Last month, the New York State Department of Financial Services (the “DFS” or “Department”) became the first US regulator to impose specific, substantive requirements on the use of “unconventional sources or types of external data” in financial services. The new requirements are set forth in Insurance Circular Letter No. 1 (2019) (the “Circular Letter”), a guidance document that applies to “insurers authorized to write life insurance in New York.”
The Circular Letter tackles two frequently cited concerns regarding the use of external data in financial services—the risk of unlawful discrimination and a lack of data transparency. Although many government publications have raised potential concerns about these issues, the Circular Letter stands out in two key respects. First, it uses unusually strong language to warn insurers about the “significant potential negative impact” that external data use may have on “the availability and affordability of life insurance for protected classes.” Furthermore, in addition to describing concerns about unlawful discrimination and data transparency, the Circular Letter imposes specific requirements governing how insurers must mitigate these risks. Although the financial services industry often desires clear compliance guidance from its regulators, in this case, some may find the guidance to be too explicit and challenging to satisfy.
The Circular Letter applies only to life insurers operating in New York. However, since New York is the second largest life insurance market in the United States, this will encompass a lot of companies. Moreover, given widespread concerns over the use of large, frequently unregulated data sets in financial services, the Circular Letter may pave the way for similar guidance from other regulators.
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