Artificial Intelligence in Insurance - A Case Study of Business Operations and a Theoretical Model of Information Balance

Abstract

This master’s thesis explores the impact of artificial intelligence (AI) in the insurance sector. The thesis focuses on how technological developments, AI in particular, have transformed business operations and strategies, as well as how the implementation of AI influences the balance of information between the insurer and the insured. Section 2 is divided into two parts and starts with a historical overview of the insurance industry’s development. Secondly, through qualitative interviews with two professionals working in Norwegian insurance companies, Gard and Fremtind, we gain insight into how technological development has affected their work processes and decision-making.

Section 3 is the methodology section of the thesis, using a model based on microeconomic theory to analyze shifts in the information balance between the insurer and the insureds brought by AI. The analysis discusses four cases with different states of information balance between the insureds and the insurers. The section considers two insurance markets: First, a market with uninformed insureds, and second, a market with informed insureds. In both markets, we study the effects of a technology that enhances insurers’ ability to assess risk more accurately, resulting in a shift in the information balance in favor of the insurers. In a competitive market, after insurers have implemented AI, the equilibrium will be that insurers will offer full coverage contracts to all customers. In markets where insurers offer full coverage contracts, the conclusion is that it is difficult to mitigate moral hazard problems completely.

Section 4 discusses the four cases in a historical context, followed by a discussion of an informational state where insurers possess more information than the insureds. The section concludes with a discussion of the ethical implications arising from the shift in information balance due to AI.

The thesis concludes that AI has significantly impacted the insurance industry by improving operational efficiency and customer service, changing traditional business models, and creating new market opportunities. AI technologies have enabled insurance companies to move from a repair to a more preventive approach, where risks can be predicted and prevented to a greater extent. By insurers giving insureds incentives to reduce risky behavior by giving lower premiums and preventative guidance, we can experience a positive effect on moral hazard. However, this transformation also raises ethical concerns, which increase the need for governmental regulations to ensure fair treatment among insureds.