AIA proposes regulatory sandbox for digital insurance innovation to NAIC

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In December, the American Insurance Association presented a model law to the National Association of Insurance Commissioners that would allow for the creation of a regulatory “sandbox” in which insurers could test digital innovations without fear of running afoul of regulations. Michael O’Malley, SVP for public policy at the AIA, discussed why both insurers and policyholders would benefit from such a law in a Digital Insurance Q&A:

Digital Insurance: What were you hearing from the industry that led you to develop this model law?
Michael O’Malley: There’s a lot of interaction between innovation and regulation. Folks are coming up with innovative ways to approach insurance, but they’re coming up against a rules-based regulatory system. New solutions may meet consumer demands in some ways, but it’s a gray area against some of those rules. The NAIC seeks uniformity throughout the country, and its innovation and technology task force had on its list of ideas to review the regulatory sandbox concept.

DI: How does the sandbox work?
O’Malley: We presented a legislative proposal that would create authority that would needed for an effective sandbox, which has been used in Europe. It would allow an insurance commissioner to receive an application from an insurer or other licensee that says, ‘We can meet the consumer protection need of that law in another way,’ but still in a supervised environment.

DI: What are some of the ideas that don’t fit nicely into existing regulations?
O’Malley: Take an example of on-demand insurance. Say you have an expensive camera that you want to only insure when you go on an adventure. You have, on your smartphone, an app from an insurance company and you want to buy insurance for a few days. But there’s a lot of laws in the US that anticipate that a policy is a 12 month policy, and if you’re going to stop the coverage for something, you need to give 60 days’ notice. How does that work when the insured is stopping and starting coverage? You have consumers who are willing to insure things that way. So here you can test it and find a way to make it so that consumers are protected.

DI: What’s the timeline for something like this going live? Do you think regulators are more receptive now?
O’Malley: We’re engaging in conversations with various regulators now to insure them to have more urgency, otherwise they’re going to fall behind other countries that are encouraging innovation. It doesn’t move fast, but I am encouraged that it has moved with tech in the past. Uber’s a great example of a technology that moved very fast. It left their drivers with a gap under the assumption that a personal auto policy would apply, and it took a model law to fix it. Uber worked hard with the industry to figure that out. But think about how much more effective that would’ve been if you were able to first pilot test when Uber was coming out. Wouldn’t it have been better if you had a product before that first accident? That’s what we’re trying to say.

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