Insurers look to AI in the face of unprecedented challenges

By Christopher Schaffer

The triple threat of increased claims severity and frequency, inflation and labor shortages continue to challenge insurers. Although inflation is abating somewhat, natural catastrophe claims continue to pressure the industry and the labor crunch is growing. To stay ahead, insurers are looking to artificial intelligence, data and analytics to control costs and drive efficiency.

More extreme weather propels massive losses and claims

From earthquakes to hurricanes and winter storms, natural disasters and catastrophes linked to extreme weather are setting records. In 2023, overall worldwide losses from natural disasters totaled $250 billion, with insured losses at $95 billion. With the planet continuing to heat up – 2023 was the hottest recorded year on record – conditions will likely worsen over time.

Extreme weather is not only pushing up losses, it is also impacting where people choose to live and how they rebuild and recover from weather events. Despite the risks, population and building growth are disproportionately concentrated in catastrophe-prone regions. As California and Florida have shown, any states prone to weather-related perils will see an increase in rates and time for construction, litigation costs, and a loss of commercial and business development.

To prepare, insurers are drawing on sophisticated models powered by AI and analytics to set expectations for greater frequency and duration of catastrophic events.

High inflation rates send costs skyrocketing

For claims severity to lessen, inflation must continue to fall. Specifically, there are three main types of inflation that impacted claims in 2023 and continue to be a challenge - wage, medical and construction inflation. Some higher costs reflect the lingering effects of the COVID-19 pandemic, as well as rising costs across health care, construction and other industries.

Wage inflation continues to exacerbate the severity of casualty and workers’ compensation claims, while medical inflation raises the severity of bodily injury and workers’ compensation claims. Construction costs and claims have also been on a steady upward trajectory.

Insurers can carefully consider how rising costs will impact their profit margins and determine how fast-evolving technology can provide an advantage.

Tight labor market causes continuing strain on insurers

The strained labor force is another problematic issue, with the U.S. Bureau of Labor Statistics predicting a shortfall of hundreds of thousands of qualified insurance workers by 2026. The shortage is due to industry-wide retirements and a lack of skilled talent.

Businesses often face two options for filling critical, vacant positions: hire new employees or rely on overtime. Hiring new employees can be time-consuming and expensive, and inexperienced employees can pose safety and liability threats. Overtime frequently dampens quality of work and employee morale, and isn’t a long-term solution.

One positive development is the use of AI, automation and other technologies that allow insurers to streamline processes, digitize data and enhance analytics, all of which make employees more effective and efficient.

Technology can also identify quickly and with certainty claims that involve high and low dollar amounts, and deploy specialty and expert resources to mitigate and improve these claim outcomes. These capabilities are particularly important as the number and complexity of claims soar. In soft markets, when insurance is cheap, claims can often become a commodity. But in this market, quality claims service and better claim outcomes are a differentiator.

Trifecta of challenges and opportunities

Throughout 2024, insurers will continue to face the triple threat of increased claims severity and frequency, inflation and labor shortages. This will necessitate more foresight and innovation. While external events, such as extreme weather and inflation, are beyond its control, the industry has a strong and powerful tool in technologies such as AI and predictive analytics. Embracing these tools – and taking a proactive role in building the workforce of the future – will allow insurers to stay on top of the market and provide the quality products and services their clients need in an uncertain world.

Christopher Schaffer is CEO of Charles Taylor Claim Solutions-Americas. Contact him at [email protected].