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On July 17, 2023, the Innovation, Cybersecurity and Technology (H) Committee of the National Association of Insurance Commissioners (NAIC) released for comment a highly anticipated model bulletin (Model Bulletin) on regulatory expectations for the use of artificial intelligence1systems (AI Systems)2by insurers. The Model Bulletin encourages insurers to implement and maintain a board-approved written AI Systems Program (AIS Program) that addresses governance, risk management controls, internal audit functions and third-party AI systems.The goal of the AIS Program is to mitigate the risks of harm to consumers thru decisions made or supported by AI Systems, including third-party AI systems, that are arbitrary or capricious, unfairly discriminatory, or otherwise violate unfair trade practice laws or other legal standards, or that include data vulnerabilities.

The Bulletin also advisesinsurers of the information and documentation that insurance regulators may request during exams and investigations of the insurers AI Systems, including third-party AI Systems.

The Model Bulletin recognizes the Principles of Artificial Intelligence (Principles) adopted by the NAIC in 2020 as an important source of guidance for insurers to use in their continuing development of an AIS Program.It also explains how the regulatory expectations outlined in the Model Bulletin are rooted in existing law, including model laws on unfair practices, corporate governance, market conduct and property and casualty ratings.

Under the Model Bulletin, insurers are encouraged to maintain a written AIS Program that governs the use of AI Systems in order to mitigate the risk that use of such AI Systems, when making or supporting decisions that impact consumers, will result in decisions that are arbitrary or capricious, unfairly discriminatory, or otherwise violate unfair trade practice laws or other applicable law.

With regarding to governance, the AIS Program should:

With regard to risk management and internal controls, the AIS Program should document and address:

Each AIS Program should address the insurers standards for acquiring, use and reliance on AI Systems developed or deployed by a third- party, including:

Under the Model Bulletin, the applicable state regulator has the authority to request from the insurer information and documentation relating to the insurers AI Systems (as well as information and documentation developed by third parties that are relied upon by the insurer or its agent) as part of their market conduct examinations and as otherwise necessary to monitor the insurers compliance with the law.Such information and documentation include:

Issues related to the draft Model Bulletin include the definitions of AI Systems and algorithms; the extent of the governance and risk management controls expected; and the expectation that third-party vendors of AI Systems will agree to be subject to inspection and inquiry by 50 state insurance departments, including market conduct exams.

Comments on the Model Bulletin are due to the NAICs (H) Committee by September 5, 2023 and should be submitted to Miguel Romero (maromero@naic.org). The (H) Committee will hear comments from in-person attendees at the NAICs Summer National Meeting on Sunday, August 13, 2023 at 2:00 p.m.

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1Artificial Intelligence is defined as machine-based systems designed to simulate human intelligence to perform tasks, such as analysis and decision-making, given a set of human-defined objectives. This definition treats machine learning as a subset of artificial intelligence.

2AI Systems are defined as an umbrella term describing artificial intelligence and big data related resources utilized by insurers.

3Algorithm is defined as a computation or machine learning process that augments or replaces human decision-making in insurance operations that impact customers.

If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

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NAIC releases highly-anticipated draft model bulletin on artificial ... - Eversheds Sutherland(US) LLP