In recent months ChatGPT has thrown AI into the spotlight, with many insurers currently looking at how it could help them cut costs, reach customers more effectively and even improve underwriting.
Yet AI is also one of the major emerging risks confronting carriers’ clients as they enter the fall of 2023, according to risk management specialist Allison Elzer.
Elzer, Managing Director of Markel Risk Solution Services, warns that the risks associated with AI are vastly under-appreciated in the industry.
In response to all the hype, a parade of experts has lined up to either trumpet AI’s benefits or warn of human annihilation. Elzer has a more nuanced perspective, but nevertheless suggests companies proceed with caution.
“AI has hit everyone in a big way, and across the board people are trying to create value from it for themselves,” Elzer notes. “My fear is people will start using it as a source of truth before it’s ready. There is so much room for error.
“People really have to understand what the information is based on, what data is being used, and what the risk is when they are using someone else’s data, not knowing whether it’s accurate.”
She notes that the risk management implications of OpenAI are only just coming to the fore, and that in the stampede to be part of the action, companies need to take care not to inadvertently put their proprietary data in the public domain.
Other tech-related risks also emerging
Open-source software is another area that Elzer warns needs close attention, with liability risks arising from seeming to guarantee results, or from potential bugs in the code when one party’s output is used to develop another’s applications.
Other, often-overlooked sources of tech risk are Application Programming Interfaces, or APIs, which facilitate the exchange of information but provide the opportunity for bad actors to infiltrate the process.
“Companies need to understand the vulnerabilities on both sides of the exchange when developing APIs. They’re often seen just as a way to transfer data, and not always as a potential risk.”
Elzer joined Markel four years ago, having started her insurance career providing risk control services to insurance captives followed by performing risk engineering services at a top P&C insurer. Elzer cites emerging technology in general as one of her clients’ key preoccupations.
“Many companies have been struggling to keep pace with changes, in industries from farming to space tech. Having a clear plan for all these new tools is essential.”
But technology may mitigate another current worry among insureds, she notes: hiring and maintaining staff, given the ageing population and labour market shortages.
Significant infrastructure risks need to be addressed
A rise in the frequency and severity of natural catastrophes is another major client concern, says Elzer, whose academic background is in Environmental Science. She notes that according to the National Weather Service Prediction Center as the North American hurricane season is here, “El Niño is anticipated to continue through the Northern Hemisphere winter (with greater than 95% chance through December 2023 - February 2024)”, which increases cat risks.
Businesses in coastal areas need to do a thorough risk analysis and put in place both preventative measures and emergency response plans, adds Elzer.
Some measures may seem mundane. Warehouse owners, for example, should ensure pallets are stored correctly, and not loaded on top of each other without being properly secured. Anyone with a property in a hurricane-prone area should also do an inventory of trees and remove branches hanging perilously over buildings, she advises. Essentially, taking an inventory of potential projectiles in a wind event and removing that threat ahead of time, will go far to prepare for storm season.
When it comes to renewables, Markel Risk Solution Services is working closely with the company’s underwriters to provide cover for facilities including solar and wind energy installations. Markel is also helping clients meet their ESG commitments in light of climate change.
“Reducing carbon footprints is how companies will be held accountable, and they are struggling to understand what that looks like,” she says. “We’re helping clients understand the potential risk impacts of their operations, and how they can keep risk at the lowest level possible.”
Elzer warns that older infrastructure can be riddled with risk, including events that are hard to anticipate. In May, for example, thousands of energy customers in Texas found themselves without power after a snake slithered into an electricity substation. The unpredictable nature of such events highlights the need for companies to have emergency response management plans, including, in the case of power producers, emergency generators, she notes.
Preparing for the unexpected
Markel works closely with clients to develop a detailed blueprint for how to deal with the unforeseen, whether it’s a protocol for contacting employees, arranging for backup power, alternative sourcing arrangements to ensure uninterrupted supplies of key materials, or plans to respond to civil unrest.
In the past decade or so, Elzer has seen a change in companies’ willingness to prepare for the unexpected.
“Emergency response management is not a new concept, but the sophistication of these plans has definitely improved over the years, and they’ve become a tool that companies actually use, as opposed to a binder sitting on a shelf.
“These are living documents, and if an employee leaves, there has to be someone who can take charge of starting the procedures.
“While Markel Risk Solution Services consults with insureds, we stress how important it is to implement these tools themselves and make them part of their culture,” she says. “The most successful businesses are the ones that take it to heart, and explain to their team why and how they’ve developed these plans.”
