Artificial Intelligence's popularity has skyrocketed in recent months, so much so people have increasingly adopted AI usage in their daily lives. Currently, the global AI market is worth $150.2 billion and is projected to grow 36.8% by 2030 at CAGR.
The insurance industry is not so far behind in jumping on the AI bandwagon. As Artificial Intelligence (AI) slowly integrates into various aspects of insurance, we explore how it may come to disrupt the most crucial part of it all - premiums. Beyond the commonly expected benefits of AI integration lies a different perspective on the potential pitfalls and ethical concerns for AI-driven insurance premiums.
To be fair, let’s explore both perspectives in this article - positive and negative.
We analyse the negatives first:
Algorithmic Bias and Fairness
AI algorithms are as biased as the data it’s been trained on. If historical data contains biases, these biases will affect the AI algorithms and exacerbate inequalities against minorities, resulting in higher premiums for minority communities. The use of certain data points, such as zip codes or social media activity may lead to discriminatory practices against suppressed communities, highlighting AI-determined insurance premiums.
Loss of Human Touch
Perhaps the most concerning and vital point where Artificial Intelligence is concerned is the fear of loss of human touch. Emotions, empathy and human connection are the cornerstones of the insurance industry. Although AI can churn out a humongous amount of data in a matter of minutes, it lacks the emotional intelligence and sensitivity to engage with distressed clients. According to a survey by EY, 67% of consumers still value human interaction in insurance dealings. Over-reliance on AI may erode the personal relationships that the customers have with insurance providers, directly impacting the premiums.
Privacy and Data Security
The vast amount of data processed by AI systems poses significant privacy risks. A survey by Deloitte found that 73% of consumers are concerned about the security of their personal data in the context of insurance. Increasing concerns about data privacy have led to heightened regulatory scrutiny. Compliance with evolving regulations makes matters complex for insurers, leading to severe penalties, and impacting insurers’ operational costs and customers' premiums.
While the disruptive possibilities of Artificial Intelligence seem viable, we’ve still to take a closer look at the undeniable revolutionising impact of AI on premiums. Here are a few ways AI is likely to influence insurance premiums in a profoundly positive way. We open with a significant point;
Telematics and IoT Integration
Artificial Intelligence coupled with Telematics and Internet of Things (IoT) integration enables the collection of real-time data from connected devices. Let’s uncover how. Wearable devices, objects with sensors and those extracting your geographical data with the help of satellites contribute to usage-based insurance. AI helps analyse your data and suggest premiums based on your usage, behaviour and history. According to Statista, the global market for usage-based insurance is expected to reach $82 billion by 2027.
Precision in Risk Assessment
Did you know AI-based fraud detection systems have contributed to a 10-20% reduction in fraudulent claims? AI excels in consuming copious amounts of datasets and extracting meaningful insights. Insurers are growing increasingly dependent on AI to study customers' behaviour patterns, including driving habits and lifestyle choices for a more personalised risk evaluation. According to a report by Accenture, insurers using AI have witnessed a 45% improvement in the accuracy of risk assessment.
AI empowers insurers with the ability to analyse market trends, competitor offerings, and customer preferences swiftly. This allows for the implementation of competitive pricing strategies. According to a report by PwC, 74% of insurance executives believe that AI will significantly alter competition in the industry. Additionally, a leading streaming service has saved over $1 billion annually using machine learning from its focused recommendation engine. Competition is fierce and insurers are wielding AI-embedded tools to stay ahead of the game.
There’s no denying the significant impact Artificial Intelligence can have on more accurate risk assessment and streamlining processes, but we can’t evade the possible blindspots of Artificial Intelligence when it comes to determining insurance premiums. As it is famously said - ‘With great power comes great responsibility’. Only time will tell if the impact of AI on the insurance industry will be utopian or dystopian.