AI can reduce loss ratios by 3%: BCG

By Aidan Gregory

April 11 - (The Insurer) - P&C insurers that embed AI across their workflows can unlock material competitive advantages including reducing loss ratios by around 3%, a report by U.S. management consultant Boston Consulting Group said on Friday.

BCG said its AI work with U.S. and UK P&C commercial insurers has found that by adopting AI technologies in manual underwriting for complex lines of business, insurers can improve efficiency returns by as much as 36%.

“We do believe there's a lot of value for insurance in AI and Gen AI,” said Jürgen Eckel, managing director and partner at BCG X, in an interview with The Insurer. “It does require a very different approach to what we've seen largely across 2024, which is grassroots internal experimentation.”

BCG said the 3% improvement in loss ratios can be achieved via the enhanced use of data and the ability of AI to factor unstructured and previously inaccessible information into underwriting decisions.

“Making that data available to underwriters and making it available to underwriting algorithms is a huge unlock for better underwriting quality,” said Eckel. “That's the quality and loss ratio reduction uplift lever.”

Due to the complex and bespoke nature of the risks underwritten by insurers, underwriting processes will never be fully automated, but AI can play a critical role in augmenting human decision making and underwriting results.

“I've seen with our clients a very measured approach in terms of setting up responsibly and being very prudent about measuring risks and controlling risks,” said Eckel.

“This is not a case of where we see dramatic changes to fully automated underwriting models at this point,” added Eckel. “We still have people taking decisions.”

Based on BCG’s work involving more than 20,000 insurance service and operations employees, the report also found that AI can tools such as knowledge assistants can help generate productivity gains in excess of 30%.

“AI will reinvent many functions in the insurance industry,” said BCG in the report. “AI does not replace any existing strategy. Rather, the technology supercharges current efforts, empowering insurers to accelerate progress.”