Massive investment in AI means plenty of change ahead

This article was originally published in Insurance Day, February 2024.

AI technologies present many opportunities to bring rapid advances to the insurance sector, addressing evolving customer needs and increasing efficiency.

The latest advances in artificial intelligence (AI) and related innovations have signalled the need to embrace digital transformation with increasing urgency.

Innovators in the insurance industry must now anticipate new and evolving threats with ever-greater acuity. They are required to keep up with changing customer expectations and offer new preventative solutions to emerging risks, rather than just merely offering and repeating cover for historic types of loss.

AI technologies present many opportunities for the insurance sector to meet those demands and bring rapid advances to the sector; enabling productivity and efficiency gains. Innovations are being developed across the insurance supply chain, and for different product areas.

In the past decade, the insurance sector has seen unprecedented investment that aims to streamline the insurance value chain. In 2022 alone, $7.9bn was invested across 521 deals completed globally, while almost $50bn has been invested globally since 2012.

Alongside the significant benefits, there are a number of legal issues arising from technologies that have the potential to bring innovation to insurance – requiring a careful balancing act between risks and rewards.

Those issues include concerns about data privacy, bias and discrimination. Use of data and data privacy is a particular pressure point in how consumers view insurance innovation.

Customer data

Many insurance innovations have built on the ability to both collect and evaluate more customer data, to either allow for more precise underwriting, speed up claims decisions or insure risks previously difficult to monitor and price.

In response, insurers should expect increasing scrutiny around how much customers trust, and want, them using their personal data to reach decisions.

While the EU’s General Data Protection Regulation is now taken as standard practice in data protection almost globally, concerns about what data is being tracked and how it is being used continue to be top of mind for consumers.

How firms are using consumer data to develop better insurance products will increasingly be a necessary proof point in building and validating trust, particularly under those regulatory regimes, such as the Financial Conduct Authority in the UK.

Marketability standards for new devices and technologies is another important consideration for firms: devices must meet the essential requirements and safety characteristics, including those set out by the EU harmonisation legislation. It is also necessary to assess whether connected devices and technology are protected by any intellectual property rights.

Overall, where insurers are seen to have overstepped the mark, they should expect consumers’ willingness to act to increase, including by turning to the regulator.

Regulatory risk

Meeting regulatory requirements is another risk in itself. As technology and innovation has been uprooting the insurance sector through the past decade, regulators have increasingly found themselves on the backfoot playing catch up with the latest product developments, and therefore regulatory implications.

As such, the regulatory regimes around the world remain heterogenous in their approaches, with many waiting to see how the first mover will attempt to de ne a prudent regulatory regime that remains attractive to innovation. While the EU is arguably leading the way with the EU AI Act, elsewhere, the approach is focused on providing guidance and principles, as in Singapore.

Finding the balance between ensuring regulation provides adequate protection to customers (particularly consumers and small and medium-sized enterprises), while maintaining an attractive prospect for inward investment to encourage innovative start-ups and talent base, is increasingly an agenda issue that regulators must reconcile and firms will need to navigate.

To mitigate risks and realise the potential of AI technologies, insurers must create robust AI governance frameworks to ensure best practice; including with regard to data governance, explainability and transparency, as well as continuous monitoring.

Doing so will help send a strong message to customers – and the wider market – that the commitment to fostering responsible AI practices will go hand in hand with applying ethical AI principles associated with AI technologies.