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Artificial Intelligence in insurance

Big data and artificial intelligence (AI) are two words that are widely used when discussing the future of business. The potential to applying them in diverse aspects of business has caught the imagination of many, in particular, how AI could replace humans in the workplace. Big data and AI could customise business processes and decisions better suited to individual needs and expectations, improving the efficiency of processes and decisions.

While much benefits can be expected from big data and AI, there are also a number of risks that require some policy considerations. General guidance or regulation related to the use of big data and application of AI could eventually be developed by governments, and the insurance sector should be prepared to incorporate them in their specific context.

Big data constitutes diverse datasets, which can be anything from expanded datasets to social media data. The granularity of data has the potential to give insights into a variety of predicted behaviours and incidents. Given that insurance is based on predicting how risk is realised, having access to big data has the potential to transform the entire insurance production process.

However, the granularity of data can also lead to the furthering of risk classification, where insurance premium is set based on a group of people who have similar risk profiles. The more detailed sets of data permits the fine-tuning of risk classification, which could lead to decrease of premiums for some consumers on the one hand and exclusion from insurance offerings for other consumers on the other.

Due to machine learning, AI has the potential to learn and adapt in a way that conventional machines were not able to, and are able to enhance their performance with more data. It could be adopted for a wide range of processes and decision making in insurance production.

The OECD adopted the Recommendation on Artificial Intelligence in May 2019, and the European Commission’s Independent High-Level Expert Group on Artificial Intelligence (HLAG AI) published the Ethics Guidelines for Trustworthy AI in April 2019. Both international guidance provide valuable recommendations in terms of what areas of AI should be monitored and regulated, and provide some practical insights into what areas regulators and supervisors should be discussing on.

There are number of policy areas in which policymakers may consider action in the insurance sector in relation to big data and AI:

  •   The insurance sector should be encouraged to engage actively with big data and AI, and regulatory sandboxes or innovation hubs could be one way to support this. In addition, addressing the skill shortage will be important for both the regulator and the insurance industry as it becomes an increasingly mainstream process.

  •   Insurance regulators and supervisors should strive to keep abreast of developments in big data and AI--including general regulation in these areas as well as cooperate with the relevant competent authorities for privacy and data protection, where needed, and explainable AI-- to ensure that the appropriate action can be taken when necessary, in a timely manner

  •   Technology can accelerate externalities and lead to oligopolistic market structures. Competition in the market should be monitored closely, depending on the authorities’ mandates and in cooperation with the respective relevant competent authorities, so that big data and AI do not only benefit certain market segments.

  •   Big data could theoretically lead to risk classification that excludes certain groups. While such a risk-adequate calculation is beneficial from an insurer’s risk management perspective, insurance regulators could decide, based on societal/political considerations, to monitor policy offering to ensure that the vulnerable population is not excluded from affordable insurance.

  •   The insurance sector could learn from the international guidelines on AI, and regulators and supervisory may wish to consider the benefits of having a governance requirement related to AI.

  •   International cooperation among insurance supervisors and regulators in the area of big data and AI would support the sharing of experiences, as well as lead to the facilitation of their cross-border activities. The OECD’s Insurance and Private Pensions Committee (IPPC) undertakes surveillance of market developments, including on technological developments, and will continue to monitor related developments so timely policy recommendations can be made for policymakers.

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