Opportunities and implications of using artificial intelligence in the insurance industry

One thing to ease your mind before we start: there is still a long way to go before we can talk about any kind of artificial intelligence that can change the course of history. But, in contrast to pure automation, artificial intelligence makes it possible to find solutions to issues and tasks that were unknown until now or for which the input data is simply too large to be processed by humans.

In the insurance sector, AI provides the opportunity to automate increasingly complex processes and thus save costs and time, as well as to incorporate much larger volumes of data into decision-making processes in order to increase the precision and quality of the services offered. At the same time, implementing AI-based systems poses major challenges to insurance companies while reducing the barriers for fast-moving, technology-driven companies to enter the insurance market.

Automated interaction between insurance companies and customers

Along the entire insurance value chain—from product development and underwriting through sales and services to claims settlement—there are use cases for which AI processes could improve output and efficiency. The optimization and management of work flows is one example for this: In the routing of business events, for example, AI can be used to pick out business events that can be processed automatically with improved precision. Plus, initial work steps can be started directly and automatically. One of the problem levels (scores) to be solved could be the underlying risk of fraud.

All in all, AI has the potential to offer customers a less rigid, less complicated and faster digital experience along the entire customer journey. To harness this potential, however, technical and organizational preconditions must be in place that force insurance companies to rethink some of their most basic principles: IT systems must become flexible, data aggregated and made available, new skills need to be procured or taught. So the race is on. It is an easy conclusion to reach that technologies such as AI allow new competitors easy entry into the market and that rigid and slow insurance companies might not have much of a future.

Insurance companies have an edge in terms of knowledge

At its core, the insurance business model is about exactly identifying the “expected value” of a risk and underwriting it at attractive premiums in order to build a large and solid customer base so as to ultimately achieve a low cost rate for claims. This relies on a feedback cycle between risk calculation and the cost of claims: while external data plays an increasingly important role in risk calculation, the calculations are validated by the actually incurred costs of claims, and constantly refined based on historical claims data. With their historical claims data, traditional insurance companies have a knowledge advantage that can be translated directly into the profitability of an insurance company.

Big tech companies on the attack

However, a look at the competition at the customer interface reveals the weak point of traditional insurers. When considering the technological possibilities, the customer experience in insurance is still plagued by too many delays, channel disruptions and complicated processes. It is easy for new providers to offer a better customer experience than traditional insurance companies by using modern technology and based on available data as well as data that customers voluntarily provide. However, an outstanding customer experience alone is not enough to establish a profitable business model in the insurance industry. The price war for mass insurance products simply does not result in sufficient margin, as demonstrated by the recent consolidation of brokers in Great Britain or investors pulling out of the once hyped fintech company Knip.

Big tech companies already offer a wide range of services at the digital customer interface and can easily add selling insurance policies to their portfolio. Benefiting from valid business models, they are not at the mercy of margin pressure and can build up the aforementioned core insurance business slowly and based on small pilots (e.g. “Amazon Protect”) with established technological know-how and an unrivaled understanding of customer needs.

Just a breather

All in all, AI mainly represents an opportunity for insurance companies and will increasingly become an important competitive factor between existing insurers. Currently, a head start in knowledge at the root of the insurance business protects established insurance companies from new market players from other sectors as it would be difficult for them to catch up.

However, this will not protect the insurance companies forever: the use of technologies such as AI to analyze claims data for improved risk calculation combined with increasingly available external data as well as the technology-driven improvement of customer interaction will become imperative.

Speed is of the essence—insurers need to act while they are still indispensable.