A little while back Jessica Altman, acting insurance commissioner for Pennsylvania, was among a group of insurance regulators attending a demonstration in Silicon Valley of the technology behind the Waymo autonomous vehicles.
When you see videos of the Chrysler Pacifica minivan that Waymo is using, there is an instinctive feeling that something is not quite right. Happy passengers are sitting in car in motion, and no one is at the wheel (the vehicle does have one). It feels, well, strange.
But for Altman, the questions went way beyond the obvious ones. She learned that the technology behind the self-driving vehicle entails more than the software that allows it to drive and navigate.
“These vehicles are recording audio and video 360 degrees ever minute they are on the road,” said Altman during a session at the RegTech Enable conference late last year. “They can see for about the length of a football field in every direction. Someone told me that each car collects about four terabytes of data every day.”
Altman, like many iPhone users, regularly gets messages from her phone warning her that she is bumping up against her 12 gigabyte memory limit. So, to hear about such a huge accumulation of multiple forms of data, she said, “is unfathomable.”
Horsepower of telematics
But understanding what will happen with such huge amounts of data is important to regulators like Altman. “As more data is collected and tied to personal behavior and personal choice, the more we need to do a better job of understanding what the potential uses of that data will be,” she said.
Waymo’s data gathering is on the leading edge of a trend already underway in the world of auto insurance and other coverages, according to Altman. This technology is called “telematics.” Already there are black boxes out there on insured vehicles that report to insurance companies how fast the motorist is driving, how quickly they brake, how smoothly and consistently they drive.
Altman said that such technology is already ranging beyond cars. Fitbits and similar devices are being used by some health insurance companies through employer programs and wellness incentive programs to adjust policy pricing for physically active customers, for example. Other technologies that allow remote monitoring of one’s home—allowing a homeowner to raise the heat remotely so pipes don’t burst during a cold snap, for instance—could lead to discounts on homeowner’s coverage.
In Pennsylvania, data from telematics can only be used to grant discounts. “You cannot get charged more if you are a bad driver, you can only get charged less if you are a good driver,” Altman explains. Yet only a small fraction of Pennsylvanians opt into such programs.
“I don’t actually know why that is,” said Altman. She thinks people may not completely understand the programs. She noted that the Commonwealth of Pennsylvania is installing such devices in state-owned vehicles, “so we’ll see if I become a better driver.”
“I think the way of the future will be to use these measurements to give people a targeted rate on their insurance,” said Altman. But this comparatively new technology leaves her, as a regulator, with questions.
A key issue is how much this could change the nature of the insurance business itself.
“The whole point of insurance is to pool risk, with everybody in the pool and a fair price being shared across the community,” Altman explained. “But when you combine these types of remote tracking with all the predictive analytics that we’re seeing for big data, at some point you’re not actually pooling risk anymore. You’re charging every person for their own risk. It becomes less and less like insurance.”
Altman said she’s all for consumers paying lower prices, and for that opportunity to positively influence behavior.
“But from a regulatory standpoint,” she continued, “it’s actually more of a challenge, to make sure that insurance companies are integrating the ratings appropriately.”
Where tech is taking regulation
The science of telematics is just one example of how the exploding capabilities of technology are rewriting the rules of not only businesses, but also the regulators that oversee those businesses. Another technology that is coming along is the ability to handle all the time-consuming aspects of filing a claim after an auto accident remotely—such as taking photos of damage and submitting them remotely.,
Altman was part of a panel at RegTech Enable (co-sponsored by Banking Exchange) that explored the many developing forms of technology influencing financial services regulation. That panel looked at the role of state-level banking and insurance supervisors. Issues explored ran the gamut from fintech that’s changing banking and insurance to regtech, technology to be used by companies to better cope with regulation and compliance to “supertech,” technology used by supervisors themselves to do their jobs better.
Regarding telematics, representatives of the banking regulatory fraternity were a bit skeptical of the impact of such technology on banking.
Customer’s interaction with insurance services tends to be episodic, pointed out Margaret Liu, senior vice-president and deputy general counsel at the Conference of State Bank Supervisors. A customer obtains coverage and typically there is little involvement unless a claim is filed, traditionally.
On the other hand, said Liu, “in banking there is data flowing and there are interactions multiple times a day. You are buying things. You are moving your money from account to account. So there is already a lot more consumer data that financial institutions have in their control right now.” Such depth of data helps permit banks to question unusual charges on card accounts to prevent fraud, for example.
Liu said that a key duty of bank regulators is to weigh the risks and benefits of new technology and to be sure that insured banks understand both as well.
She said that new nonbank technologies that use payments and receivables data as a basis for extending credit is a new wrinkle that “regulators have to wrap their heads around to understand both the benefits and risks.”
Liu noted that such technologies hold out the promise of increasing participation in financial services.
However, she added, “it is a false premise that all technology is good, right? That it’s all going to be better for consumers. There’s huge opportunity around inclusion, and affordability, and access to consumer financial services. But I think that sometimes some of those advocates of fintech don’t necessarily have a proper balance of the good and the bad opportunities.”
Bryan Schneider, secretary of the Illinois Department of Financial and Professional Regulation, said it was possible for something like telematics to improve pricing or availability on the basis of analysis of consumer behavior.
However, he added, “we have to think about whether the extent that it is being deployed with is safe and sound.” There is potential risk that a financial bubble could arise because of such new methods of evaluating creditworthiness.
“And there’s also the potential discriminatory aspects,” said Schneider. “Are you looking at market behaviors that are really proxies for what would otherwise be an impermissible reason to make a credit decision?”
Altman said insurance companies have brought her department proposals to tap a particular data source only to be turned down after evaluation.
She said credit scores are one such data factor.
“Some states have allowed that and think it’s fine,” she explained. “However, other states have said it’s unacceptable because credit scores are so correlated with other socioeconomic factors that they view it as unfair. So there are certainly cases where as a regulator you have to say, ‘No, we think that’s not really appropriate.’ Just because it’s statistically correlated doesn’t mean you should use the data.”
State regulatory technology
In many ways, said Schneider, for the state regulatory system, “technology is the glue that holds us together.” Increasingly state banking regulators have been working together in their approach to regulated and newer financial industries.
The state system has been using technology to coordinate licensing since the early 2000s, with a system originally mortgage oriented that expanded to become the Nationwide MultiState Licensing System. CSBS and its member regulators are in the midst of a revamp of NMLS that will be unveiled in the third quarter of this year.
The system has dual nature. While it is used by regulators and licensees of many types of financial services providers, portions of it are accessible by consumers who wish to be certain that they are really dealing with a licensed providers and licensed individuals. Even in today’s connected world, Schneider said, there are fraudsters who claim to be licensed but aren’t—in his state a company deceptively presented itself as a chartered credit union.
More and more data is shared among regulators and Schneider said that CSBS is working on systems that will facilitate more such sharing.
“There’s a lot of efficiency that’s already been gained but the states are continuing to look at how we can do that more efficiently,” said CSBS’ Liu.
While remote access to data already informs the regulatory function, Schneider said that he doesn’t see regtech or supertech wholly replacing person-to-person regulatory contact.
“I don’t think you’re ever going to get rid of human beings,” said Schneider. “We’ll have technology-assisted regulation that will help us identify trends, and help us identify things that we need to look at more deeply.”
However, said Schneider, he said bankers themselves have made it clear that they don’t want robo-examination.
“We hear them say that while they like the general notion that ‘You won’t be here quite as long, or you won’t ask quite as many’—what they perceive as—‘silly questions, but we don’t want to turn this into just a technology thing. We like the ability to communicate with our regulator to explain what’s going on’.”
The state banking system represents a large portion of American banking, and an unusual factor on the international scene. The state system has frequently been where innovations in banking began.
While innovation issues continue to be discussed and studied at the federal level—the Comptroller’s Office has its Office of Innovation, for example—no federal “sandbox” has been sanctioned thus far. In countries such as the United Kingdom, the “sandbox” approach, which entails a level of regulatory cooperation and protection for fledgling services, has attracted much scrutiny.
State regulators have been looking at innovation at multiple levels. CSBS has its Vision 2020 effort, where the organization is taking a centralized look at innovation issues, including appointment of a fintech advisory group consisting of representatives of nonbank providers. The intent is to balance innovation in bank and nonbank financial services while ensuring consumer protection. (See a video about Vision 2020.)
CSBS is also revamping its Nationwide Multistate Licensing System, to enable green-lighting most licensing through an automated approach while enabling state regulators to concentrate their energies on higher-risk proposals. CSBS is also coordinating efforts to harmonize licensing procedures across state lines. (A past complaint of fintechs has been the need to go through separate licensing procedures in each state they wish to do business in.)
Schneider said that his department was going to try to set up a sandbox of some kind in Illinois. The first step is to build a dialog around the idea, said Schneider, as introduction of a state sandbox would require legislative approval by the state legislature.
“Time is not your friend if you are innovating and being restrained by a regulatory regime—which almost always by definition is looking at yesterday’s issues,” said Schneider. “Some regulatory flexibility will help people get products and services to market more quickly. I think that’s good for Illinoisans. Part of my job is not to just keep bad things away from Illinoisans but to also make sure that they get good things as quickly as possible.”
Liu of CSBS said that states have been discussing setting up regional and even business-line-specific compacts.
“You don’t go from 0 to a 50-state-wide initiative overnight,” said Liu. “You get a critical mass amongst a handful of states that are invested, committed, and that grows. A lot of different things can happen in different parts of the country that aren’t just about creating a new patchwork quilt, but are about working towards something larger on a national basis.”
For the state regulator, such efforts are a balancing act, according to Altman.
“You have to remember that we are dealing with highly regulated industries. We have a lot of regulations and they are very descriptive about products in many cases. The regulations didn’t happen overnight. They happened over time, and they happened for good reasons,” said Altman. “The challenge is to allow for innovation without sacrificing those core principles.”
Altman said that communication between industry and regulator will be critical as such efforts move forward.
“We can’t just say, ‘Here’s a sandbox. See us in two years and tell us what you did’,” said Altman. “We have to say, ‘Here’s the sandbox. Let’s be checking in constantly and making sure that this is something that everybody thinks is a good outcome’.”
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