US legacy regulation makes insurtech enormous challenge
Insurance codes in US states that date back decades, if not centuries, are making the regulation of insurtech a daunting task, according to Adam Hamm, former president of the National Association of Insurance Commissioners. In order for insurtech to be regulated properly many legal codes may need to be rewritten by regulators, he said. Hamm added that many codes adopted years ago were written for a paper-based insurance market. Certain codes date back to as early as the 1800s and many insurtech firms may not realise there are significant differences between the codes of each state, Hamm noted. 

The emergence of insurtech represents the biggest challenge facing regulators over the next decade, as lawmakers work to ensure startups comply with state provisions imposed on carriers while encouraging growth.

Individual state insurance codes, some dating as far back as the 1800s, also make insurtech business models difficult to grasp for regulators, according to Adam Hamm, who served as president of the National Association of Insurance Commissioners in 2014. He argues established legal codes were written for an old paper-driven market, not a digital world where insurtechs produce data in real-time.

“Of course, legislature gets to meet, revise or add to a statute, but it’s built on the original model,” says Hamm, who was North Dakota’s insurance commissioner from 2007 to 2016. “Regulators have to either rewrite codes completely or tweak statutes to allow for these new business models.”

The NAIC Innovation task force established this year will play a big role in regulating insurtech going forward, Hamm predicts. By giving insurers and startups a seat at the table, regulators can better balance industry innovation with consumer protections and solvency requirements. In return, insurers and industry newcomers can communicate the pain points of current insurance codes.

“The task force is regulators trying to wrap their minds around how to eat this huge elephant one bite at time,” he added.

Finally, Hamm warns insurtechs are in for a “rude awakening” as they expand into new markets, as the majority of startups are unaware of the standards they are required to meet as part of the U.S. 50-state regulatory system.

“Not a lot grasp this will not be a one-stop shop,” he says.

Hamm now serves as managing director of Protiviti, a global consultancy firm. In this role, he educates insurtechs on how to make business models fit within current regulatory environments. Hamm also advises carriers on the pros and cons of their insurtech approach, which largely involve M&A activity or building emerging technologies in-house.

“Market share players understand regulation, but should know that regulators aren’t going to grant insurtechs shortcuts,” he said. “The same rules applied to carriers will be applied to startups.”