As 2023 draws to a close, the insurance industry faces a landscape rich with possibilities and fraught with potential failure. Insurers are faced with having to answer the existential threat of climate change alongside the expanding use of artificial intelligence (AI) as regulation evolves in real time.

In 2024, many experts predict that insurers must refresh, rewire and remodel — all while dodging dangers — to meet the moment.

AI transformation remodels business as usual

While all economic sectors will experience some degree of change as they incorporate AI, insurance may emerge as among the most radically transformed. Insurance thrives on having and leveraging a wealth of data. The providers best at harnessing this data are simply better equipped than their competitors to assess risk and optimally strategize.

That said, the industry has a long way to go before risks and insurance rates are primarily calculated by AI alone — and to what degree actuaries will be involved to verify, update and maintain models.

Despite being awash in data, most insurers do not have the resources to cleanse collected data to ensure that it is accurate, complete and appropriate, or to audit AI-generated synthetic data for biases. Insufficient data management capabilities and a lack of suitably sophisticated analytics hinder the ability to use AI to reliably differentiate risks, optimize underwriting and create totally personalized rate offers.

As the insurance industry waits with bated breath for the EU's AI Act and similar regional regulation, the classification of new insurance products — and how to model them to prevent unfair discrimination — is a subject of hot debate. AI reflects the biases of its programmers, and finding ways to ensure that algorithms and underlying data (AI-generated synthetic data especially) don't perpetuate historic prejudice in insurance is a conundrum the industry hasn't yet resolved.

Another looming concern? As insurance practitioners learn the AI ropes, fraudsters are exploiting its advantages, too. Everyday people can use readily available generative AI tools to edit photos of car damage to make an accident look more catastrophic than the reality to swindle a higher claim reimbursement from an insurance company. Meanwhile, career crooks can use GenAI programs designed specifically to commit insurance fraud. There are as many as 20 such programs currently on the market that help commit fraud faster than insurers can keep pace with.

 But alongside these concerns, insurers have a great deal to look forward to. AI can accelerate claims and other processes enormously, enhancing efficiency, profitability and customer satisfaction — a true insurance trifecta.

A regulatory refresh 

In the coming year, insurance professionals can anticipate closer integration of the various operational silos that define insurers’ business architectures. The interactions between insurance contract valuation, rate pricing and reserving, fraud detection and customer management are interconnected — or can be with the right technology — and insurers will aim for a more holistic view of policyholders’ financial data, risk profiles, behaviors and interactions. 

Insights from IFRS 17 and LDTI, combined with data from insurance rate pricing and fraud management, allow for more accurate assessments of risks, claims and potentially fraudulent activities. This informs both pricing decisions and valuation calculations, ensuring consistency between financial projections and customer premiums. 

Furthermore, many global Internationally Active Insurance Groups (IAIGs) have already started their Insurance Capital Standard (ICS) 2.0 implementation projects, as have first-tier and second-tier insurers in several Asia-Pacific countries, where guidelines will be adopted as a local regulatory solvency standard, like Solvency II in the European Union. 

Since the large European insurers (also IAIGs) must comply with Solvency II and ICS 2.0, convergence with Solvency II will come into focus again.

Together with IFRS 17 and the interaction of various regulatory initiatives, the idea of a broader insurance framework with a closer integration of operational silos could become even more relevant, especially for its significant cost-saving potential.

Rewiring the insurance value proposition for climate change

Natural disasters are becoming an incalculable risk, and not only for American insurers. Many are raising premiums or pulling out of high-risk markets altogether, all to the detriment of policy holders.

Worldwide, payments following natural catastrophes totaled $130 billion last year. According to reinsurer Swiss Re, storms in the U.S. caused more losses in the first half of 2023 than in any previous six-month period.  

Under these unprecedented circumstances, insurers will respond with unprecedented technology — and an unprecedented rewiring of how they price risk in vulnerable areas. AI can be used to study data to examine how structures are built, which are at the greatest risk and how consumers and corporations can take steps to safeguard lives, livelihoods and properties. Though still in early stages, models like parametric and community-based insurance also hold promise in redistributing risk.

Another encouraging development: traditional numerical weather prediction is getting a much-needed overhaul. In a recent study, a new machine learning-driven method of forecasting outperformed traditional forecasting by 90% on 1,380 verification targets. When this methodology is fully implemented, it’s feasible that insurers will be able to predict the course and impact of severe weather far more quickly and accurately, drastically impacting loss prevention and the amount and extent of insured losses.

Growing adoption of such methods will add momentum to insurers’ use of external data to feed models, rather than relying solely on in-house sources. Increased access to internal and external models —especially those generated by AI — will highlight the need for additional oversight to ensure model compliance.

Future-proofing with AI

Refreshing, rewiring and remodeling amidst the climate crisis and evolving regulation will not be an easy task. Insurers must be ready to fully implement AI and other new-gen tech and carefully prepare to meet compliance guidelines, all while recalibrating for climate risk. By embracing the potential of these emerging technologies, insurers can better position themselves to navigate the risks and opportunities at hand in 2024 and beyond.