The chief executive of the UK’s Financial Conduct Authority (FCA), Nikhil Rathi, has issued a stark warning about the potential risks of artificial intelligence (AI) in the insurance sector, cautioning that some consumers could become “uninsurable” as a result of the technology’s growing influence.
Rathi highlighted the “AI-enabled hyper-personalization” issue in insurance, a technology that tailors insurance products and pricing to individual customers based on extensive data analysis.
Risks of AI-driven personalization in insurance
While this could lead to more tailored and potentially cheaper insurance for many consumers, there is a significant concern that it could also lead to some individuals being deemed uninsurable. This could particularly affect those without health conditions or access to the technology needed to benefit from such personalized services.
The warning comes amid broader concerns about the use of AI in financial services, particularly in areas like health insurance. Experts have pointed out that using live data in AI-driven models could exacerbate existing inequalities, making it harder for certain groups of people to access affordable insurance coverage.
The European Insurance and Occupational Pensions Authority (Eiopa) had previously advised companies to monitor and mitigate biases in AI systems to avoid discriminatory outcomes.
Balancing innovation with consumer protection
The FCA has been exploring the implications of AI in financial services for several years, having launched a discussion paper on the subject two years ago. While the regulator has not yet introduced specific rules governing AI use, it has intended to closely monitor the technology’s adoption in the sector.
Rathi underscored the need for an open conversation about AI’s potential risks, drawing a parallel to the controversy surrounding dynamic pricing models, which recently led to a surge in ticket prices for concerts by the band Oasis. He stressed that just because a technology can be implemented doesn’t mean the public will accept it.
Despite these concerns, Rathi encouraged the insurance industry to continue experimenting with AI, emphasizing that the potential benefits for consumers and long-term economic growth could outweigh the risks.
He suggested that the FCA might need to rethink some existing rules to promote financial inclusion, acknowledging the tension between traditional regulatory frameworks and the demands of a rapidly digitizing financial services market.
Encouraging financial inclusion through innovation
Rathi also pointed to the role of technology in boosting financial inclusion, citing examples from other countries such as Brazil’s instant payment service Pix and India’s biometric ID system Aadhaar. He noted that while the UK ranks seventh in global financial inclusion, over a million people in the country still lack a bank account, indicating room for improvement.
The FCA has recently been given a new mandate to consider the impact of regulation on economic growth and competitiveness. In line with this, the regulator announced that it would exempt members of the 267 billion Euro investment trust industry from specific disclosure rules stemming from EU legislation, which are set to be replaced next year.
Rathi acknowledged the inherent risks of experimenting with new technologies and processes but maintained that the potential benefits, including greater financial inclusion and economic growth, justify these risks. He called for an open debate on the matter, encouraging the industry to be willing to experiment and learn from both successes and failures.
This approach underscores the FCA’s commitment to fostering innovation while ensuring that the financial services sector remains inclusive and fair for all consumers, even as AI becomes more integrated into the industry.
