The Rise of AI: Risks, Rewards, and the Need for AI Insurance

By 29 March 2024Blog

As large language models like ChatGPT and LLaMa democratise AI usage, the risks associated with increasingly potent AI models should not be ignored. Imagine businesses relying on biased AI or unstable models – the potential financial and reputational damage could be significant.

AI Guarantee Insurance

Enter AI Guarantee Insurance, a product designed for the age of artificial intelligence. In a world powered by easily trainable models like LoRa, where an AI ‘arms race’ looms and sophisticated phishing attacks threaten, this innovative insurance will offer protection against a range of AI-related risks. From performance failures and unfair outputs to legal disputes and even cyberattacks, AI Guarantee Insurance provides comprehensive coverage to mitigate the risks from AI.

Here are some examples:

      • Performance Guarantee Insurance: Safeguards against losses from underperforming AI systems, protecting businesses from inaccurate insurance quotes or failed marketing campaigns, ensuring financial security for those relying on AI-driven processes.
      • Business Interruption Insurance: Covers financial losses in the event of AI-induced disruptions to business operations. As AI becomes more prevalent across all industries and sectors, it is crucial to provide protection against such interruptions.
      • Fairness and Non-Discrimination Insurance: Offers financial security against lawsuits arising from biased AI outputs. With the increasing focus on ethical AI practices, businesses must protect themselves from legal action related to discrimination or unfair practices resulting from AI decision-making.
      • Intellectual Property Insurance: Provides defence against intellectual property infringement claims specifically related to AI models. As AI technology evolves, intellectual property disputes and consequent legal actions are likely to increase.

Who needs AI insurance?

Those requiring AI insurance span a diverse range of industries and needs. For example:

      • Insurtech Pioneers: Start-ups using AI algorithms for personalised insurance and dynamic risk assessments need protection against performance failures, biased outputs, and potential legal challenges arising from unfair pricing or coverage decisions.
      • AI-Powered Customer Service: Insurance agencies and brokers using AI-powered chatbots and virtual assistants face risks such as data breaches, misinformation, and discrimination. AI insurance mitigates these threats, ensuring customer trust and regulatory compliance.
      • Frontline Healthcare: Healthcare organisations deploying AI for diagnosis, treatment plans, and drug discovery require protection against inaccurate diagnoses, biased algorithms, and potential privacy violations. AI insurance offers peace of mind for organisations and patients.
      • Autonomous Vehicles: Developers and manufacturers of autonomous vehicles face immense liability concerns. AI insurance covers accidents, malfunctions, and even hacking attempts, safeguarding companies from financial ruin and protecting passengers.
      • AI-enabled Supply Chains: Companies using AI for demand forecasting and logistics optimisation need insurance against inaccurate predictions, leading to production bottlenecks or inventory losses. AI insurance ensures business continuity and minimises financial setbacks.
      • Developers Shaping the Future: Technology companies creating AI systems also require protection against data breaches, cyberattacks, and intellectual property theft. AI insurance provides vital defence against these threats, securing the developers’ valuable IP and fostering innovation with confidence.
      • Manufacturing in the AI Age: Manufacturing companies relying on AI-controlled production face risks like equipment malfunction, production errors, and even biased AI decisions impacting output. AI insurance safeguards against these potential disruptions, ensuring smooth operations and product quality.
      • Regtech Innovators: Employing AI algorithms for regulatory compliance and risk management require safeguards against operational deficiencies, biased outputs, and potential legal repercussions stemming from regulatory violations or compliance failures.

Parametric Insurance

Imagine an insurance policy triggered by a tremor, not a claim, where instant payouts hinge on pre-defined parameters like earthquake intensity or rainfall levels. That’s the magic of parametric insurance, powered by AI crunching real-time data from satellites, weather gauges, and even blockchain-powered sensors that pinpoint parametric triggers with laser accuracy.

For instance, Swiss Re’s parametric Flight Delay Compensation uses an AI model that predicts flight delays, enabling instant payouts to customers without the need for complex claims processes. Another example is the World Food Programme (WFP), which partners with Munich Re to provide parametric insurance for farmers in Africa. Based on rainfall data, payouts are triggered during droughts, protecting farmers’ livelihoods and preventing food insecurity. Hiveminds’ parametric solution, on the other hand, provides insurance for energy production from solar panels. Payouts are based on actual energy output, providing financial security for solar energy investors in case of underperformance.

Harnessing AI within Insurance

The insurance industry is also using AI, deploying it internally in the following areas:

      • Claims Processing: AI automates payments for straightforward claims, categorises and prioritises requests, differentiates plausible claims from potentially fraudulent ones, and interprets and assesses damages more efficiently.
      • Pricing and Underwriting: AI enhances decision-making through automated data gathering, enrichment, and storage. This includes personalised pricing models (parametric and otherwise) and improved competitor analysis, using sensitive factors for more predictive pricing.
      • Document Interrogation: AI-powered natural language processing facilitates document interrogation, allowing comparison of claims documents with policy wording to determine coverage, supporting compliance checks and streamlining document-related tasks like cover verification.
      • Marketing and Customer Communications: AI personalises customer interactions, automates reports and communications, enables chatbots, content creation, customer sentiment analysis, and generation of marketing materials.
      • Parametric AI Risk Cover: This innovative approach relies on pre-defined parameters (e.g., earthquake intensity) to trigger instant payouts in case of specific events, simplifying the claims process.

Progress and protection

Innovators like Lemonade and FloodFlash reflect the evolution of AI in insurance, and many other companies are now pushing the boundaries for insurtech. Lemonade uses AI to streamline claims through automation and machine learning, while FloodFlash provides instant, parametric payouts for specific events like floods based on parameters such as a water level surpassing an agreed threshold.

It is only by continuous testing and refining that we will maximise the benefits of AI while minimising the risks. Structuring insurance for AI risks is particularly challenging. As Michael Berger, head of Insure AI at Munich Re, says: ‘In principle, every AI system, including every generative AI system, is a probabilistic system. It is technically unavoidable that even if you build the most perfect AI or generative AI model, there will always be a certain probability that the AI will make mistakes.’

There are already many well-documented cases of AI going wrong. For example, Google’s Gemini chatbot generated racially inaccurate historical images, including people of colour depicted as Nazi soldiers, while an Amazon AI-enabled recruitment tool only recommended male candidates, forcing Amazon to scrap the ‘sexist AI’ tool. Additionally, Amazon’s facial recognition software mistakenly identified 28 members of Congress as criminals, highlighting inherent biases within the system.

The need for protection will grow as new use cases are developed and AI increasingly impacts our everyday lives. AI Guarantee Insurance and parametric AI risk cover will help to ensure we balance progress with protection.

For more information and advice on risk management, contact the Elmore team.

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