory environment Vermont has to offer to operate in,” Bigglestone said.

Of course, a lot of consideration goes into deciding whether or not a captive is the right choice for a particular company. Businesses need to assess their exposures and their books to make sure they can adequately operate a captive.

There are significant advantages, however. “For low frequency, high severity risks, captives can access the reinsurance markets directly, so it’s very attractive for businesses to put a captive in place,” Bigglestone said.

And carriers are more accepting of captives as part of a broader insurance program.

“Captives are changing the relationship businesses have with commercial carriers,” Bigglestone said. “Commercial carriers are wanting to see companies with skin in the game; therefore, the relationships have evolved to be less transactional and more strategic.”

Balancing Bureaucracy

With 76 global domiciles, companies have a lot of options when it comes to selecting a captive partner. “Captive insurance domiciles compete globally for the business,” Bigglestone said. “If you were to put all 7,000-plus captive insurance companies around the world, all in New York, it wouldn’t have the same economic impact as 700 captives in Vermont does. The captive insurance industry is very important to our state and we will continue to support it in any way we can.”

Businesses should look for domiciles that balance a need for quality regulations with a process that isn’t overly bureaucratic and is seamless for business owners to navigate.

“Companies are attracted to an environment with quality regulatory standards and a stable regulatory environment,” Bigglestone said. “Vermont sets the regulatory standard in terms of financial analysis and examinations.”

In addition to quality regulations, firms will want to seek out a domicile that is agile enough to license captive insurance companies that fit their unique needs. It is important that a domicile have firm but fair regulation and the experience to consider new ideas and implement them. Companies must consider a variety of factors when choosing a domicile and not everyone will be the right fit for every company.

“You have to consider the captive owner and the industry sector that that owner operates in, as well as the insurance risks that are going into the captive program,” Bigglestone said. “Captive laws and regulations have to have a reasonable degree of flexibility to accommodate all the varying needs of owners and then impose rules based on the merits of each captive program.”

She added that creativity is a critical part of the process: “The ability to vet concepts and ideas with trusted individuals is key to having quality standards,” Bigglestone said. “And it can make captives appealing to insureds who are tired of commercial carriers not meeting the needs of the business, and who desire more control over their insurance programs.”

“When you think about the commercial marketplace, commercial insurers are supposed to operate in each jurisdiction in a competitive manner. Commercial carriers often look the same. They sell auto coverage to anyone with a driver’s license. The rules and regulations imposed upon commercial insurance companies are designed to be more formulaic for that reason,” Bigglestone said.

“Uniform regulatory standards apply to commercial carriers for the protection of the policyholders. These are standards all insurance regulators focus on, and standards captive insurance regulators need to understand, but with a specialized focus.”

A Quality Domicile Built for the Future

A combination of experience, regulatory standards and talent make Vermont a top domicile for companies looking to form a captive. The longevity of licensing captive insurance companies for over forty years is a testament to the quality work they’ve provided in the past and will continue to provide for many years to come.

Vermont’s reputation has helped the state attract and retain top captive talent, ensuring the businesses it serves are in good hands. The state has 32 employees dedicated to captives, and their average employee retention is 15 years. The Vermont Captive Insurance Association, the largest captive insurance trade organization, also helps companies connect with professional services needed to make their captive successful.

“There’s a whole host of service providers with proven expertise right here in Vermont,” Bigglestone said.

Taken together, Vermont’s resources, expertise and talent make it a prime domicile. They’ve been on a growth trajectory over the last few years and that’s unlikely to change anytime soon. Companies can trust their captive will be in good hands when they choose Vermont.

“Vermont has always competed on quality,” Bigglestone said. “We do have a mission and that hasn’t changed in over 40 years. It’s to maintain a system, or domicile that attracts quality business to Vermont, to promote our reputation in the industry, and to uphold a regulatory framework to protect the solvency of the companies that choose to place their business here.”

To learn more, visit: www.vermontcaptive.com

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,200 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.