The landscape of insurance is changing rapidly as artificial intelligence (AI) technology weaves itself into the very fabric of claims handling. This evolution has sparked both optimism and concern across the industry. While AI promises efficiency gains that could benefit both insurers and policyholders, it also raises ethical questions about fairness, transparency, and human oversight.

Historically, technology has sometimes been weaponized to reduce claim payouts and maximize profits at the expense of policyholders. As early as the 1990s, IT applications supported insurance companies to streamline claims processing - but not without serious ethical concerns. As AI takes center stage in today's insurance industry, watchdogs and regulators are advocating for explainability and transparency, hoping to prevent misuse.

This article delves into the historical context, current legal battles, and the moral obligations of insurance providers in this era of automation. At the core of this discussion is the industry's fundamental duty of good faith and fair dealing toward policyholders.

The Rise of AI in Insurance: A Double-Edged Sword

AI’s arrival in insurance offers undeniable benefits. Tasks such as risk assessment, claims management, and even customer service are increasingly supported by algorithms capable of analyzing vast amounts of data in seconds. For policyholders, this could mean quicker resolutions, more accurate risk-based pricing, and a more efficient insurance experience. Insurers, on the other hand, see opportunities to reduce operational costs, minimize human error, and streamline labor-intensive processes.

However, AI also holds the potential for misuse, especially when it comes to claims denials. One of the primary concerns is that AI may encourage insurers to prioritize cost-cutting over policyholders' rights. In fact, cases reveal how algorithms have led to mass denials of medical claims, often without sufficient human intervention. The specter of bias in these automated decisions is looming larger, spurring a conversation around fairness and ethics in insurance.

The Duty of Good Faith in the Age of AI

The relationship between insurers and policyholders hinges on trust, often codified as the duty of good faith and fair dealing. In essence, insurers are required to act with "decency and humanity" when handling claims, a mandate that extends beyond the basic expectations of policy coverage.

This principle was reinforced by the California Supreme Court in the late 1970s, which argued that insurers hold a quasi-fiduciary duty to serve the public's interest and not merely their own financial objectives. Insurers, the court argued, must consider the well-being of their policyholders and respect the trust placed in them. This duty demands that insurers refrain from exploiting technical tools to the detriment of the policyholder.

Yet as algorithms increasingly make—or strongly influence—claims decisions, the ethical implications of these tools become harder to ignore. Algorithms may be efficient, but they are inherently impersonal. The subjective elements of a claim—such as an individual's medical or financial circumstances—may be lost in a data-driven decision process, leading to outcomes that might lack empathy or fairness.

Transparency and Accountability: Ensuring Fairness in AI Decisions

Regulatory bodies are beginning to take notice of the risks posed by opaque AI systems in the insurance sector. The National Association of Insurance Commissioners (NAIC), for example, has highlighted concerns over "lack of explainability" in AI-based claims tools. As these tools become more complex, their inner workings become less transparent, making it difficult for policyholders—and even insurers themselves—to understand the rationale behind certain decisions.

The concept of "explainability" is pivotal here. If an algorithm denies a claim, it must be able to provide a clear and comprehensible explanation for its decision. This is not only essential for consumer trust but also a legal safeguard. Policyholders have the right to know why their claims are denied and to challenge those decisions if they believe the denial was unjust.

In addition, there is growing pressure for insurance companies to establish internal oversight mechanisms that ensure fairness in AI-driven claims processing. Companies must commit to regular audits of their algorithms, ensuring that the outputs align with ethical standards and do not discriminate against specific groups of policyholders.

The Path Forward: Balancing Innovation with Integrity

AI is in insurance companies to stay, and its role in the insurance industry will only grow. The challenge lies in harnessing its power responsibly. Insurance companies stand at a crossroads, with an opportunity to use AI not just to cut costs but to enhance the policyholder experience.

For insurers, this means adopting a holistic approach to AI governance, one that includes accountability, transparency, and a steadfast commitment to ethical principles. Regulators and policymakers have an important role to play in shaping these standards, ensuring that insurance companies remain true to their obligations.

Above all, the insurance industry must remember the lessons of history. Technology can be a force for good, but it must be tempered by a commitment to fairness and humanity. As AI continues to reshape claims handling, this principle should remain at the forefront, guiding insurers to honor their duty of good faith in every claim they process.

References

• National Association of Insurance Commissioners. "NAIC Model Bulletin: Use of Artificial Intelligence Systems by Insurers."