AI risks and opportunities for the insurance industry: where is the development leading?

The role of artificial intelligence (AI) in the insurance industry is the subject of an increasingly critical and, at the same time, promising discussion. In an article in Financial Times on 19 September 2024, Martin Arnold and Ian Smith emphasise the warnings of British financial regulators: AI could increase the risk of certain groups of people becoming ‘uninsurable’. Despite these concerns, the UK Financial Conduct Authority is calling on insurance companies to be bolder in their use of AI.

The technologies at the heart of this development include anomaly detection, machine learning, deep learning, natural language processing (NLP) and predictive analytics.

Growing acceptance, but concerns remain

According to the Swiss Insurance Monitor of the University of Lucerne published on 2 September 2024, scepticism towards AI in Switzerland is decreasing. Meanwhile, 56 % of the Swiss population have already used AI applications, with 45 % doing so in a private and 30 % in a professional context. Despite widespread use, a critical attitude still prevails in the public perception. At the same time, more and more people recognise the benefits of AI, particularly when searching for information, calculating offers and processing claims. Transparency is an important aspect here: 80 % of respondents attach great importance to being informed by companies about the use of AI.

Algorithmic risks: risk of discrimination

Despite the advantages offered by AI-based hyper-personalisation of insurance services, this development also entails risks. It could lead to some customers becoming ‘uninsurable’ or being discriminated against, especially in sensitive areas such as health insurance. There is a danger that people in poor health or with limited access to technology will no longer be able to obtain affordable insurance cover because AI systems will be able to calculate their individual risks more accurately based on real-time data.

Advances and innovations in the insurance industry

Insurance companies that rely on AI could secure decisive competitive advantages in the coming years. One particularly promising field of application is car insurance. The ongoing development of autonomous and connected vehicles offers new opportunities in risk assessment, loss prevention and customer care. A major change is emerging here that will enable insurance companies to adapt more flexibly to the needs of their customers.

The influence of autonomous driving

The Swiss Federal Council has already signalled that autonomous driving from ‚level 3‘ should be in series production from 2025. The Mercedes EQS and series S are leading the way with the so-called ‘Drive Pilot 95’, which should enable autonomous driving up to a speed of 95 km/h. With over 40 assistance systems, this vehicle is set to be the epitome of future mobility and will be on Swiss roads as early as the beginning of 2025.

What does level 3 system mean?

The development of autonomous driving is categorised into five levels, which were defined by the Society of Automotive Engineers. Each level describes the extent to which the vehicle can and may take over the tasks of the driver.

Level 1: Assisted driving, e.g. cruise control and lane departure warning.
Level 2: Partially automated driving, e.g. parking assistance.
Level 3: Highly automated driving, car steers, overtakes and brakes independently.
Level 4: Fully automated driving, car can navigate independently, driver only intervenes in an emergency. Level 5: Autonomous driving, passengers no longer perform any driving functions.

AI in the insurance world: more than just automation

Although AI currently excels in the automation of repetitive tasks, such as data analysis or automated customer care, its true potential lies in the far-reaching transformation of the insurance industry. In addition to improved chatbots that offer round-the-clock support, AI can set new standards in underwriting, fraud prevention and risk assessment.

The need for regulation and the role of Switzerland

While the EU is already preparing far-reaching regulations with its ‘AI Act’, Switzerland is pursuing its own path. Federal Councillor Beat Jans has announced that the Federal Department of Justice and Police (FDJP), together with the Federal Department of the Environment, Transport, Energy and Communications (DETEC) and the Federal Department of Foreign Affairs (FDFA), will present a comprehensive analysis of the need for regulation of AI by the end of 2024. This should take into account developments in the EU and the Council of Europe and keep Switzerland internationally competitive.

The insurance industry is therefore at a crossroads: between the opportunities presented by AI and the regulatory challenges, it must find a way to reconcile innovation with social responsibility.

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Also read: FeelGPT & AppTone: AI and language analysis tools for fraud detection in the insurance industry