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Emerging Risks Report: Q2 2017
July 07, 2017
XL Catlin’s Emerging Risk Task Force actively monitors a wide array of emerging risks to provide our underwriters, as well as clients, with pertinent information regarding new and existing emerging risks. This quarterly report provides key highlights and developments for the emerging risks that have recently generated notable activity and media attention.
Artificial Intelligence – risk or opportunity?
- AI refers to a theory of computer systems that are able to perform tasks that normally require human intelligence.
- Simple and interactive artificial intelligence (AI) systems are now ubiquitous in many industries, embedded into most software applications used by consumers and companies around the world. As increasingly cognitive AI systems go ‘mainstream,’ operational, regulatory and legal uncertainties may arise for many businesses as well as (re)insurers.
- To date, most AI and machine learning development has occurred absent of any regulatory environment. However, in coming years regulators and governments are likely to address the privacy, ethical and legal standards necessary to clarify responsibility and liability where an AI system is involved.
AI as a risk:
- One aspect of AI is machine learning which more specifically enables computers to be taught an action without having been explicitly programmed how to perform it. The machine is able to adjust and automatically adapt to changes based on learned actions. While still relatively nascent, this area of AI is progressing rapidly.
- As machine learning becomes more widely adopted across industries, it is possible that questions may arise when determining liability for the failure or vulnerability of an AI application. Other potential implications for consideration might be: intellectual property concerns; cyber vulnerability/data privacy and liability policies via products/completed operations related to defective products; worker’s compensation/employers’ liability; and/or professional E&O related to negligent design.
AI as an opportunity:
- Companies embedding AI technology (such as machine learning) within their products and services will increasingly benefit from faster, smarter and more efficient delivery of these services / products. Automation also provides manufacturers, producers and suppliers (among others) with the opportunity to establish better processes (creating systems that learn and improve patterns) to enhance a business’ overall production potential via reduced costs associated with inefficiencies. The utilization of ‘big data’ generated from connected systems and devices (a.k.a. internet of things) that power predictive analytics, provides increased knowledge and insight for strategic decisions.
- In house, insurers will be able to improve operations, such as leveraging real-time data to drive underwriting decisions, analyzing patterns to support fraud management, and finding new market opportunities. This can be achieved through big data, predictive modelling, deep learning and greater computing power for a better understanding of customers and risks they face, potentially lowering transactional costs and providing a higher value service.
- Within XL Catlin, Accelerate is an internal innovation team working with our business units to generate new commercial opportunities from new technologies, such as AI. The goal is to enhance our customers’ overall experience – from policy purchase to claims handling.
- In response to growing competition and innovation within the insurance industry, there’s been increasing attention and investment in InsurTech (or ‘Insurance Technology’) by large insurance carriers.
- InsurTech is an emerging trend that encompasses a landscape of startups fostering innovation of ideas, increasing transparency and the relevance of insurance. It’s focused on meeting changing customer demands and expectations to enable growth through new proposals and offerings. The InsurTech opportunity also facilitates access to new markets, products, growth and commercial / operational augmentation for the industry.
- The scope of InsurTech is expansive with several areas of focus, including but not limited to: digital customer engagement, data analytics, usage-based insurance and/or new business models (i.e. peer-to-peer insurance), product / service innovation, internet of things, information security, etc.
- From a (re)insurance perspective, rating agencies have expressed a view that they see limited disruption to the traditional insurance market in the short-term from InsurTech, and it is having no immediate impact on insurers’ ratings. Typically, InsurTech start-ups are small and nimble, focused on a niche product or service. By partnering with established insurers, these start-ups can leverage the distribution channels and regulatory environments of the incumbents.
- Despite having little immediate impact on insurer ratings, rating agencies have noted that (re)insurers that do not invest in ‘digitalization and innovation’ in coming years will see an impact on their operating performance.
- XL Catlin’s venture capital fund, XL Innovate, actively invests in early stage start-up companies that have potential to create disruptive insurance models and data and analytics companies developing high value insurance applications.
- Within the marine industry, the development of unmanned and / or fully autonomous vessels has generated much interest and discussion. Similar to autonomous trucks on the roads, autonomous vessels at sea controlled by on-shore crews are expected to reduce risks and costs associated with human error and crew on-board, while having efficiency benefits.
- These vessels could incorporate new technology integrating sensors and machine learning to study trends and patterns to navigate routes more safely.
- The marine industry still has to address key regulatory and legal challenges associated with existing maritime standards (developed for manned vessels) before autonomous ships could be formally introduced. For instance, companies would have to consider the applicability and/or revision to existing international conventions for maritime guidelines (such as rules on ‘minimum manning’) or other provisions requiring human action and judgment.
- Seaworthiness rules and liability, errors in navigation or collisions also need to be considered. Absent clear rules, uncertainty regarding liability and how it might affect shipbuilders, equipment manufacturers, software developers and/or remote navigators is very possible.
- Autonomous systems could also be more vulnerable to cyber risks, potentially creating new / unknown risk exposures under existing marine policies.
Interested in learning more about autonomy? Read our Let’s Talk with Dr Graeme Smith on Mobile Autonomy.