A New Colorado Regulation Aims To Prevent Life Insurers Relying On External Models From Engaging In Discrimination

The Colorado Division of Insurance (CDI) has adopted a new regulation to prevent life insurers that rely on models and ECDIS from engaging in race-based discrimination.

Life insurance regulators have been grappling for several years with the potential risks and benefits of insurers using AI and the significant external data sources utilized by AI in underwriting.

The technology used raises regulatory questions, including concerns that its use could cause unfair discrimination.

Several insurance regulators have also expressed concern that external data sources used by AI and other algorithms could contribute to underwriting improperly based on characteristics such as race.

According to The Insurance Journal, estimates have found that about 37% of all “Facts” used by AI have a bias.

In insurance specifically, AI has perpetuated biases that generate discrimination based on race, class, and gender.

For example, minorities are much more likely to be denied conventional mortgages in some cases.

An insurance company, State Farm, additionally faced a class action in 2022 for racial discrimination from its use of models.

The Colorado Regulation

The regulation adopted by the Colorado Division of Insurance (CDI) will prohibit life insurance companies from using information sources, algorithms, and predictive models to discriminate based on race.

Insurers will now be required to share all framework components with the CDI.

The aim is to oversee whether the life insurers’ use of ECDIS – Electronic Chart Display and Information Systems – and algorithms potentially result in unfair discrimination concerning race.

ECDIS can include credit score, social media habits, locations, purchasing habits, home ownership, educational attainment, licensures, civil judgments, court records, and occupation that do not directly relate to mortality, among other factors.

Insurers are supposed to make sure that the vendors supplying any ECDIS, including AI tech, comply with Colorado antidiscrimination regulations.

The regulation also aims to remediate such unfair discrimination if detected and submit a compliance progress report on June 1, 2024.

Although Colorado is the first state to regulate AI in the insurance industry, many others have statutes and guidance.