Solving the legal puzzle for technology, innovation and insurance

We live in an era in which many aspects of life are increasingly heavily technology-led and this will only increase exponentially, given the pace of development of artificial intelligence (AI) and other advances.

The insurance industry is not immune to this and technological developments influence every aspect of it, from industry services to actuarial forecasting, underwriting and reinsurance. It also creates opportunities for insurers to innovate, as well as raises complex issues and concerns.

The ability to access big data – plus technological advances in AI, predictive analytics and blockchain – creates the operational capacity for new insurance products and ways to create and execute insurance transactions. Data might be used to delineate more precisely the scope of cover provided, such as permitting insurers to monitor an insured’s activities in real time, with the data about the insured’s behaviours permitting the insurer to vary the cover or premium payable by way of instant variations. Better data may make it possible to ensure premiums more closely reflect an insured’s risk and to reduce the overall cost of insurance.

However, the increasing availability of powerful AI and analytics to process vast data sets raises questions regarding the integrity of data and the assumptions of the predictive models being deployed. Driverless cars, robots and autonomous machines will give rise to legal concerns, ranging from the concept of “AI personhood” to bias and liability issues, with obvious insurance implications.

Here, we explore four examples of newer insurance products.

On-demand insurance

On-demand or usage-based insurance is a good example of technologically enabled insurance product development. In its “purest” sense, on-demand insurance means an insured activates coverage by way of a smart device or application or the cover is auto­matically based on criteria like location, activity or context. Cover is terminated manually or auto­matically and the customer can choose to turn on insurance from different providers at different times.

In usage-based insurance, the contractual relationship between the customer/insured is continuous (that is, both where the item is and is not “in use”) because the usage-based component is often part of a traditional insurance coverage. An example is usage-based insurance for cars, where a basic level of liability and theft insurance may be always in force and additional premiums for liability and collision cover are calculated on usage (for example, distance travelled or driving habits).

Big data and the AI-driven analytics of it provide new information and insight into specific risks of individuals, groups and types of insureds, enabling risk to be predicted and priced more quickly and accurately. However, the ability to create very detailed specific risk profiles and pricing for individual customers has the potential to undermine the use of insurance as a risk pool

On-demand insurance can be made available in many situations for individuals, particularly where traditional insurance might be less available (for example, for drones, home-sharing hosts, travel and event insurance and for workers in the gig economy). It might cover digital businesses against loss in traditional lines of business such as employers’ liability, public liability and professional indemnity.

Big data and the AI-driven analytics of it provide new information and insight into specific risks of individuals, groups and types of insureds, enabling risk to be predicted and priced more quickly and accurately. However, the ability to create very detailed specific risk profiles and pricing for individual customers has the potential to undermine the use of insurance as a risk pool; and is something on which regulators have an eye.

It has, for example, been raised by the UK’s Financial Conduct Authority, flagging the hyper-personalisation of insurance could provide the benefit of tailored premiums for some but for others runs the risk of rendering some customers uninsurable or of discriminating against certain customers.

Embedded insurance

Emerging technologies allow both insurers and non-insurance brands to partner to create value and opportunity for customers. This is particularly the case with embedded insurance (that is,insurance sold alongside a primary product or service). Embedded insurance enables insurance to be offered in innovative ways and to be presented to customers at various points in a purchase process. However, regulatory restrictions are complex – the involvement of multiple parties, often in different jurisdictions, gives rise to several regulatory and supervisory considerations.

Applicable laws, licences and ongoing regulatory requirements vary in each jurisdiction and are not always well understood by the non-insurance partner. For example, providers of embedded insurance in the UK will need to understand and demonstrate how the Consumer Duty applies to consumer-facing products. Policyholder protection and treating customers fairly are the primary objectives in many jurisdictions, but not all will take the exact same approach, meaning insurers and third-party providers must navigate (often multiple) complex regulatory environments.

Parametric insurance

It is widely reported natural disasters are increasing in severity, duration and frequency globally, with the greatest impact often felt by those least equipped to recover. Insurance solutions can form a key part of disaster preparedness and resilience and para­metric insurance is an important tool to fill the well-documented “protection gap”.

Traditional insurance involves payment of a premium in return for a promise to cover actual loss suffered in the event of an insured fortuity (such as a wildfire causing damage to a property). Payment is made after an actual loss assessment and investigation to put the insured back in the position they were in before the event (that is, the policy provides an indemnity that covers actual loss).

Conversely, parametric (or index-based) solutions cover the probability of a predefined event happening, instead of indemnifying actual loss incurred. A parametric contract is an agreement to make a pre-agreed specified payment on the occurrence of a triggering event (such as wind speeds of a certain strength) and, therefore, is detached from the amount of any loss or damage.

Removing the loss-assessment process makes the payout quicker (especially if coupled with technology and a smart contract), with payment often being made immediately after the loss, allowing the process of recovery to begin. A good example is the parametric insurance of coral reefs in Mexico, triggered by a hurricane of a certain strength, releasing funds to allow stabilisation of the coral reefs immediately.

Even though parametric insurance is now well established, regulatory and legal environments still have not specifically adapted to it.

Key challenges include: understanding whether the contract is an insurance or a derivative contract and accordingly which regulatory framework is relevant; correctly modelling likely actual losses to align as closely as possible with the predefined payout; and ensuring contracts and other documents are properly designed and, in particular, triggers are clear to all parties.

Autonomous transportation

Increasing use of autonomous vehicles, vessels and aircraft will be an important development for the insurance industry to address.

Taking motor cover as an example, ownership of private vehicles may decrease, with a potential reduction in the number and severity of accidents and, therefore, insurance claims. Liability for accidents will become more complex, shifting from the driver to the manufacturer of the vehicle for design defects and/or associated technology provider in relation to programming.

In the UK, the Automated Vehicles Act 2024 (not yet fully in force) moves liability (with exceptions) from drivers in vehicles with automatic functions engaged to others, including in particular the authorised self-driving entity (ASDE) – the manufacturer – that is responsible for the way the vehicle drives.

Motor insurers are liable to meet claims from all victims in an accident under the Automated and Electric Vehicles Act 2018 and then may seek to recover from liable parties such as the ASDE or the operator overseeing the vehicle where there is no driver. The act provides a legal framework and it awaits the necessary secondary legislation, as well as the development of various processes for approvals and other matters.

The position will be similar in relation to the use of autonomous and remotely controlled ships (maritime autonomous surface ships) and the use and deployment of unmanned aerial vehicles or drones.

The regulatory and legal framework for autonomous transportation is still developing across many jurisdictions. Although there is broad acceptance regulatory intervention needs to adapt to allow these advancements to be deployed safely but without stifling innovation, the fast pace at which the technology is developing makes it difficult for regulators to find that path.

Addressing these issues and choosing between competing solutions is no easy task and impacts insurance law and practice in all jurisdictions.

This convergence of new technologies and consumer demands creates new and exciting opportunities within the insurance industry, but also complex challenges.

How legislatures and regulators around the world structure oversight of emerging insurance products to ensure responsible roll out and governance will be critical to maximising their efficacy, with a balance to be struck between facilitating development and protecting customers.

Will Reddie is a partner and Dr Anthony Tarr is a senior consultant at HFW