AI in Insurance
Artificial Intelligence Regulation and the Uptick in AI-Related Federal Securities Class Actions
Artificial intelligence (AI) technology is rapidly evolving along with the associated risks. The evolving AI regulatory landscape and the uptick in litigation arising out of AI disclosures underscore the importance of managing these risks with directors’ and officers’ (D&O) insurance.
Key Takeaways
The European Union AI Act entered into force on August 1, 2024. Violations of the AI Act have the possibility to result in substantial monetary penalties.
In the U.S., the frequency of AI-related federal securities class actions is increasing.
Organizations using and implementing AI should regularly review D&O policies as part of a broader risk management strategy. EU AI ACT
On May 21, 2024, the European Council unanimously approved the adoption of the European Union’s (EU) first-of-its-kind Artificial Intelligence Act (‘the Act’).
Persons subject to the Act include those who develop, deploy, import, or distribute AI systems in the EU — even if such persons are located elsewhere. The Act classifies and regulates AI with a risk-based approach, outright banning “unacceptable” risky AI systems (e.g., those used for social scoring and emotional recognition) and imposing varying degrees of compliance obligations (e.g., validation and human oversight) with respect to other AI systems.
AI creates efficiencies, won’t replace underwriters: E&S executives
Generative artificial intelligence is already speeding up the submission and underwriting process in the excess and surplus lines insurance market, but human judgment remains key, E&S executives say. FULL ARTICLE
Many companies have introduced or are in the process of introducing AI tools. Although there are fears about how AI could inadvertently discriminate against some policyholders and concerns over privacy, executives at WSIA were largely positive about the technology’s prospective impact on the market.
“AI really allows us to speed up the process and accelerates our ability to get to every single account that comes in the door, especially on the delegated underwriting authority side,” said Tim Turner, chairman and CEO of Ryan Turner Specialty, the wholesale brokerage unit of Chicago-based Ryan Specialty Holdings Inc.
AI enables underwriters to process information more quickly, particularly on lengthy coverage submissions, said Alex Blanco, Philadelphia-based CEO, insurance, at Vantage Group Holdings Ltd.
“We can summarize information a lot easier. If the underwriter chooses to go through a 20-page Word document, they’re privileged to do so, but this at least gives them a synopsis and a review of the information,” he said.
AI can help underwriters visualize and analyze data quickly, but it does not replace human judgment, said Lucy Pilko, New York-based CEO for the Americas region of Axa XL’s insurance operations.
The “superpowers” of multimodal AI | MAPFRE
Multimodal artificial intelligence (AI) is the next step beyond traditional AI models. It enables the simultaneous integration and processing of multiple types of data or “modalities” to improve the understanding and responsiveness of the systems.
When we talk about multimodal AI, we talk about text, images, audio, video or other types of data that, at a given time, may arise in the interaction with a human. A clear example of this innovation is a virtual assistant that simultaneously interprets voice commands and visual gestures interchangeably to provide a more precise and contextual response.
What advantages does it offer over conventional AI? Let’s look at a specific case. Traditional natural language processing systems (NLP) work only with text, without the ability to integrate and analyze visual or auditory information. The multimodal system exceeds the format limitation and allows multimedia components present in our current communication to be added; this incorporation of different sources allows it to have a richer and contextual understanding of the environment or task to be performed.
Insurance sector's race to adopt AI spurs private equity investment
Private equity investment in the insurance industry is surging as fund managers eye opportunities to consolidate market share and leapfrog competitors with technology.
The value of private equity and venture capital investment in insurance underwriters and brokers is on track for its highest annual total since at least 2021. Investment so far this year totaled $18.62 billion through Sept. 18, which is 52% more than the $12.25 billion total recorded in all of 2023, according to S&P Global Market Intelligence data.
Already active consolidators in various insurance segments, private equity funds are now seeing additional value-creation opportunities in the sector's digital transformation, said David Crofts, director of M&A at West Monroe Partners LLC. There is a growing sense that AI, in particular, could boost profits by streamlining time-consuming tasks.
Crofts views the use of AI and machine learning to speed document processing as the "holy grail" in the insurance space.
The potential for digital transformation to propel growth in the insurance sector is expected to be the primary force behind insurance dealmaking over the next 12-24 months, according to the opinions of 250 private equity and insurance executives in the US and Europe surveyed by West Monroe in the second quarter. Half of the survey respondents selected digital transformation as a "main driver" of insurance sector M&A, and nearly one-fifth ranked it as the most important spur to dealmaking.
Commentary/Opinion
Large Property Insurers Respond to Climate Change by Denying Homeowner Claims
Weiss Ratings, the nation's only independent insurance company rating agency, revealed today that 13 large U.S. property insurers have flatly denied 40% to 70% of the 3.9 million homeowner claims they closed in 2023.
Weiss Ratings Founder Martin D. Weiss said this is probably an effort to offset the surging costs of climate change. "Instead of maintaining adequate reserves to cover the likely potential damage from storms, floods and forest fires, many insurers distribute the funds to shareholders or move them to other subsidiaries," Weiss said. "Now, to make ends meet, these companies are closing about half of homeowner claims with no payment whatsoever."
Among insurers that received and closed 50,000 or more homeowners and farmowners claims in 2023, Farm Bureau Property & Casualty Insurance Company (domiciled in Iowa) denied 70.5% of claims with no payment; American Bankers Insurance Company (FL) denied 51.2%; and Allstate Indemnity Company (IL) denied 50.5%.
The nation's largest providers — each with hundreds of thousands of homeowners claims closed in 2023 — made zero payments on nearly half of their claims:
Meanwhile, including all reporting companies, 8.8 million homeowner claims were closed in 2023, among which 37.4% were denied payment, up from 24.9% in 2004.
News
Hurricane Helene insured losses projected at $3B-6B - Business Insurance
[Ed. Note: Advancements in hurricane tracking, geocoding, aerial and exposure modeling allows for early and accurate financial impacts that used to take days/weeks post storm. Helene is predicted to wreak havoc among homeowner insurers for wind, NFIP for flooding and crop insurance programs.]
Hurricane Helene is being projected to cause some $3 billion to $6 billion in insured losses, according to a report Wednesday from Gallagher Re, the reinsurance business of Arthur J. Gallagher & Co.
Additional combined loss costs from federally funded insurance programs such as NFIP or the USDA’s crop insurance program could be as high as $1 billion depending on the height of coastal storm surge, the report said.
“Any shift in track to the east or west could make the difference in billions of dollars with final economic and/or insured loss costs,” Gallagher Re said.
“In the best case, a Big Bend landfall could result in losses mirroring Hurricane Idalia’s $3-5 billion; but a significant swing in either direction — either toward the peninsula or panhandle may produce losses that exceed $10 to $15 billion, similar to Hurricanes Michael or Irma,” Anna Neely, managing director, head of catastrophe R&D at Howden Re, said in a statement.
CoreLogic Inc. separately said it estimates that nearly 25,000 residential properties with a combined reconstruction cost value of $5.6 billion are at risk to storm surge flooding from Hurricane Helene. This estimate assumes that Helene will make landfall as a Category 3 and keeps its current forecasted track.
Citizens urged to work with FEMA to hasten claims payments for flood victims
Insurers are telling their customers that they are ready for soon-to-be Hurricane Helene’s march up the Gulf of Mexico and into Florida’s Big Bend region.
Private-market companies including state-owned Citizens Property Insurance Corp. and private-market insurers Heritage Property & Casualty, Vyrd, Tower Hill, Security First, and Slide have all added information to their websites advising customers how to prepare for the storm and how to file claims, if necessary, afterward.
If recent history is any guide, many hurricane victims will file claims their insurers won’t pay. They will determine their damages were caused by rising floodwaters from Helene’s storm surge, and property insurers don’t pay flood claims.
Meanwhile, homeowners might have to wait as many as 60 days to receive the claim denial that they must then submit before the Federal Emergency Management Agency’s National Flood Insurance Program begins its review.
At Citizens’ board of governors meeting on Wednesday, board member Charlie Lydecker urged the company to look for ways it can help customers get FEMA to more quickly pay their flood insurance claims. Citizens can help, Lydecker suggested, by establishing lines of communication between Citizens and FEMA and by more quickly issuing denials of coverage that FEMA requires.
InsurTech/M&A/Finance💰/Collaboration
Xceedance Acquires Millennium Information Services
Xceedance, a global insurance consulting, technology, and managed services provider, has announced the acquisition of Millennium Information Services, a leader in property inspection and data analytics.
This strategic move enhances Xceedance’s presence in personal lines and strengthens its underwriting and analytics offerings.
The acquisition adds nearly 200 employees to Xceedance, along with a network of over 1,300 inspectors. Millennium conducts over 1 million property inspections annually for more than 80 carriers and managing general agents (MGAs). With access to Millennium’s extensive property risk data, Xceedance will further develop its MAPS® software platform, driving innovation in property inspection and analytics services for insurers and MGAs.
Cyber Risk
What's the leading business concern in America?
The Travelers Companies has released its 2024 Travelers Risk Index, which identifies cyber threats as the top concern among business leaders in the United States.
This annual survey, launched in 2014, collects feedback from business insurance decision-makers across various industries and company sizes, highlighting the issues that most worry them.
For the fourth time in six years, cyber risks ranked as the primary concern, with 62% of respondents expressing significant worry about the threat.
Tim Francis (pictured), enterprise cyber lead at Travelers, commented on the findings, noting that the results reflect the business community’s growing awareness of the operational and financial damage that cyberattacks can cause.
“What’s troubling is that while more businesses are securing cyber insurance as a tool to mitigate vulnerabilities, many still elect not to – despite knowing the risks,” Francis said.
The survey revealed that nearly 30% of the more than 1,200 respondents said their company did not have a cyber insurance policy. However, the number of businesses with such coverage has grown, with 65% now reporting that they have a policy, up from 60% last year.
SURVEY: One quarter of small business owners have been targeted by AI-driven scams
Small business owners in the U.S. are highly concerned about cyberattacks that could bring their sales to a halt. While common cyber threats like ransomware, phishing and malware remain top concerns, a new survey from Nationwide has found that in the past year roughly one-quarter of small business owners (SBOs) have been targeted by a scam that used generative AI. Of those targeted, most described the attacks as attempted fraud using email, voice or even video impersonations of other business owners or senior-level employees they associate with.
More than half of SBOs (52%) also admit being personally fooled by a deepfake image or video in the past year, while 9 in 10 say gen AI scams are becoming more sophisticated and that they need help protecting their enterprises from such attacks. Though most SBOs agree that the rise in gen AI technology makes them more likely to purchase cyber insurance, less than half report actually having the necessary coverage.
"As gen AI continues to transform various industries, its misuse in scams presents a significant challenge for small businesses with less resources for cyber defense than larger corporations, making them easier targets for cybercriminals," said Nathan Lentz, vice president of Small Commercial Sales and Distribution for Nationwide. "While small business owners feel prepared to prevent a cyberattack, they must ensure their preparedness is backed by comprehensive cyber insurance to truly safeguard their operations. Without it, they face potentially devastating consequences to their finances, operations, and customer relationships."
Future of fraud: AI named a major security concern among small business owners
Businesses aren't the only ones benefiting from the use of artificial intelligence (AI). Cyber criminals are using the same technology to carry out more sophisticated cyber attacks, and small business owners are taking notice. According to a new survey conducted by Insurance Bureau of Canada (IBC), two-thirds (65%) of surveyed small and medium-sized business owners and decision makers in Canada are concerned AI/new technology will make it harder to protect against cyber risks.
"AI has made cyber attacks easier to automate and harder to detect and can pose a real threat to the integrity and security of any business," said Mahan Azimi, Manager, Catastrophic Risk Policy, IBC. "With AI applications and new technology becoming more numerous and widely used by cyber criminals, there is a growing need for business owners to improve their cyber resilience."
For example, AI applications such as ChatGPT have made it easier to create more convincing social engineering emails, while other new technologies are capable of adapting to cyber security defences in real time.
Despite this emerging risk, the survey results indicate that business owners' preparation and investment in cyber resilience is on a downward trend. In 2023, 69% of small to medium-sized business owners who responded to the survey said they are doing what they can to reduce their business's cyber risks. In 2024, that number fell to only 61%.
People
Guidewire Appoints Mark Anquillare as Board Member
Guidewire (NYSE: GWRE) today announced that it appointed Mark Anquillare to its Board of Directors effective September 23, 2024.
"We are thrilled to welcome Mark Anquillare to the Guidewire Board of Directors. With Guidewire Cloud Platform now established as the trusted platform used by P&C insurers globally, we are uniquely positioned to further embed data, analytics, and AI throughout insurers’ core operations to drive smarter risk and claims decisions. Mark’s deep industry experience and sharp focus on data and analytics will provide Guidewire valuable insight and perspective as we deliver on this mission," said Michael Keller, chairman of the board, Guidewire.
Mark Anquillare served as president and chief operating officer of Verisk Analytics (Nasdaq: VRSK), an insurance industry data analytics and technology provider, through January 2023. Prior to that, he was Verisk’s chief financial officer starting in 2007, leading the company through its 2009 IPO and continuing until 2016.