In 1997, the world of technology and human achievement was turned upside down when Garry Kasparov, world chess champion and one of the greatest minds in the game, lost to Deep Blue, a chess computer developed by IBM. The event demonstrated that machines can surpass human intelligence in specific domains. What happened to Kasparov, however, is not unique and reflects a broader pattern that we are currently seeing in the insurance industry.

Insurance companies are currently in a favorable position. Profits remain high, the operational models that have been used for years are successful, and there is little external pressure to drastically change. This situation seems ideal but can actually lead to a dangerous trap: the innovation paradox. The innovation paradox occurs when companies, despite realizing that innovation is necessary for long-term success, tend to cling to existing, successful models.

The innovation paradox in the insurance industry is clearly visible. While many insurance companies recognize the potential of AI and other emerging technologies, there is little urgency to implement them. This can seem logical in the short term, as the current business operations are still profitable. However, this inertia can have serious long-term consequences. Companies that do not innovate risk being overtaken by more agile and technologically advanced competitors, which can lead to loss of market share and, not unthinkably, even bankruptcy.

Warning

A literally and figuratively illustrative example of the innovation paradox comes from a completely different industry: photography. Kodak, once a dominant player in the photography industry, tragically failed by clinging to its traditional business model despite the rise of digital photography. Kodak was aware of the emergence of digital technology and had even developed some of the first digital cameras. Yet, the company stuck to its old business model of film rolls because it still generated significant profits.

Kodak's management underestimated the speed at which digital photography would break through and saw no need to give up their profitable film production for a new, but uncertain technology. This decision ultimately led to the downfall of Kodak as a market leader when digital photography took over and the demand for traditional film rolls drastically declined.

Just like Kodak faced the rise of digital photography, the insurance industry now faces the rise of AI. Despite the clear advantages of AI, such as automated risk assessment, improved customer interaction, and increased efficiency, there is still a reluctance in many insurance companies to fully embrace this technology. The profits and associated valuations of portfolios are high, customers seem relatively satisfied (after all, the product is ‘low-interest’), and the need to change does not seem urgent.

However, this complacency can lead to serious consequences. The insurance market is changing rapidly, and new global players who fully embrace AI and other technologies can quickly overtake traditional companies. Just think of Uber or Airbnb. These new players are often more agile, efficient, and better able to

‘I don't believe AI will defeat us, but it challenges us to improve’ - Garry Kasparov

Learning from Kasparov

Garry Kasparov's defeat by Deep Blue is a striking parallel for the insurance industry. Kasparov was a brilliant thinker and the undisputed world chess champion, but even he initially underestimated the power of the chess computer. He thought human intelligence and experience were invincible, but learned the hard way that technology, when applied correctly, can even defeat the smartest human opponents.

‘The inertia in the insurance industry can have serious long-term consequences’

Insurance providers, underwriting agencies, and intermediaries can learn from Kasparov's experience. It would be a mistake to think that current successes will protect them against the rise of AI. Just as Kasparov eventually realized that he had to collaborate with machines instead of competing against them, insurance companies must see AI as a partner rather than a threat. In this way, they can not only remain competitive but even strengthen their market position.

Benefits of AI

The benefits of AI for insurance companies are enormous. AI can help automate risk assessments, personalize customer interactions, predict future trends, and improve operational efficiency. For example, AI underwriting assistants can analyze customer information and perform risk assessments, speeding up underwriting processes and providing customers with a better experience.

AI can significantly enhance the role of the advisor by analyzing customer data, providing relevant information, and generating tailored advice. In today's market, where consolidations are becoming more common and the number of customers is increasing, advisors face the challenge of giving the right customer the right attention at the right time. Customers expect a more personalized approach, but the technological possibilities to make this happen are often underutilized. Moreover, there is a shortage of qualified personnel, both in terms of content knowledge and ICT expertise. AI can provide a solution here.

Multidisciplinary Character

Implementing AI, however, is not a simple task. It is often thought that installing AI systems is comparable to installing a software package, but in reality, this requires a multidisciplinary approach. This means that different specialists, including insurance experts, AI strategists, data engineers, machine learning engineers, solution architects, and responsible AI officers, must work together to successfully implement AI solutions.

The multidisciplinary character of AI implementation is crucial to ensure that the technology aligns with the specific needs of the insurance sector. This means that AI solutions must not only work technically but also fit within the ethical standards and regulations in force in the sector.

Legitimate Concerns about AI

Despite the many advantages, AI also rightly raises concerns, particularly regarding transparency and ethics. Just as Kasparov was initially skeptical of the capabilities of a chess computer, there are many today who doubt the use of AI in the insurance industry. A common concern is that AI will replace human jobs. While AI can indeed take over some tasks, it should be seen as a tool to enhance human capabilities, not replace them.

Another significant concern is the transparency of AI systems. Models like generative AI, including ChatGPT, are often seen as ‘black boxes’ because their decisions are difficult to explain. This lack of transparency can be problematic, especially in sectors like insurance where trust and understandability are essential. This underscores the need for transparent and explainable AI solutions.

Additionally, ethical considerations play a crucial role in the deployment of AI. It is essential to ensure ethical standards and regulations to minimize negative effects. This includes preventing biases in AI models, ensuring the privacy and security of customer data, and maintaining transparency in decision-making processes. It is the task of AI strategists to ensure that their AI solutions are fair, responsible, and respectful. Fortunately, more and more guidelines are emerging, such as the data-ethical frameworks of the Alliance and legislation like the AI Act, which will discourage parties from reinventing the wheel with all potential risks.

Jack Vos: ‘The coming years are crucial’

Paradigm Shift

The future of AI in the insurance industry looks promising. Insurance companies that embrace AI can benefit from the many advantages this technology offers, such as improved efficiency, growth, and a higher level of customer satisfaction. However, the success of AI depends on the balance between humans and machines. AI should be seen as a partner that enhances human capacities, not replaces them. This means that insurance companies should not only invest in technology but also in developing the skills and knowledge of their employees to work effectively with AI.

Just as Kasparov's loss to Deep Blue marked a turning point in the history of AI, the insurance industry now finds itself at a similar crossroads. This requires the industry to undergo a paradigm shift: this is a fundamental change in the dominant framework within a field, often caused by new insights or discoveries. It is up to the sector to determine whether AI is embraced as a tool for growth and innovation, or whether fear of the unknown dominates. The coming years will certainly be crucial for how the industry redefines itself in light of this powerful technology.

Jack Vos is co-founder/CEO of Onesurance.ai and has been involved in designing and applying AI solutions in the insurance industry since 2020.

Tip

Check out this inspiring and at the same time humorous TED talk by Garry Kasparov on YouTube:

Don’t fear Intelligent machines. Work with them.

In fifteen minutes, Kasparov shares his vision of a future where intelligent machines help humanity make their greatest dreams come true.

This article originally appeared in the VVP, read the online article here.