Imagine if the IRS were allowed to base your taxes on its own “projections” of your income. And you were not allowed to check the math.
That’s the gist of Insurance Commissioner Ricardo Lara’s long-awaited insurance plan: let insurance companies use top secret algorithms and AI to predict the future and raise your insurance rates. It crashed into reality at a meeting Lara convened last week on his proposed “catastrophe model” regulations.
Lara’s goal was to liberate the insurance industry from having to rely on statistical data from previous losses to predict future events like wildfires. (That’s how insurance rates are normally set.) Insurance companies would instead be allowed to get together with privacy-busting Wall Street computer modeling firms in a secluded corner of cyberspace, where they would write computer code to decide what Californians will pay for coverage for their homes. The industry has kept insurance in very short supply for the last year or so, driving up prices and putting enormous pressure on Lara and other state officials to agree to their demand for this and similar cutbacks in California’s nationally renowned consumer protections.
But the proposal itself seemed to be hiding key details, as Consumer Watchdog noted in its 18 page analysis– such as whether the insurance and modeling firms will even have to prove that their algorithms are safe, reliable and free of costly software bugs before they can go ahead and use them to set insurance prices. In a rare convergence, insurance lobbyists also complained that the proposal was short on details. The absence of uniform standards by which computer models – and their use by insurance companies – would be evaluated was a problem raised by just about everyone – except the modeling firms, of course.
And the Commissioner ignored the alternative presented by Consumer Watchdog, Public Citizen and Consumer Federation: that he must adopt a fully transparent public model that can be independently evaluated to assure its accuracy. Transparency is a requirement under Proposition 103.
Lara’s scheme conflicts with the protections against price gouging that California voters put in place when they passed Proposition 103 decades ago, in the midst of a similar “insurance crisis” that destabilized California’s economy. 103 requires insurance companies to justify the rates they want to charge, before the Commissioner can approve them. And consumers are allowed to independently look over the Commissioner’s shoulder and challenge the insurance companies. All of this has to happen in full view of the public.
It wouldn’t under Lara’s proposal. Only he and his hand-picked staff, and private consultants hired by the Department of Insurance, would be privy to the insurance algorithm. Everyone else would be forced to sign “Non-Disclosure Agreements” with private firms that prevent members of the public from revealing anything they learn.
Many government officials bitterly complain about the prying eyes of the people who pay their salaries. Commissioner Lara is one of them. So perhaps it is no surprise that his new proposal exalts the wizards in the increasingly tech-oriented insurance industry, placing them beyond the reach of the public.
It’s disturbing though that Lara wants to squelch public scrutiny of computer models at a moment when scientists and responsible businesspeople are increasingly alarmed about unregulated artificial intelligence, and there is widespread recognition that American industry is using secret software surveillance programs to decide who gets jobs, housing, medical care and even lower retail prices – cloaking old fashioned discrimination in the glittery garb of high tech.
Lara calls his plan the “largest insurance reform since Proposition 103,” but someone forgot to tell him that he has no power to cancel an initiative passed by the voters. The farther away from California’s protections against price gouging and government overreach this plan gets, the more likely it’s going to be thrown out by the courts.
It’s hard not to consider this first draft DOA.
You might be wondering what’s in Lara’s plan for California consumers, homeowners, and businesses? When he announced, last fall, that catastrophe models would be a core component of his “sustainable insurance strategy,” the Commissioner said he’d reached a deal – behind closed doors of course – with the insurance industry: If he forced California consumers to pay the industry’s ransom, the insurance companies would resume selling insurance to 85% of the people who live in “risky” areas across the state and haven’t been able to buy coverage from insurance companies. But the regulations Lara has proposed to date contain no such requirement.
And we later discovered that the “85% commitment” to re-enter the market was itself a deception: companies would be allowed to sell bare bones policies like the California FAIR Plan, not the standard comprehensive home insurance coverage that most people want. But homeowners already have access to the FAIR Plan, so there’s actually no “quid” for Californians in exchange for the cat model “quo.”
The companies, which have been vociferously demanding the right to use black box models, were conspicuously silent last week about their pledge to return to the neighborhoods they have abandoned. Only one industry representative – a senior Allstate lawyer – said anything about their company returning to the market. And he chose his words very carefully: if the Commissioner agreed to all the industry’s price-boosting demands, “Allstate would begin writing new homeowner policies in nearly every corner of California.” Translation: “Do what we want, and some of you will be in good hands with Allstate.”
Doesn’t sound that sustainable to us.
