AI providing opportunity for insurance industry to transform itself by embracing change

New GILC report highlights the global challenges and opportunities for the use of AI in the insurance industry

Global Insurance Law Connect (GILC) has launched its first Artificial Intelligence report, providing insights from 18 countries (including Australia) on how artificial intelligence is impacting the insurance industry in their own markets. As well as providing details on changes to AI regulation and risk prediction and analysis, the report also finds that while AI will continue to bring greater efficiency to many areas of the insurance process, this does not come without challenges. AI algorithms may have inherent biases and lack transparency, raising concerns about data privacy and ethical issues, and the use of AI also increases the potential for cyber-related events.

Gillian Davidson, GILC’s Chair and Partner at Sparke Helmore, commented, “AI has already become an essential part of our daily lives and is quickly making its way into the insurance sector.  This trend is expected to continue as AI offers numerous benefits including faster claims processing, improved underwriting, innovative insurance products, streamlined administration processes, and more efficient chatbots.”

Better understanding of risk

The research highlights the ability of AI to quickly analyse vast quantities of data as a powerful tool for insurers in predicting and assessing risks, particularly when there is a significant source of data. As Gillian explains, “The use of AI can help insurers enter markets that may be challenging due to lack of lengthy loss histories for certain types of risks.  AI can rapidly digest large volumes of data and produce more precise analytics, which can be useful in designing coverage for large-scale cyber incidents, for example.

“Ultimately, this improved risk analysis will benefit consumers as it enables insurers to offer more relevant and tailored coverage to their customers.”

New models, new distribution

Insurers and their legal advisers will closely monitor the progress of regulations and legislation specific to AI; the EU’s forthcoming AI Act will become the benchmark for many jurisdictions around the world. They will also be keenly aware of the liability, privacy, and cyber exposures that could emerge as their policyholders adopt AI in their business models.

In Australia, the Government in January 2024 published its response to public submissions to a discussion paper on ‘Supporting Responsible AI’, which examined the need for a combination of general regulations, sector-specific regulations, and self-regulation initiatives to support safe AI practices.  The Government has also said it is considering implementing mandatory guardrails for the use of AI in high-risk settings, either by amending current laws or creating new laws specific to AI.  In addition, from March 2024, a new online safety code will be introduced covering search engines and providing protection against generative AI-related risks. 

Jehan Mata, Sparke Helmore Partner and Cyber Insurance Leader, added, “The Australian Government needs to ensure greater collaboration with the insurance industry to provide much-needed certainty around legal, regulatory, and voluntary AI frameworks, and provide a clear roadmap for their adoption.  Otherwise, Australian insurers may be hesitant to embrace AI to its full extent.”

In many markets, AI is being utilised or is likely to be adopted to optimise distribution models. The COVID-19 pandemic accelerated a shift by many insurers towards digital and online tools, replacing traditional distribution models. We are likely to see a similar rapid expansion in the use of digital techniques, including smartphone apps that often involve AI, to distribute insurance policies.  This trend will be especially beneficial in markets with low insurance penetration.

AI could create new challenges

Insurers face a significant risk with regards to data privacy, which could be exacerbated by the widespread adoption of AI. The processing of vast quantities of personal and often sensitive data will mean that insurers need to have robust procedures to ensure compliance with national and international data protection standards.

Insurers also need to be mindful of the need to have measures in place to safeguard against data breaches, and to have adequate processes to handle the reporting and management of any breaches should they occur.

“For the Australian insurance industry, AI and generative AI technologies present significant opportunities and associated challenges. The use of predictive AI will need clear parameters and overarching guidance and preparedness to face the challenges across data privacy, ethics and bias in order for insurers to prevent financial, regulatory, legal, and reputational risks”, Jehan commented.

Gillian concluded, “Currently, insurance solutions tailored to the risks associated with artificial intelligence are still in the early stages of development. However, as the technology advances and becomes more prevalent, and regulatory bodies sharpen their focus, we can expect an increase in AI-targeted risk solutions.”

Click here to access the full report.