From the Desk of the Secretary General – September 2024

By Jonathan Dixon

Interest in the use of artificial intelligence (AI) has surged in recent years, driven by significant advances in machine learning, natural language processing and data analytics. AI has the potential to revolutionise various sectors, including insurance.

The benefits for insurers and their customers from the use of AI are still evolving. Current examples tend to be in the area of enhanced operations, including streamlined claims processing and more effective chat bots. Ultimately, AI has the potential to support improved access to insurance, including by offering more personalised products and developing new, targeted products or services.

However, the use of AI technology still faces challenges, such as ethical concerns, data privacy issues and the need for substantial computational resources. Our understanding of supervisory risks from the use of AI – from bias to protection gaps – is also evolving.

The benefits and risks from the use of AI are not unique to the insurance sector. The far-reaching impacts will be common across the financial system and broader economy. This is why it is beneficial that we have close cooperation with partner organisations here in Basel, allowing the international standard-setting community to examine this issue holistically while also considering the specific impacts on different sectors.

For instance, the Financial Stability Board (FSB), of which the IAIS is a member, will soon publish a report assessing the potential risks to financial stability posed by AI. And our colleagues at the Financial Stability Institute (FSI), which is part of the Bank for International Settlements (BIS), will later this year publish a report that looks at increasing AI use cases across the banking and insurance sectors. By sharing this information amongst the different bodies, we have been able to provide our members with a better understanding of global developments.

At the IAIS, we have been exploring these AI developments through our FinTech Forum, chaired by Petra Hielkema (Chair, European Insurance and Occupational Pensions Authority). The FinTech Forum serves as a platform for insurance supervisors and stakeholders to discuss the implications of AI and other technological innovations on the insurance industry.

Earlier this month, we collaborated with the FSI to host a policy implementation meeting of more than 40 supervisors to explore market and regulatory developments related to AI. Together with insurers and consumer representatives, meeting participants discussed growing insurer AI use cases, the need to embed consumer protection considerations, the role of governance and risk management frameworks, as well as financial stability risks. The meeting provided an opportunity to discuss the future trends in AI and supervisory challenges.

The IAIS has conducted an analysis to determine whether the Insurance Core Principles (ICPs) – the global standards for insurance supervision – adequately cover risks that could arise from the greater use of AI. We concluded that, given the principles-based nature of the ICPs, no immediate changes are necessary. However, to ensure that supervisory actions on AI align with the ICPs, the FinTech Forum is in the process of developing an Application Paper on supervision of AI.

The draft Application Paper outlines the supervisory expectation that insurers must effectively manage AI-related risks, focussing on four key themes: (i) governance and accountability; (ii) robustness, safety and security; (iii) transparency and explainability; and (iv) fairness, ethics and redress. Given the cross-cutting nature of this work, the Application Paper connects our efforts on governance, market conduct and operational resilience objectives. We plan to publish the draft paper for a 90-day consultation in late-November. Alongside our standard consultation process, we will also host a roundtable discussion on the topic at our Annual Conference in Cape Town in December.

The Application Paper will be the first step in a broader initiative to help insurance supervisors respond to AI’s impact on the insurance sector. The FinTech Forum will take forward more work in the coming years, and the IAIS will consider further quantitative and qualitative analysis, including incorporating additional questions into the IAIS’ annual Global Monitoring Exercise.

The impact of AI on the insurance sector will be global in nature. Therefore, it will be important for the IAIS to help ensure a globally coordinated supervisory response – a response that will need to balance the need for proper guardrails while still embracing innovation.