AI Benefits for Insurers Will Be Gradual, Moody's Says, Citing New Risks

Moody's Ratings published a report Tuesday on artificial intelligence in the insurance sector. The conclusion: AI will improve efficiency over time, but the payoff will be incremental, not sudden, and it comes with a fresh set of operational and regulatory risks.

Insurers are already using AI in underwriting, pricing, claims management, and capital reserving analysis, Moody's said. The firm expects wider adoption to cut operating costs and boost productivity, particularly for property and casualty insurers. Retail P&C distribution – high transaction volumes, routine processes, standardised products – is the area most likely to see near-term disruption, according to the report.

For life insurers, the impact will be smaller. Moody's cited the complexity of life products, longer-duration liabilities, and stricter conduct rules. Insurers have generally been cautious about using AI for core underwriting and reserving decisions, the firm noted.

One wrinkle: insurers in competitive markets may not keep all the financial gains. Some of the efficiency savings will flow to customers through lower prices, Moody's said, especially where products are similar and switching is easy. Motor insurance was flagged as a sector where AI could pressure profit margins.

Moody's also expects AI to widen performance gaps between insurers. Companies with strong data infrastructure, financial resources, and the ability to redesign processes around AI are likely to pull ahead. Large insurers can invest in technology and specialist talent. Smaller insurers may benefit from having fewer legacy systems and more flexibility. Mid-sized insurers face the toughest position – fewer resources than the big players, but more complexity than the small ones, Moody's said.

Insurers that depend on long-term customer relationships and tailored services, including life insurers, may be better placed to retain productivity gains than businesses in standardised markets, the report added.

For now, most insurers are using AI to improve existing processes rather than replace human judgment. Moody's said AI is helping with compliance, risk models, and personalised products. Human oversight remains central where legal, regulatory, or customer trust considerations apply.

The risks are real and several. Implementing AI requires significant upfront investment in technology, data infrastructure, computing capacity, governance, and specialist staff. Ongoing costs include model training, software licences, and computing resources. Many insurers will need to run AI alongside existing systems before efficiency gains materialise, Moody's said.

Greater AI use also increases operational, regulatory, and litigation risks. AI models can lack transparency, introduce algorithmic bias, and depend on third-party data and technology providers, Moody's noted. While AI may reduce some manual-process errors, failures involving automated decisions could draw more attention from regulators and consumers, particularly when large numbers of policyholders are affected.

Cybersecurity is another concern. AI can improve the identification of software vulnerabilities, but it also increases exposure to cyber threats, data loss, and fraud. Greater reliance on cloud infrastructure, external AI models, and interconnected data systems could amplify the impact of incidents at technology providers, Moody's said.

Data quality, privacy, and security were flagged as well. Inaccurate or incomplete data can produce biased or unreliable AI outputs. Large-scale use of personal information creates challenges in meeting privacy and data protection requirements.

Moody's also warned that insurers could become increasingly dependent on a small number of AI and cloud technology providers. Insurers have experience managing relationships with technology suppliers and protecting proprietary data, the firm said. But growing reliance on external AI services could create additional operational risks and attract more regulatory attention as adoption spreads.

The report lands as Moody's itself, rated Alpha Score 63/100 in the Financials sector, faces the same questions it raised for the industry it covers.