Explaining the AI revolution in Insurance and Reinsurance

October 10, 2023
Yasemin Demetriou

This month, we had the pleasure of hosting an insightful webinar on the AI revolution within the financial services industry, co-hosted with Insurance Times and EY. 

In this webinar, we heard from three experienced speakers:

  • David Carmalt, Managing Director – ExploreAI
  • Dewald Botha, Director of AI Solutions – ExploreAI
  • Apoorv Kashyap, Consultant – EY

The three speakers explored the true meaning behind AI, differentiated between fads and the real benefits, explored what successful implementation looks like, and dove deep into the regulatory and ethical challenges and considerations. 

In this blog, we revisit the key themes and learnings that emerged from the fireside chat and resulting audience questions.

Interest in AI has grown rapidly in the last 12 months

This is due to two main reasons:

  1. Advancements in generative AI, specifically around algorithms and models, have taken massive steps forward
  2. The launch of ChatGPT gave the power of generative AI to the non-technical public

“The explosion into public consciousness has bled into the C-suite,” as David Carmalt explained. “They’re beginning to ask questions around AI and whether it could be right for their business, what is hype and what is reality.” 

From a corporate perspective, this is the first time we’ve seen a major move at a C-suite level to engage in these discussions, and at such a wide scale. Senior leaders within financial services are beginning to understand the impact that data science can have on the bottom line – whether driven by improvements in customer engagement, process automation, risk pricing, reserving, fraud detection, or other areas. 

In short: the surge in interest is not a passing trend; it signifies a broader awakening to the potential of AI.

Real applications of AI in insurance and reinsurance

AI is already making a significant impact in insurance and reinsurance. Pre-trained models and accessible AI technologies have paved the way for real-world applications.

As [EY] noted, “Now you don’t need to train the models. They’re available on a nice user interface for everyone to use, and it’s a massive step forward.”

Some applications already used within the industry include: 

  • Risk Pricing and Underwriting: AI is being used as a tool to improve credit risk pricing, across a range of insurance underwriting classes.
  • Claims Processing: Automation and AI-driven systems are streamlining the claims capture and assessment process, reducing turnaround times and costs.
  • Customer Engagement: AI is enhancing customer interactions, enabling personalisation and improving communication with clients.

Navigating challenges in implementation

As in any industry, implementing AI presents a set of challenges and even potential risks alongside the abundance of opportunities. 

Understanding the tipping point

When discussing these challenges, an audience member asked how to navigate the ‘tipping point’ around the cost of implementation vs. value creation. 

Dewald Botha, Director of AI Solutions, explained how all investments in AI must come down to ROI, plain and simple. He expanded, “You have to do that assessment really well, and to know the exact cost going in and the return expected to be received. If that isn’t clear, it’s difficult to justify an AI project. For me, the tipping point is cost vs return.”

Selecting the right use cases for your business 

There are thousands of use cases where AI could have an impact on your business, but what may work for one firm may not be right for another.

When it comes to implementation, knowing the ROI you expect to generate is just the first step. The next step is to take stock of your business and understand true areas of improvement, not just copying what your competitors are doing. 

It all depends on what you’re underwriting and your competitive landscape. “It depends on the lines you’re writing, how evolved your business is, and whether there are strategies that you may be looking to adapt,” David expanded. “AI could really change your business… but you have to base the decision as to how and where to use AI on tangible needs and expected results.”

When it comes to finding your specific business need, Apoorv summed up succinctly: “My biggest advice is to start with the biggest, the lowest common denominator – what are your biggest pain points? From this, you usually get the biggest return.”

Ensuring data quality

Ensuring data is of high quality and suitable for AI model training is crucial. A “platform mindset” is key, said Dewald when answering a question about the dangers of implementing too quickly.

“You need to keep in mind that whatever is developed should be capable of adaptation and to be used for years to come… As long as the foundations of the platform are correct from the start, you can keep building and developing whilst new use cases arise and as technology evolves.”

Stakeholder alignment

As with any project, ensuring alignment among all stakeholders, both internally and externally, is essential for successful AI implementation.

“We find the most hurdles in implementation when there’s a lack of clear alignment. This could be over the use case itself, data which is in the wrong place, or people are arguing over data and technology ownership,” David commented. “Having clear alignment enables companies to execute with good momentum, iterate quickly whenever needed, and continually sense-check that the solution being built works for all stakeholder groups. “

Ethical and regulatory considerations

The regulatory environment and transparency

An increasingly important stakeholder to consider is the regulator. As a result, most solutions or products which are built should be done so with one eye on existing regulation or the likely evolution of AI regulation. 

Most financial services firms answer to multiple regulators, whether within a single jurisdiction or across multiple ones. This is obviously a challenge in that AI regulation is not homogenous across jurisdictions or indeed in some countries, across sectors. That being said, most major financial services firms have long dealt with the complexities of multiple regulators, and so are typically used to managing these challenges. 

One critical aspect of AI technology which all regulators agree on is the need for transparency, and therefore building solutions which allow interrogation by risk teams, boards and regulators will continue to be extremely important.

Bias and fairness

An important note made by Dewald is that “Bias in models and data is almost always present.”

For example, a motor insurance company may have historical data which reveals men had more accidents than women. As a result, men would be charged a higher premium. Being aware of how your data is working is key: “You have to always be aware of it and be able to explain it. Then you can ask yourself – is it ethical to discriminate against someone based on Risk Factor X?”

Where does true risk lie in AI implementation for financial services?

The implementation of AI in financial services does carry risks, but these risks should not deter organisations from embracing AI. As Apoorv noted, "The risk is not taking advantage of the opportunity." The true risk lies in not harnessing the power of AI to drive innovation and efficiency.

Organisations need to strike a balance between risk management, compliance, and innovation:

  • ROI Assessment: Evaluating the return on investment is crucial to justify AI-related projects and ensure they align with business objectives.
  • Data and Engineering: Ensuring data is in the right place and engineering is correct from the start to build a robust AI platform.
  • Stakeholder Alignment: Aligning stakeholders and addressing issues of ownership and responsibility are critical to executing AI projects successfully.

In conclusion, the rapid growth of interest in AI has naturally created some hype around the subject, but the genuine applications within insurance and reinsurance have the potential to be transformative in some or all areas of the insurance value chain. These, of course, have to be considered alongside the challenges in implementation, ethical and regulatory considerations, and the rapidity of the technology evolution which can (if not executed with a long-term “platform mindset”) render certain solutions redundant. 

Organisations that navigate these themes effectively can harness the power of AI to heighten competitiveness and drive innovation in the ever-evolving insurance and re-insurance landscape.

If you’re interested in how AI and data science can evolve your financial services business, reach out to David Carmalt today at david@explore.ai 

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