From deepfake fraud to biodiversity loss – Kennedys highlights evolving insurance risk

An AI generated deepfake image offered as evidence in support of a fraudulent claim – this is the kind of new risk that insurers are facing.

In our Global forecast 2024: Evolving insurance risks report, we also identify ‘deglobalisation’ – due to a fragile geopolitical landscape – and biodiversity loss as issues that insurers will increasingly have to tackle.

The report draws on the insights of Kennedys lawyers around the world to analyse and explore the priority themes expected to have the biggest impact on the insurance market in the year ahead.

It says environmental, social and governance (ESG), developing technologies, geopolitics and claims inflation all remain top concerns for the sector. The risks examined in previous reports within these themes – such as supply chain disruption, climate change and cyber breaches – are all still firmly in place, but alongside these, the risks have evolved and diversified.

AI has evident benefits in insurance. While the impact of AI may vary across the insurance value chain, access to more and better quality data translates to improved risk assessment for underwriting, allowing customised pricing and coverage. AI can also help manage the claims process, allowing insurers to pay claims more quickly.

In broad terms, AI risks falls into three categories: failure of the AI – both human failure and technology failure, malicious use of AI by third parties, and issues with data. The report says: “A particular challenge of evolving AI capabilities is that the potential for AI harms do not neatly fit into existing insurance lines.”

It highlights claims arising out of the performance of AI in an unexpected manner, such as deepfake fraud, a cleaning robot causing a flood or fire, a self-driving car that kills a pedestrian because its machine learning system fails to account for jaywalking, or a smart conversational bot that goes awry, damaging a business’s brand.

On geopolitics, factors such as the impact of the global pandemic, natural disasters and rising territorial tensions have disrupted trade and global supply chains, supporting a shift towards a new ‘deglobalisation era’, the report explains.

“The uncertainty in the world is inescapable. Geopolitical risk is at an all time high. This has resulted in a reconfiguration of trade and global supply chains, bringing with it more careful risk management characterised by local solutions, onshoring, nearshoring and border controls. For companies operating across borders, sectors and legal and regulatory regimes; the prospect of this new landscape brings the potential for a host of new risks, as well as complexity due to the interconnectivity of these risks.”

In terms of ESG, there is growing recognition of the economic impact of biodiversity loss and ecosystem degradation, coupled with the reputational risks organisations face by non-compliance with ESG practices.

“As a close bedfellow to climate change, there is a link between biodiversity loss and higher underwriting risks. This relationship is especially clear for insurance covering floods, crops, life, health and environmental liabilities,"

Also, greenwashing “is likely to be one of the biggest sources of class action claims in the coming months and years”.

Our partners from different parts of the globe identified different priorities. In the UK, the shifting regulatory landscape was the biggest concern, as it adapts to the pace of change in data privacy, AI, cyber, climate change, sustainability, geopolitical tensions, trade relationships, diversity, equality and inclusion and more.

“The provision of new regulations will assist in managing those risks. It will also create risk as global measures misalign, as new burdens are missed and as gaps and inconsistencies appear. Corporates and their insurers will need to keep close watch on changes across all jurisdictions in which they operate.”

In North America, by contrast, automation/the use of AI was the main emerging issue that would have an impact on claims, while Europe, the Middle East, Africa and Latin America all identified climate change. In Asia Pacific, it was cyber attacks/issues.

Our North American lawyers also distinguished themselves from their counterparts in other regions by recognising social inflation as an emerging issue, stemming from the substantial level of awards handed down by US juries.

John Bruce, a partner at Kennedys, says: “The global risk environment in which the insurance sector operates has always reacted and adapted to new and emerging risks. What is evident from our report is that the pace of change is quickening.

“This is true of risks falling under all key themes – ESG, geopolitics and technology. It demands commercial agility and forensic planning.

“We do not exempt ourselves from this challenge – insurers and insureds expect their lawyers to anticipate new risks and advise on how to cope with them. This report is just one way in which Kennedys strives to do just that.”