NAIC produces Model Bulletin for Artificial Intelligence
Without someone stepping forward to provide affirmative regulation in the public interest to govern the use of AI, we can expect ugly scandals to come.
By Kevin P. Hennosy
In December 2023, the National Association of Insurance Commissioners (NAIC) adopted a model “Bulletin” addressing insurers’ use of Artificial Intelligence (AI).
Some observers, even in advertisements, equate the onslaught of AI on business as a “new Wild West”—a comparison that recalls films by the Director Sam Peckinpah with massive amounts of gunfire and exploding packets of stage blood; all shot in slow motion.
As Alex DeLarge opines, a character steeped in the field of ultra-violence in the dystopian film A Clockwork Orange: “It’s funny how the colors of the real world only seem really real when you viddy them on a screen.”
Let us hope that the application of AI will not turn offices into shooting galleries. We already have enough problems with that in the United States.
Meet Mr. Malvo
Big changes in history’s narrative are sometimes best explained by fictional characters of literature, stage, or screen. The unknown is difficult to prepare for, and fictional characters can build our confidence when we’re faced with something new and different.
When contemplating the regulatory policies necessary to face the rollout of AI with confidence, consider a fictional character played by Billy Bob Thornton in the first season of the FX series Fargo. Thorton played “Lorne Malvo,” a psychopathic killer who issued the following warning to those acting upon incomplete information:
[S]ome roads you shouldn’t go down. Because maps used to say, “There be dragons here.” Now they [the maps] don’t. But that don’t [sic] mean the dragons aren’t there.
Let’s Pretend
Instead of the direct and savage warnings of Lorne Malvo, we have the NAIC to show the way forward into the world of AI, which may not foster confidence in the future.
With very few exceptions relating to Medicare Supplement Insurance, wherever the NAIC applies the name “model” to a work product, the word “pretend” is more descriptive. In truth, the NAIC’s publication of pretend regulatory documents is all the association can ever do. The NAIC could adopt a “Model Act and Regulation to Adopt Sharia Law to the Business of Insurance,” and it would not mean anything in the real world. Think of the NAIC as a 153-year-old game of Let’s Pretend.
Now, playing the game Let’s Pretend is not a bad thing. Freed from real-world responsibility, the players may unleash creativity. A good game of Let’s Pretend allows for players to respond to unreal situations with command authority without putting life, liberty, or property at risk.
Sadly, the NAIC is not particularly good at Let’s Pretend.
The closest the NAIC gets to playing it with flair relates to its attempts to assume the standing of a governmental body. With the level of conviction shown of any successful travelling-show charlatan, the NAIC presents itself to international audiences and, before Congress, as a “standard-setting” organization. Standard setting suggests a type of regulatory authority, where none exists. Certainly, some people believe the claim, but they catch on after a short time.
In 2020, the NAIC published guiding principles—or a rudimentary roadmap—as the insurance sector gunned its engines and barreled down the AI highway. Even freed from the real world, the NAIC did not post any highway signs that read “Road Closed” or “Do Not Enter.” We cannot expect any heroics from the NAIC.
In other words, the NAIC roadmap to the land of AI does not mark where the dragons lurk. So, the “Malvo Warning” should apply: Some roads you shouldn’t go down.
Pulp fiction
Of the offices of the association, the NAIC Washington office is the most adept at playing Let’s Pretend. In the sub-genre of pulp fiction known as “NAIC Congressional Testimony,” the state regulatory system produces only sweetness and light. Nothing ever goes wrong!
For example, when the “World’s Largest Insurance Company” needed a massive financial bailout in 2008, the NAIC sent a malleable “past president” (who liked to travel very much) to testify before Congress that AIG was “not an insurance company.”
In the words of our guide to the unknown, Mr. Malvo: Of course, no one hangs the sad pictures. Am I right? Mom crying and dad looking angry. Kid with a black eye.
No matter what collection of gibberish that the NAIC produces, shame will never stop the Washington office from cranking out congressional testimony that will tout the work as if it appeared carved in stone beneath a burning bush.
Fluid authority
Insurance regulation has existed in one form or another since the 1820s. At that time, New Hampshire created a state office to grant charters so insurers did not need to ask the legislature to pass charter legislation.
Massachusetts followed soon after, and a math nerd named Elizur Wright began looking into the backgrounds of the people who formed insurance companies to judge the trustworthiness of their word. Wright also developed one of the earliest mechanical “computers” to check the fairness and adequacy of insurance pricing—in that order.
Nevertheless, for the last third of the 19th century and first third of the 20th century, interlocking boards of life insurers and rate-and-form cartels of property and liability insurers provided a private regulatory framework in the United States.
In 1944, the U.S. Supreme Court reversed 70 years of precedent and declared insurance interstate commerce. That court opinion placed authority over insurance with the Congress.
The state officials cared less about having regulatory authority over insurers; however, they wanted to protect access to premium tax revenue. As the 1945 financial statement deadline approached, insurers began to announce they would neither file financial information with the states nor tender tax payments.
As a former governor, and consummate politician, President Franklin Roosevelt worked with Senator Joseph O’Mahoney (D-Wyo.) to oversee drafting legislation with input from the NAIC, the independent agents, and the non-cartel insurance companies to replace the private regulatory system. The coalition crafted a loan of authority from Congress to the states to tax and regulate the business of insurance to the extent that the states used the regulatory power. In a signing statement, Roosevelt expressed the opinion that in a very few years the jurisdiction over insurance would return to Congress.
State officials hold authority over insurers only to the extent that those jurisdictions regulate the business of insurance. To any extent the authority is not used, the McCarran-Ferguson Act returns jurisdiction to Congress. That still leaves the question unanswered: What is the business of insurance?
The loaned jurisdiction as defined in Securities and Exchange Commission v. National Securities, Inc. 393 U.S. 453 (1969) by Associate Justice Thurgood Marshall, the business of insurance means “the relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement—these were the core of ‘the business of insurance.’”
Rules
The use of AI could touch upon every aspect of the relationship between insurer and insured. A series of Pretend Guiding Principles or Pretend Bulletins is not what Justice Marshall, Senator O’Mahoney, or President Roosevelt had in mind.
However, although he is a fictional character, Lorne Malvo provided people like the Justice, the Senator, the President, and this writer a spoonful of hyper-realism:
Your problem is you have spent your whole life thinking there are rules. There aren’t. We used to be gorillas. All we had is [sic] what we could take and defend.
As explained above, rules do exist—so we have progressed beyond the “take and defend” phase of development.
Still, some state officials boast with buffoonish glee that they let competition regulate insurance, which runs counter to the text of McCarran-Ferguson. But who wants to play the heavy with a commercial sector where the regulator wants to find a job in the future?
Without providing a spoiler to those who have not watched Fargo, the hesitance to enforce rules recalls another quote from our coldly violent friend Lorne Malvo when he is pulled over by a police officer for running a stop sign. Malvo convinces the police officer not to cite him for the violation by saying:
Let me tell you what’s gonna happen, Officer Grimly. I’m going to roll my window up, then I’m going to drive away, and you’re gonna go home to your daughter, and every few years, you’re gonna look at her face and know that you’re alive because you chose not to go down a certain road on a certain night. That you chose to walk into the light instead of into the darkness.
To leave readers with a quote not attributable to a fictional psychopathic killer, consider the following thought from conservative icon William F. Buckley Jr.:
A conservative is someone who stands athwart history, yelling Stop, at a time when no one is inclined to do so, or to have much patience with those who so urge it.
Well, neither avoiding dragons nor yelling “stop” in the insurance sector is fashionable among today’s insurance regulators—or those who pretend to have a regulatory role. Without someone stepping forward to provide affirmative regulation in the public interest to govern the use of AI, we can expect ugly scandals to come.
The author
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.
