The NAIC’s model bulletin on carriers’ use of Artificial Intelligence Systems, adopted in December 2023, specifically sets out expectations that insurers will describe their processes for acquiring, relying on and performing due diligence on third-party AI systems in written programs for the responsible use of AI Systems.

Is an MGU or a broker considered a third party by the NAIC drafters?

“I think it could be,” said Bruce Baty, partner with the law firm Norton Rose Fulbright U.S. LLP. He noted that provisions related to third parties were being discussed—and changed “on the fly”—in the final minutes before the vote for adoption at a December 1 meeting of the committee that drafted the bulletin. “One regulator raised his hand and said that licensees [insurers] can go out and audit these third-party providers of data only if there’s a contractual right to go out and audit these companies,” Baty said.

Related article: “Regulators Run Alongside Speeding AI Train: What the NAIC Model Bulletin Means for Insurers”

“It was a very good point,” he said, alluding to a reference in the bulletin to carriers’ auditing protocols with respect to third-party providers of AI systems or data. “If they are not a licensed entity, neither the carrier nor the regulator has the right to come in and look behind the curtains to see what what’s in the sauce,” he said. “But a lot of what we’re seeing now are MGUs that are developing out their own systems, purchasing their own datasets, and packaging that and selling them to carriers. And so, it’s both. It’s third-party vendors that are not licensees, but also MGUs that are licensed and subject to audit.”

Asked whether there might be another model on the horizon aimed specifically at brokers, agents and MGUs, Baty said he doesn’t think so. Instead, the NAIC will remain focused at the carrier level—”if you contract the third party to supply these data, you have to have the following terms. You must comply. These terms have to be in the contract. That’s what we’ll likely see coming out of 2024.”

Baty said that Maryland’s Insurance Commissioner Birrane, the chair of the NAIC committee that drafted the model bulletin, has indicated that in 2024 the relationship between carrier and third-party data supplier is one of the things the NAIC will be examining more closely.

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This article is featured in Carrier Management’s first-quarter 2024 magazine.

In a related article, “Regulators Run Alongside Speeding AI Train,” Baty gives a high-level overview of what regulators rushed to accomplish in crafting the “Model Bulletin on the Use of Algorithms, Predictive Models, and Artificial Intelligence (AI) Systems by Insurers,” adopted by the NAIC in December 2023.

Other related articles with details of AI-focused insurance regulations are:

• NAIC’s AI Model Bulletin in Brief
• What’s in New York’s Latest AI Circular?
• Definitions, Definitions: Advanced AI vs. AI