A new report from Morningstar DBRS, an overview of key areas of the insurance value chain which stand to benefit from artificial intelligence (AI) adoption, warns that AI adoption introduces new risks that could cause financial or reputational damage if not managed properly. This, they say, would have negative credit rating implications for affected insurers.
“Investments in AI will continue to grow as they hold a lot of potential for insurance companies’ growth and profitability,” the report states. Entitled Insurance Companies Increasingly Look to AI for Growth and Profitability, it continues, noting that machine learning, natural language processing and predictive analytics have long been part of insurers’ underwriting models. “The adoption of these and other AI-powered technologies has become more widespread and essential to maintaining competitiveness.”
Customer acquisition costs
The paper discusses how AI and large language models can be used in numerous client-facing and internal functions. The hope is these technologies will increase efficiencies, reduce operational costs and reduce overall customer acquisition costs. AI powered tools are also helping insurers handle larger claims volumes, assess vehicle and property damage and assess companies’ exposures to catastrophic events in a shorter span of time.
Fraud is also a noted pain point where AI can provide value, they add. “Flagging claims that appear to be fraudulent for further inspection will help insurers pay out legitimate claims faster. However, we would also note that companies using AI assessments to reject claims could be exposed to legal and reputational risk if those AI models turn out to be unreliable,” they write, adding that AI models need to be carefully selected, trained and tested.
Operational risks
“In our view, one of the most serious challenges arises when AI is used extensively in underwriting and pricing of policies, as these decisions are directly related to profitability,” they warn. “Equally concerning could be certain decisions related to claims processing.” Should AI draw conclusions about which claims to reject based on flawed reasoning, they say this could result in class action lawsuits such as those seen against health insurance companies in the United States. “Last but not least, working with vast amounts of data to price risk more accurately also exposes insurers to increased cyber risk.”
They conclude saying from a credit rating perspective, AI can both enhance and damage franchise strength by affecting customer experience. “While it may improve profitability through efficiency gains, it generally also contributes to higher operational risks, including legal and compliance risk.”
