Insurers should anticipate increased regulatory oversight of AI

Insurers should anticipate increased regulatory oversight of AI

Artificial intelligence (AI) is here to stay, and its use across financial services is steadily increasing. However, as a 2020 survey by McKinsey & Company showed, while 48% of surveyed companies recognised the regulatory and compliance risks associated with AI, only 38% were actively addressing these risks.

The concern is that the technological arms race is outpacing appropriate ethical, regulatory and legal guidelines - as well as the ability of the insurance industry to address the potential within AI systems for discriminatory bias against certain insureds.

Following the EU’s publication in 2020 of its AI White Paper, there has been an increasing drive towards regulation of AI, with the EU publishing its draft AI regulations in April this year.

The proposed regulations are intended to safeguard the rights of both individuals and commercial entities, while facilitating investment and innovation in AI. They will be extraterritorial in scope, with users or providers of AI systems that operate within the EU expected to fall under its remit, regardless of location.

In terms of enforcement, the proposed EU AI regulation will have more teeth than the GDPR, with a power to issue fines of up to €30 million, or 6% of global revenue.

There are also regulatory initiatives on AI underway in the US, with AI bills and resolutions having been introduced in around 17 US States in 2021, and regulations passed into law in Alabama, Colorado, Illinois and Mississippi.

In the UK, the Association of British Insurers contributed to a joint KPMG-UK Finance report on data ethics in December 2020, which outlined five core principles for the ethical use of AI in financial services.

It will take time for regulators and legislators to catch up with the technology, and it remains to be seen whether new AI regulations will introduce greater clarity on the extent of AI deployment, as well as the controls needed to protect customers.

But with regulatory oversight of AI use in insurance set to increase, companies need to adopt appropriate internal governance systems now, embed appropriate expertise and ensure board awareness.

View all our Insurance 2022 Predictions here