Added exposure paves way for emerging AI insurance market, expert says

With many insurers across the United States increasingly using generative artificial intelligence for different parts of their practice, an industry leader suggests they may be overlooking the external exposures some already face — and the emerging  AI insurance market it’s creating.

“I think for any business today, this is an important topic that they should be having with their risk advisor. Depending on how much, how broadly they’re utilizing AI in their operations and/or if they actually manufacture AI solutions for others, there is potential that they already have uninsured risks based on how current policy language is structured,” Peter McMurtrie, partner and a leader in West Monroe’s insurance practice, said.

This presents added risk for insurance carriers, even as they contend with whether or how to incorporate generative AI internally. However, it also presents an opportunity to assess whether introducing specialty coverage would be a feasible option.

“My expectation would be that we will see insurance companies looking to adjust policy language to start to restrict some of their coverage related to AI utilization exposure and then offer AI-specific coverage for companies to purchase to address that exposure,” he said.

However, carriers will need to assess and understand the added risk and determine the best way to move forward.

Double risks

Although the issue of how different branches of insurance begin to utilize AI in their practice is already a largely discussed topic, McMurtrie noted that the focus tends to be on internal usage and risks rather than external liabilities.

“There’s this rush; everybody wants to do something with gen AI. But, oftentimes, they don’t fully understand the differences between the different solutions and the applicability based on the different jobs,” he said.

The issue remains a complex one in the absence of federal regulation to govern the use of AI in insurance. At the time of this writing, regulations have been mostly ad-hoc by state, although the National Association of Insurance Commissioners has adopted a Model Bulletin guiding the ethical use of AI in insurance practice.

“While we’re thinking about using AI to help improve our insurance operations, whether that’s helping make decisions faster, provide faster service experiences, get better accuracy, lower operating costs, the businesses that we insure are using AI as well within their businesses,” McMurtrie noted.

He reminded insurance carriers that many of those businesses are likewise navigating uncharted territory when it comes to using AI, and that can create risks for the insurer that likely did not exist when the policy was written. This means that even while insurers have to consider potential litigation when using AI internally, they could also potentially have to deal with significant claims from corporate clients if they face litigation over their external use of AI.

Unforeseen exposure

For insurers to accurately assess the new exposures or risks that could emerge as a result of ensuring a business that is using AI, McMurtrie said they must first understand how that client is using AI in their daily operations.

“Because of how broadly AI is being used, it can be almost any kind of a business now has a new, unique exposure,” he said. “What if the decisioning that that AI is making within that business is creating exposure, releasing customer information unintentionally, as an example, [or] creating disparate treatment to customers based on how it’s trained would be another example.”

Insurers will likely take one of two actions when addressing this added risk, McMurtire said: either by adjusting policy wording to cover or exclude AI-related risks, or by introducing new, specific coverage options.

“I think, as this issue is more clearly understood, carriers will start to clarify their language on their primary policies to specifically exclude certain AI-related exposures,” he said. “Then, as that occurs, you will see the emergence of more AI-specific policies.”

Emerging market for AI coverage

A market for special coverage or add-on packages for AI is already beginning to emerge with its increasing use, and McMurtrie expects this trend to continue as the use of AI expands in America.

“It’s definitely an emerging market… This is really how cyber insurance evolved, and so we’d expect AI insurance to be the next risk category that you start seeing insurers restrict on their underlying coverage and then add policies specifically for that exposure,” McMurtrie said.

Whichever path insurers choose to take, however, McMurtrie encouraged them to reassess the risks from both an internal and external perspective rather than rushing ahead prematurely.

“There’s a whole bunch of discussions around use cases with AI and operations, but I think the important ones are really: are we being disciplined around how we’re using AI and how we’re deploying it, and that sort of intentionality around that, versus trying to be the first one to say, ‘Hey, I’m doing something with AI in my operation.’”

West Monroe Partners is a business and technology consultancy based in Chicago, Illinois. Founded in 2002, the firm has more than 2,000 employees in 10 offices around the world.

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