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Life insurance regulators still adapting to new realities

Life Insurance and Annuities
by Chris Davis
Life insurance regulators still adapting to new realities
Life insurance regulators still adapting to new realities

Changes in the life insurance industry as a whole during the last several years have been significant, in part because of a crackdown by regulators on a number of previously normal aspects of business. However, regulators are also adapting to the new environment in the sector by making changes that give insurers a bit more flexibility.

One such decision in New York recently fell into that category, as the Empire State will now allow insurers to examine the social media habits and other data, of those applying for life insurance to make better underwriting decisions.

The New York State Department of Financial Services, which oversees companies operating in the state's insurance industry, recently issued a circular letter that explicitly allows life insurers to examine social media behavior from applicants, but only as long as they can prove why it was necessary for them to do so. The use of so-called lifestyle indicators can, of course, play a role in underwriting. If a person posts a lot about their love of skydiving or other risky activities, that would likely factor into decision-making and couldn't otherwise be assessed with traditional sources.

What consumers post on social media could impact their life insurance premiums.What consumers post on social media could impact their life insurance premiums.

Why it's happening and what it entails
Insurers and regulators apparently see the need to adapt with the times, so the NYDFS getting in front of potentially sticky regulatory situations by clearly defining how and when such data can be used is vital for all involved. This change stems from an internal investigation at the department to better assess how and why some kinds of information may occasionally be necessary above and beyond what is turned up in traditional medical-based underwriting decisions.

"The Department fully supports innovation and the use of technology to improve access to financial services," the DFS letter said. "Indeed, insurers' use of external data sources has the potential to benefit insurers and consumers alike by simplifying and expediting life insurance sales and underwriting processes. External data sources also have the potential to result in more accurate underwriting and pricing of life insurance."

However, the letter also stated that the accuracy of external data, including what is posted on social media, may not always be reliable or accurate, which could be troubling for both insurers and applicants. For that reason, the DFS also laid out a number of rules related to what can't be used as part of the underwriting process when going beyond traditional data sources, including "race, color, creed, national origin, status as a victim of domestic violence, past lawful travel or sexual orientation," among other groups.

In addition, the use of this data cannot be discriminatory in any way, and insurers will have to disclose what kind of information they used to make their decisions, the letter said.

What's the difference?
Of course, at issue here is the fact that many life insurance companies were already using this kind of data, according to The New Yorker. The DFS letter noted that companies were already making use of algorithms that examined a number of nontraditional factors including social media use; and as such the new regulatory changes may be seen as something akin to greater scrutiny. Even beyond social media posting habits, some companies also had algorithms that based underwriting decision-making, at least in part, on "condition or type of an applicant's electronic devices." That is, whether they had old smartphones or devices that were in bad shape, for example.

Whether that information is in any way predictive of actual long-term health outcomes that would impact a life insurer's actuarial tables is certainly up for debate, and the findings from the DFS investigation seem to lean toward the information being more or less inconsequential, the report said. However, the newly clarified rules do not prevent use of that data. Rather, they seek to make certain that insurers are using it the right way and have clear reasons for doing so. The idea that insurers having more information about applicants would lead to better underwriting decisions is certainly understandable from a regulatory point of view, but DFS wants to help ensure that privacy standards are upheld and that such data is only being used as needed.

Another example
Life insurers have long used all sorts of publicly available data in underwriting decisions, but not always based on information the consumers themselves posted. Such information includes credit history, which may be seen as a long-term indicator of health outcomes in some ways. However, LIMRA Senior Vice President and Director of Research Alison Salka recently told NerdWallet that this information certainly isn't likely to make or break a person's eligibility for such coverage, but it could impact certain aspects of an insurer's decision.

"Credit data overall isn't as important as family health history [or some other factors], but it appears to be a good predictor of good health and longevity," Salka told the site.

"Fewer than 20% of life insurers used credit records to make underwriting decisions."

As of 2017, fewer than 1 in 5 life insurers said they used credit records to make underwriting decisions, but more than a third (36 percent) said they relied on outside predictive modeling that included some credit information, the report said. That comes with the acknowledgement use of that information has been seen as controversial; a handful of states ban use of credit information when setting auto insurance premiums, but not those for life insurance. In this evolving regulatory environment, however, it's not difficult to imagine the landscape shifting in the future.

For their part, insurers also say that use of this information is what allows them to give applicants greater flexibility to avoid a medical examination, so that tradeoff may be seen as worth the other considerations to some applicants.

Sizing up the issue
Consumers who are concerned with how their social media posting might impact their eligibility for coverage would be wise to avoid certain types of posting that would get them tagged as being higher-risk applicants in the first place, according to U.S. Insurance Agents. For instance, people who post selfies of themselves in the driver's seat of a vehicle may be flagged because it wouldn't be easy to tell if the vehicle was in motion at the time the photo was taken. Likewise, sharing screenshots of text conversations that talk about risky behavior, including texting while driving, could likewise be flagged.

Those who are particularly concerned might also be wise to make sure their privacy settings are being applied to their liking, and that their posts aren't being geotagged on an ongoing basis, the report said. They could also be prudent to scroll back through their feeds and identify potentially objectionable posts.

With so many changes now happening in the regulatory and underwriting spheres, it's important for brokers and insurers to stay abreast of all this information and make sure their policyholders and applicants are likewise aware of how decisions may be made in the years to come. This will help to keep lines of communication open and ensure strong working relationships on an ongoing basis.

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