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New York DFS AI Regulation, What Insurers Need To Know

Jan 8, 2024 | FairNow Blog

By Kayla Baum
AI Governance

Why We Have Our Eye on AI Governance and Insurance Companies


As a trusted AI governance software provider, we’re not just occasionally glancing at emerging AI regulations – we’re playing an intense game of regulatory ‘I Spy’.

Our job is to keep you up to date and optimize your time by only updating you when there are meaningful changes to the regulations that impact you most.

Before We Start, Acronyms to Know

Fair warning: there are a LOT of acronyms in our overview. Here’s a cheat sheet:

  • AIS = Artificial Intelligence Systems
  • ECDIS = External Consumer Data and Information Sources
  • LLMs = Large Language Models
  • NAIC = National Association of Insurance Commissioners
  • NYDFS = New York State Department of Financial Service
  • NYIL = New York Insurance Law
  • RAG = Retrieval-Augmented Generation

What We Know about AI Regulation for NY Insurance Companies So Far (Early 2024)

In a press release dated January 17, 2024, the New York State Department of Financial Services (NYDFS) shared a draft of the upcoming guidance regarding the use of Artificial Intelligence Systems (AIS) and External Consumer Data and Information Sources (ECDIS) in insurance underwriting and pricing.

The press release highlights the key points of the full “circular letter,” which was also published on January 17th, 2024.

First things first, what is a circular letter? “circular letter” is a fancy term for a document or announcement sent to a large group of people. Ok, that’s easy. Moving on.

Importance of AI Governance in Insurance Pricing and Underwriting

While there is no formal legislation in place yet, the circular letter highlights the intentions of the legislation and gives us clues into what the future may hold for insurers around the world.

Who Does The NYDFS’ AI Governance Apply To?

According to the draft of the upcoming legislation, the circular letter “applies to all insurers authorized to write insurance in New York State.”

Why Is the NYDFS Concerned About AI Governance for Insurance Companies?

The New York State Department of Financial Services (NYDFS) has expressed strong reservations about the possibility of discrimination arising from the use of AI and external consumer data in insurance.

They emphasize the need for comprehensive guidance to guarantee that such technologies do not lead to unjust results.

Concerns Over Discrimination: At the top of the list, the NYDFS (reminder: that’s the New York State Department of Financial Service) has significant concerns that AI and ECDIS in insurance could lead to discrimination, especially in underwriting and pricing.

Potential for Unfair Outcomes: The use of AI and ECDIS could inadvertently reinforce and exacerbate inequality due to systemic biases, and there are issues with variable accuracy and reliability of data sources not under regulatory oversight.

Risks Due to AI Self-Learning: The self-learning nature of AIS can lead to outcomes that are inaccurate, arbitrary, or unfairly discriminatory, potentially affecting vulnerable communities and disrupting the insurance market.

5 Key Takeaways From the Current Draft

1. The Document Distinguishes Between Fair and Unfair Discrimination: The regulation allows insurers to differentiate based on risk levels among different groups, which is why, for example, younger individuals might pay more for car insurance than older ones.

However, this draft focuses on preventing unfair discrimination, especially in cases where it doesn’t correspond to actual risk levels.

2. Notable Concerns Over AI and Third-Party Data Sources: The regulation specifically highlights the potential for unfair discrimination stemming from the use of AI and external consumer data and information sources (ECDIS).

3. Highlights Requirement for Actuarial Validity and Bias-Free Data: Under this regulation, insurers must prove that the third-party data they use for underwriting and pricing is actuarially valid and free from bias.

The regulation further clarifies that insurers, not vendors, bear this responsibility.

4. The Announcement Hints at an Upcoming Mandate for Comprehensive AI Governance and Risk Management: According to the draft, insurers will be required to implement a robust governance and risk management framework to protect consumers and comply with legal obligations.

This framework should include:

  • policies and documentation regular testing
  • both quantitative and qualitative assessments
  • oversight by the board of directors and senior management
  • established standards and procedures
  • clearly defined roles and responsibilities, and an effective internal audit function.

5. The NYDFS Wants to Know What You Think: The NYDFS is seeking feedback on its proposed guidance by March 17, 2024.

Want to Learn More About AI Governance for Insurance Companies? Follow These Industry Leaders:

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