Artificial Intelligence Has Evolved from Pilot Projects to Differentiators Among Insurance Firms

A year ago, insurance companies boasted that AI investments had emerged from fledgling pilot projects into production enhancements that increased efficiency and improved profitability. What a difference a year makes. Comments on most recent conference calls by Travelers, Chubb, Hartford, AIG, and others position last year’s deployments as this year’s competitive moats that help keep competitors at bay.

AI-fueled advances in underwriting and claims were discussed on recent conference calls. Travelers cited a digital quoting platform that now processes over a million transactions annually. It has helped the firm's agent distribution produce a new quarterly record, in part due to new underwriting capacity attributed to technology. A faster, more predictable platform is likely to attract agents to process even more business.

Across other firms:

• Chubb highlighted that AI has helped accelerate its underwriting of small commercial business, historically underwritten manually because of unprofitability at scale.

• Hartford’s personal lines business has experienced a revamp of its underwriting process.

• AIG provided numbers on its improved underwriting, which now processes 4x submissions with a 20% improvement in the submissions that are bound.

Increased underwriting volume increases bound policies and the loss experience data collected, which can be fed back into AI models to further improve risk selection. The moat widens.

Claims efficiency is a second area of improvement AI is driving. Traveler’s highlighted that over half of claims now qualify for straight-through processing, which produces a paid claim without human interaction. Staffing has been reduced by 30%, and operations have been consolidated into two centers from four.

Hartford’s AI effort has accelerated the summarization of medical records in underwriting. The model advances with every set of medical records it summarizes by operating with improved consistency and precision, which translates into margin resilience.

The lower claims costs for insurance companies translate into lower combined ratios, which give companies a choice to price lines at more competitive rates, which attracts more volume, which produces more claims data that can be used to improve the AI model. The moat widens.

Interestingly, AI only recently appeared as a category of risk that companies must underwrite as well as deploy. Cyber, professional indemnity, and liability risk is now joined by AI risk, which Travelers mentioned is a formal underwriting consideration in cyber products. Today's straight-through processing sits just outside this specific risk.

Agentic systems that carriers anticipate developing carry AI risk with direct operational significance. A presentation by AI researcher Ellie Pavlick of Brown University explained a scenario called “Schrodinger’s Chain-of-Thought” problem that agentic systems may introduce AI risk.

As agentic models are executed with longer autonomous chains of reasoning without human reviews to check each step in the process, a problem manifests. Agentic AI makes underwriting, claims adjudication, and fraud flagging decisions that produce a visible routing chain, but the chain may not drive the answer. As a result, the actual computational path that produced the answer remains opaque and may pose serious governance issues.

Macro Trends

Market Performance Data: Investment Income / Premiums

The shaded portion of the chart below— January, February, March 1Q and into April—belies the volatility that permeated the quarter. Markets did rally to record levels just weeks after the quarter, but throughout January, February, and March the heightened volatility raised concerns that consumer confidence and demand would be shaken and impact demand. However, strong loan growth reported by two of three banks—and the absence of weakness—helps allay fears of consumer-related weakness that might have impacted the growth of insurance premiums.

Employment Data: Premiums

We have written notes on the potential impact that a weaker labor market could have on group insurance premiums. MetLife, with a large proportion of group premiums, reports next week. Given volatility, it is very likely Met reports that February’s drop in payrolls and the 1Q rise in unemployment may have dampened 1Q growth, and even the outlook for growth in future quarters. However, weakening employment data—the first drop in payrolls in at least a year and rising unemployment—does not appear negative enough to drive a drop in total premiums. (Insurance: Contrary to Positive Estimates, Jobs Data Points to Headwinds) 

Data released Thursday showed initial claims and continuing claims were slightly above the prior week but remain well below levels seen in January / February.  Recent employment data remains in a range outside a range of concern.

Inflation Data: Claims Costs

We have written about the negative impact inflation (driven by tariffs) has on the cost of claims. Higher costs for auto parts and lumber attributed to tariffs, for example, push up costs to settle policyholder claims and drive down earnings.

Highlighting an interesting inflation situation in 1Q, we have written that the most recent source of inflation, higher fuel costs, may actually lower claim costs for companies focused on writing auto insurance. In our note we made a case that a sustained increase in the price of gasoline may change driving habits (such as increases in work from home or carpooling) and reduce miles driven. If habits change and fewer miles are driven it should translate into lower claim costs. (Gas Prices, Benefit Ratios, and Inflation) 

Linking Macro Trends to Potential EPS Impact

Our Macro Tracker table lists key economic data relevant to insurance company earnings. The right-hand column ties macro trends to the potential impact on company earnings.

 Access insurance insight reports from the FactSet Workstation using the Document Search function with this search string: "Insurance Tracker: Event of the Week".  

Insurance Solutions

Deep sector data and functionality shown in this report are available through the FactSet Workstation. Learn more about FactSet insurance solutions that combine investment research, portfolio construction, and risk management in a cloud-native platform. Our comprehensive tools enable investment and actuarial teams to enhance asset modeling and capitalize on market opportunities.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.