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Artificial Intelligence and the Insurance Industry

Artificial Intelligence and the Insurance Industry

The application of artificial intelligence (AI) in the insurance industry is already ongoing and will substantially increase over the next decade. The expansion in the use of AI in the insurance industry comes from the trends of increased automation, data mining of “Big Data”, and analysis of information retrieved from the Internet of Things (IoT).

The impact of AI on underwriting and claims processing is significant. Many consider AI to be a major disrupter in the insurance industry that will cause fundamental change to how insurers conduct business.

Automation Using Artificial Intelligence

Automation affects the labor market, creates new insurance risk categories, reduces the need for some types of insurance, and increases the need for other types of insurance.

Impact on the Labor Market

CNN reported in January 2016 that research papers presented at the World Economic Forum showed that technological advancements could cause the loss of five million jobs globally by the year 2020. This loss of jobs coming from the increased use of automation and robots is similar to the massive global transformation that came from the historical Industrial Revolution.

The compelling opportunities found in increased application of artificial intelligence in the insurance industry should encourage all insurers to embrace these technological developments enthusiastically.

An Oxford study done in 2013 predicted that over the next few decades, 47% of American jobs are at risk of disappearing due to computerization. The trend of increased use of semi-autonomous robots reduces the need for humans in the workforce.

For workers in the insurance industry, standardized underwriting analysis and processing of routine claims becomes more efficient by using automation when compared to using human efforts. Because the insurance industry has traditionally relied heavily on human resources, the massive shift towards automation will create significant cost savings for insurers.

New Insurance Category – Autonomous Driving of Vehicles

Vehicles that drive themselves are a new category of auto insurance. One of the benefits of having autonomously driven vehicles is a decrease in traffic accidents. This comes from the safer operation of the vehicle that is not subject to human mistakes or the erratic driving patterns of some people behind the wheel. If there is a serious reduction in claims from auto accidents that comes from the increased use of this technology, then insurance revenues from auto insurance will decrease.

This reduction in risk by safer automated driving using AI programming is somewhat offset by the possibility of technical errors, such as recent example of an autonomously driven vehicle causing a fatal accident. The accident happened when a Tesla Model S was operating on autopilot assist. Neither the vehicle’s safety system nor the human driver applied the brakes and the car collided with a truck crossing the roadway.

It was determined after the crash that the autopilot did not make a distinction between the white truck and the white sky background behind it. The automobile’s warning radar system mistakenly concluded that the truck was a stationary overhead road sign, because the radar signal passed under the truck without impediment. This was the first reported fatality in a crash by a vehicle driving on autopilot assist. The estimate is that in the past few years the Tesla S model owners drove over 130 million miles with the autopilot assist engaged.

The change to autonomous driving of vehicles using AI, has serious ramifications for the auto insurance industry that need to be part of insurers’ strategic planning for the future.

The Internet of Things

A huge impact increasing the ability to collect data comes from the exponential expansion of the Internet of Things (IoT). The IoT connects physical devices and their locations with IT networks. A vast amount of data is retrievable from connected devices, which may include informative text, audio, and video.

Statistica reports the number of connected devices in the world during 2016 to be over 22 billion, with the estimate that this number will increase to over 50 billion by 2020. Insurers writing property & casualty insurance will benefit from analysis of the meta data provided by the IoT.

Automation and Artificial Intelligence Impacts on Insurance Sales

In total, more automation will reduce the need for worker’s compensation insurance as robots replace human labor. There will be an increased need for product liability insurance for innovative products such as autonomously driven vehicles, which simultaneously reduces the need for traditional auto insurance. Increases in property & casualty insurance will come from coverage of expensive robotic equipment and the networking equipment used for the IoT.

Machine Learning and Analytics

Machine learning is using AI for the computer-based detection of patterns in Big Data, sometimes referred to as “meta” data. Computers can do this data checking much faster than any human can. AI evaluates multiple queries simultaneously in order to uncover patterns that exist in the data, which may provide beneficial underwriting opportunities.

As the analysis of more meta data continues, AI programming subsequently performs better at making predictions.

Consumer Patterns and Risk Reduction

The availability of large amounts of unstructured information, such as temperature readings from millions of locations or viral posts on social media, allows insurance underwriters to analyze the data in new ways and ask new questions to gain more insights.

The development of sophisticated and complex algorithms arises from conducting this analysis. These algorithms are helpful in making predictive recommendations by identifying consumer patterns. This AI process improves risk mitigation efforts in order to avoid substantial underwriting losses.

Consumer-Focused Insurance Products

Because the insurance industry has traditionally maintained a product focus, the opportunity exists to use meta data analysis by AI to create brand new insurance products that have a consumer focus. Such new products are highly desired by the purchasers of insurance. This is an opportunity for insurers to gain market share by making distinctive insurance-product offerings suggested by the AI data-mining results.

Successful Use of Artificial Intelligence by Insurers

Accenture notes that insurers benefit from the application of AI in a number of ways, which include:

  • Automation of routine processes using AI reduces human labor expenses and human error
  • AI increases the effectiveness of the human staff in the areas of client acquisition, insurance recommendations, developing new insurance products, fraud detection, and risk management
  • AI helps insurers discover new opportunities and reduce risk

Summary

Traditionally, the insurance industry, as a whole, is risk averse. Insurers typically are slow adopters of new technology. This should now change. The compelling opportunities found in increased application of artificial intelligence in the insurance industry should encourage all insurers to embrace these technological developments enthusiastically. The potential benefits of using AI far outweigh any downside risks.

2018-07-08T08:23:57+00:00

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