Demystifying AI for Financial Services & Insurance
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The insurance industry is experiencing a significant impact from the increasing frequency and severity of natural disasters. This surge in extreme weather events — such as hurricanes, wildfires, floods, and storms — has resulted in a substantial rise in insurance claims in both volume and loss amount.
Insurers are grappling with the challenge of accurately assessing and managing these claims, reevaluating their risk models and pricing strategies, and continuing to meet stringent regulations. Many are witnessing higher payouts, which, in some cases, has prompted insurers to withdraw altogether from certain high-risk regions including California, Florida, Louisiana, and Colorado.
Why Insurers are Leaving High-risk Areas
|The Insurance Information Institute data shows that in California alone, more than 1.2 million homes are exposed to extreme wildfire risk. Yet regulations such as Proposition 103 require rate increases to be approved by the elected insurance commissioner, creating hurdles for insurers to remain profitable while still offering coverage. In California, industrial business owners normally have annual insurance premiums ranging from $500,000 to a few million dollars. In wildfire zones, the premium increases have spiked, with one customer experiencing a premium increase from $230,000 four years ago to $1.5 million in 2023.||The Florida Office of Insurance Regulation (OIR) is responsible for assessing insurance company ratings. Several companies experienced a downgrade from an A rating to either S or M (Substantial or Moderate), and the primary mortgage providers, Freddie Mac and Fannie Mae, only accept A ratings, which results in customers switching to different insurers to get better rates. Sixteen homeowners’ insurance companies left Florida in July 2022, primarily citing business risk as the reason behind their decision.||In 2022, more than 80,000 policies were terminated due to the substantial financial losses insurers endured from severe storms such as Laura, Delta, and Zeta, amounting to $10.6 billion. In 2021, the devastation caused by Hurricane Ida resulted in an astounding $30 billion in insured losses, pushing multiple insurers into insolvency.||The Marshall Wildfire cost insurers over $2 billion. A study commissioned by state lawmakers found that 76% of carriers decreased their exposure in Colorado in 2022, leaving the five largest insurance companies to dominate the market. The average insurance premium has jumped close to 50% in the last three years.|
|Source: Digital Insurance|
But these aren’t the only challenges insurers are facing in today’s evolving and often volatile insurance landscape. They also struggle with outdated technology and manual processes that can delay claim settlements and negatively affect customer service and retention. And the menace of fraud is always looming — and growing — putting additional strain on company profitability.
To deal with these challenges, insurers are increasingly turning to advanced technologies — such as artificial intelligence (AI), machine learning (ML), and data analytics — to better predict and manage risks associated with climate-related events, modernize and streamline the entire claims process, improve fraud detection, and ensure continued coverage for their policyholders.
And the technology delivers, truly transforming the insurance industry and claims processing, in particular.
The Importance of Efficient Claims Processing
Claims processing is a cornerstone of the insurance industry, representing its fundamental promise — providing financial security to policyholders in times of need. The ability to efficiently and accurately process claims not only fulfills this promise but also serves as a primary driver for customer satisfaction and loyalty.
Close to 90% of insurance customers say that claims processing efficiency influences their loyalty to their insurer.Forbes
In an era where consumers demand streamlined and hassle-free experiences, claims processing plays a crucial role in retaining policyholders and attracting new ones. It also directly impacts an insurer’s financial stability and competitive positioning. A well-executed claims process helps carriers and insurers alike strike the right balance between paying legitimate claims promptly and detecting and preventing fraudulent ones, safeguarding profitability and maintaining the trust of policyholders.
However, for many insurers claims processing relies on old technology and manual tasks, making handling claims a cumbersome, paper-driven process that often leads to delays, errors, and high administrative costs. The manual entry of data, document handling, and the need for extensive human intervention in reviewing and processing claims contribute to this inefficiency.
Additionally, the lack of centralized information sharing and communication among various stakeholders — including policyholders, insurance agents, claims adjusters, and backend systems — creates bottlenecks in the process. Data silos and legacy systems that do not easily integrate with modern technologies further hinder the efficient exchange of information.
There’s also the complexity of insurance policies and regulatory requirements. These often mean extensive manual review and verification, which prolongs the claims processing timeline. These inefficiencies result in delayed claim settlements, frustrated policyholders, and increased operational costs for insurance companies.
All these negatively impact customer satisfaction and competitiveness in the market.
Opportunities for AI
The integration of AI — and ML, large language models, analytics, and automation — presents significant opportunities to transform claims processing in the insurance industry, introducing efficiency gains, cost savings, and enhanced customer experiences. Here are just some of the ways modern technology can make a difference:
AI and ML algorithms can play a pivotal role in expediting claims assessments, including first notice of loss (FNOL). These technologies can analyze and categorize vast amounts of data from various sources — including claim documents, images, and historical information — to assess the validity and extent of damage more quickly and accurately. AI can also identify patterns that might indicate fraud, speeding up the detection process, and allowing insurers to focus their attention where it’s most needed. This reduces the processing time, increases accuracy, and enhances the customer’s experience, providing faster claim settlements.
Simplify and Streamline Tasks
AI-driven automation can streamline many manual and repetitive tasks in claims processing, speeding response times and reducing human intervention and errors. It can also manage communications, providing visibility and timely updates to policyholders and claimants about the status of their claims and improving transparency and customer satisfaction. And automating claims can ensure submitted claims adhere to policy guidelines, minimizing the chances of rejections or errors that would otherwise extend the processing timeline.
Gain Data-driven Insights
The potential for data-driven decision making is one of the most substantial advantages AI and ML bring to claims processing. These technologies can predict claim outcomes, identify potential bottlenecks in the process, and suggest optimized workflows for different types of claims. This enables insurers to allocate resources more effectively, speed the processing of straightforward claims, and provide additional attention to more complex cases. Ultimately, AI and automation foster efficiency by improving the allocation of resources, reducing operational costs, and enabling insurers to focus on enhancing the quality of service they provide.
AI can analyze historical data and large language models can process vast amounts of information, empowering insurers to proactively assess and predict risks associated with various factors, including natural disasters, economic fluctuations, or demographic changes. By improving the accuracy of risk prediction, insurers can price policies more competitively, reduce losses, and make data-driven decisions that benefit the company and its policyholders. With AI, insurers can stratify their coverage policies, ensuring premiums are set fairly and allowing them to continue providing coverage even in high-risk areas.
AI plays a significant role in identifying fraudulent claims. By analyzing data and claim patterns and continuously monitoring claims in real time, AI can spot irregularities and detect anomalies — such as unusual claim behavior, inconsistencies, and suspicious trends — that suggest potential fraud and immediately trigger alerts for further investigation. Automation can help verify claim details, cross-referencing them with established fraud indicators, and can even flag claims for closer inspection based on pre-defined rules. This not only helps insurers identify fraudulent claims more quickly, it also prevents unnecessary payouts and minimizes financial impact.
Enhance Customer Service
Generative AI and chatbots can improve customer service by offering personalized and proactive outreach, visibility and transparency, and round-the-clock support. They can swiftly address routine inquiries, provide policy information, and guide customers through the claims process. This not only increases customer satisfaction but also reduces call center activity, which frees up resources to handle more complex tasks — boosting efficiency and cost savings.
”AI and Machine learning (ML) algorithms can facilitate and speed up the claims-handling process without human intervention. ML can help to determine aspects of claims such as image recognition, data unification, data analysis and predict potential costs. ML algorithms typically analyze images and sensors along with the insurer’s historical data, helping to speed up claim settlement.”Forbes
Insurance Industry AI in Action
AI and other advanced analytics are proving to be invaluable tools for insurers. And Hitachi Solutions has been leading the charge when it comes to helping our insurance customers harness the power of their data with AI.
Through Hitachi Solutions advisory services and our Lumada Empower Data Platform, we guided one agricultural insurance provider to modernize their complex data environment, streamline their operations, and simplify the process of capturing and managing their data. The result was a central source of invaluable insights for improved decision making and enhanced policyholder service.
With their new AI-powered data platform, the customer was able to gain real-time insights into various aspects of their operations, such as customer behavior, market trends, and potential risks. For example, with our help, they were able to build an automated alert system. So now when they get a storm notification, they can draw a net around an impact area and instantly send out an alert to impacted policy holders.
This has led to more accurate forecasting and planning, improved resource allocation, overall operational efficiency, and elevated customer service. With Hitachi Solutions’ AI expertise and tools, this insurer has been able to stay ahead of the curve, providing outstanding support and meeting the needs of their members, as well as helping their broader agricultural community.
“While 32% of software and internet technologies have begun investing in AI, only 1.33% of insurance companies have invested in AI.”Deloitte
Hitachi Solutions Brings AI to Life for Insurance Customers
Whether it is to deal with the effects of climate change, combat fraud, or improve efficiency, leading insurers are moving fast to find new and effective strategies to remain profitable and competitive. With our expertise and unique ability to innovate, Hitachi Solutions can help you do the same.
As a premier Microsoft partner with the experience and technical and industry know-how to bring AI to life for insurance companies, Hitachi Solutions is ready to help you explore AI for improved claims management and enhanced customer service. And we are committed to responsible AI development to ensure our solutions are not only effective but also ethically grounded. So, you know we are the trusted and reliable partner you can count on.
Contact us today, our AI experts are on-hand to guide and advise you on your AI journey.