Navigating the Future: How AI is Transforming Insurance

What does the future hold for AI in insurance? According to Time, AI has surpassed human ability at a number of tasks – from image and speech recognition to reading comprehension. Although there are still some areas where humans perform better, AI is advancing rapidly and is not expected to slow down in the near future. As AI continues to improve, its impact on the insurance sector will also continue to grow.

Insurers Are Leveraging AI in Underwriting and Claims

Insurers have been leveraging AI to improve insurance processes for a while, using solutions ranging from auto insurance underwriting that leverages telematics to tools that analyze photographs to assess damage and detect fraud.

In the near future, AI will be able to take on even more processes. McKinsey & Company theorizes that automation may handle half of all claims processing activities by 2030, whereas IoT sensors, drones, and other data-capturing technologies may support better first notice of loss processes and enable better claims triage. The result would be a more efficient and accurate claims experience with faster resolutions. Similarly, advancements in AI underwriting may result in faster application processes and more accurate pricing, with automated underwriting occurring in mere seconds.

AI Helps Policyholders Manage Risks

The very nature of insurance is changing due to AI.

Historically, insurance has been primarily reactive. If a policyholder experiences a covered loss, the insurer provides a payout to make the policyholder whole again. However, the insurer does not do much – if anything – to prevent the loss from occurring in the first place.

This is starting to change. With losses surging, both insurers and policyholders are motivated to prevent incidents before they occur. Cyber insurers are requiring cybersecurity best practices and providing guidance on how to avoid cyberattacks, whereas property insurers in areas with high catastrophe risks are focusing on proactive property hardening measures.

AI is giving insurers new tools to help with these risk management initiatives:

• AI can detect hazards before they cause a loss. We’ve seen this in auto insurance, where telematics programs provide feedback on driver behavior. In addition to creating personalized rates, telematics programs give drivers a chance to stop risky habits before they result in collisions. Other IoT devices (such as sensors that detect water leaks) also prevent losses.
• AI-powered risk modeling technologies are giving insurers the insights they need to create strategies for the future. As climate risks change, models based on historical data may no longer be accurate. Models that leverage machine learning provide more accurate forecasts. For example, com explains how AI is helping forecasters predict wildfires caused by lightning strikes.
• AI is facilitating new coverage options to plug coverage gaps. It can assess existing coverage and make recommendations – but that’s not the only way it can help policyholders avoid coverage gaps. According to Insurance Journal, experts predict that AI will help insurers offer more types of coverage, particularly parametric insurance options.

New AI Risks Require New Coverage

Although AI can help insurance companies and their customers manage risks, new technologies are also creating new risks, which will require new types of coverage.

McKinsey & Company says that, as of early 2024, 72% of organizations have adopted AI and 65% have adopted generative AI specifically. Adoption is happening quickly due to the many benefits, but this also means businesses are sometimes using innovative technologies before risk management and regulations have caught up.

For example, what happens if an AI chatbot shares your intellectual property or makes unfounded promises to customers? Alternatively, what if a generative AI tool used by an employee produces images, text, or code that infringes on another company’s intellectual property rights? Some companies are already navigating these legal scenarios.

Meanwhile, cybercriminals are also using AI, which is resulting in cyberattacks that are harder to detect and that occur at a much greater frequency. The World Economic Forum warned that AI is being used to carry out social engineering cyberattacks that result in losses of millions of dollars.

Existing insurance policies may cover some AI-related losses, such as coverage for cyberattacks and copyright infringement lawsuits. However, existing policies may not cover some losses adequately.

In addition, insurers may introduce new exclusions that limit or bar coverage for losses stemming from the use of AI. To fill the gaps, insurers will need to introduce new products – something that is already happening. For example, Swiss Re says some insurers have already started to offer coverage for AI algorithm and performance risk.

Is your risk management keeping up with the changes AI in insurance is bringing? We can help! Contact Heffernan Insurance Brokers for guidance.