Pierson Ferdinand’s Panensky: Soft market slowing AI underwriting shift

By George Abbott

Aug 21 - (The Insurer) - The current soft cyber market is acting as a brake on insurers’ ability to treat artificial intelligence as a distinct underwriting risk, according to Pierson Ferdinand’s Howard Panensky.

“In a soft cyber market, you can't force things (such as AI exclusions) because there's always other options,” said Panensky, a lawyer specialising in complex coverage matters in cyber and technology.

That reluctance has been evident in the market. Sources told The Insurer that a major U.S. commercial lines carrier recently attempted to introduce AI exclusions across several products but withdrew them following pushback from brokers.

Panensky said he has not yet seen an AI claim cause a declination of coverage. Most carriers define “computer system” broadly enough to include AI, and, so far, he has not seen mainstream applications ask insureds outright whether or not they use AI.

He predicted that formal AI-related application questions will only arrive after the market has concrete loss examples to react to.

“Applications (for AI products) will get much more specialised. Once (AI) claims start coming in, you’ll see pressure on limits, you’ll see pressure on terms, you’ll see pressure on breadth of cover,” said Panensky.

SILENT AI

Panensky said there are clear parallels between how insurers are treating AI and silent cyber. A decade ago, carriers began to realise that cyber incidents could trigger property, business interruption, D&O and other covers that had not been priced with cyber risk in mind. He said insurers have now started to recognise how many different types of policies could be exposed to AI losses.

“AI is another exposure that's out there, and you need to secure it the right way,” Panensky said. “The question is, where are you exposed? And are you comfortable with that loss sitting in that portfolio?”

He added: “If you’re Ben & Jerry’s and use AI to control your freezers, and an employee changes prompts that destroy $60 million of ice cream, is your property policy going to respond? Probably. Is there an AI exclusion? Probably not."

This week, The Insurer is publishing a series of articles about emerging AI risks. Read about the growing frequency and severity of AI incidents, how insurers are considering their AI exposures and recent coverage disputes, and look out the final article on product innovation later this week.