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Director Tom Davey comments on the role of AI in insurance underwriting in Risk Management Magazine

With the increasing adoption of artificial intelligence in the insurance industry, Director Tom Davey comments on how AI can improve insurance cover and the impact of this technology on insurers and insureds.

Tom’s comments were published in Risk Management Magazine, 26 March 2024, and can be found here.

“The ability to analyse huge amounts of data sets quickly and effectively in a meaningful manner allows insurers to understand risk in ways never before seen, giving more precision to actuarial models and underwriting. Insurers, therefore, are investing heavily in AI to improve performance and customer satisfaction, such as insurance advice, underwriting and claims processing. AI can also assist in fraud prevention by picking up anomalies and suspicious clusters of unusual activity which has a detrimental impact on the profitability of the industry and increases premiums.

“Being able to distil complicated and voluminous data into useful management information allows insurers to provide tailored insurance coverage to their client base and overall assist in risk management.

“Insurance is a highly regulated business and insurers have duties to safeguard information and not to use it to the disadvantage of their client base. For instance, an insurer who handles sensitive information about a client and uses this information in a way that prejudices the availability of insurance or pricing may find themselves in trouble.

“With companies, this is perhaps more problematic, as there are fewer safeguards for corporate insureds who are viewed as sophisticated purchasers. Increasing use of data allows insurers to be better able to spot ‘bad’ risks as well as good ones, so the increasing precision and understanding of risk can both positively and negatively impact insureds.”

“Generally, consent needs to be provided by insureds, and when applying for insurance, proposal forms will include details of how information is being collated, used, and shared. Insurers need to safeguard this information against nefarious activity such as hacks by cyber criminals.

“Recent claims brought against companies such as British Airways for losing control of their customers’ data, serve as a lesson for all data handlers.

“In the UK, the Insurance Act 2015 is one of the relevant statutes addressing the relationship between insurers and insureds. In terms of getting the best relationship with insurers, the key point is the application process, maintaining a good working relationship and understanding what insurers need and why. Corporate insureds must also be aware of their duties and responsibilities in terms of material disclosure and representation.

“An underwriter has a right to information that might influence their decision regarding a risk. However, this is not a clear cut area, and many insureds approach the market through brokers who can provide guidance on these critical processes.

“An insured’s own systems can also help in this process by capturing and analysing data that insurers need in a manner that provides the data in an understandable way and doesn’t end up being a meaningless ‘data dump’ and building into systems a way of collecting this data on an ongoing basis can save time and money in the long term. Insurers know that claims will happen, but they are more likely to offer preferential terms to companies that effectively manage risk.”