2018 Most Dangerous Emerging Risks

AI as a Risk Multiplier

AI has potential, but it comes with risks. Mitigating these risks helps insurers and insureds alike, enabling advances in almost every field. 
By: | April 9, 2018 • 7 min read

Viewers of even one hour of commercial television will likely see pharmaceutical commercials promising to cure eczema, migraine headaches or pattern baldness, among other things. But as fast as viewers can say, ‘ask your doctor if this is right for you,’ on comes a scary litany of associated risks.

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Some industry insiders would say that it’s the same scenario with artificial intelligence (AI) — lots of benefits but with every benefit comes a new risk or two, making AI a risk multiplier across many industries, insurance included.

Artificial intelligence is already surrounding us. More and more, common — and evolving — intelligent devices at home, work, school and play are woven into the fabric of our lives. Some we recognize. Some we don’t. But either way, it’s here; it’s not going away. Nor should it. With the potential to do many things better, quicker, cheaper and safer, AI is a force to be embraced.

For example, AI can perform fraud detection much more robustly than humans can. Look at medical billing fraud as an example.

Thompson (Tom) Mackey, risk management consultant, EPIC Insurance Brokers and Consultants, said the auditing of Medicare cases with an eye toward fraud detection is 8 percent successful when conducted by humans. Using AI, the detection rate increases to 80 percent.

Instead of fearing AI, experts say, it’s better to identify risks and work to mitigate them.

Adam Cottini, managing director, cyber liability practice; area senior vice president, Gallagher

Adam Cottini, managing director, cyber liability practice and area senior vice president, Gallagher, New York City, where he is responsible for the overall direction of the cyber liability practice, said “a shift in liability” is an AI risk that should be on the radar of insurers and insureds.

“Technology allows machine learning in things such as robotics, self-driving cars, drones and other items. These things are deployed in a variety of industries. What happens if there is a massive failure? When something goes wrong you need to assess the loss and determine who is liable.”

Despite the dangers, Cottini feels that AI offers a great opportunity to increase safety and decrease injuries and losses.

“The predictive algorithms have given AI an edge over humans. There is a small percentage of decisions where a human has an advantage. For most decisions, in driving or other areas, the machine is going to perform at a higher level.

“If you are a risk manager of a vehicle fleet, you need to look at the cost-benefit of the automated technology. But you also consider how AI is helpful. It can quickly find and diagnose problems. It’s the best of both worlds — it does what it can, and if need be, it also involves a human,” he said.

Take, for example, self-driving cars. “What is the safety mechanism?” Cottini asked. “These devices are all connected. How do they deal with a failure at the command center? What is the back-up plan? Can they communicate locally?”

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In this scenario, Cottini said liability is likely to shift from auto policies to product liability policies; from drivers to product manufacturers.

Mackey specializes in the design and implementation of risk management programs for clients. Mackey identified a range of internet-related risks that fall under the umbrella of cyber security and also named business interruption as an exposure. But, the biggest risk, Mackey said, is the risk of the unknown.

“AI is a newer risk, but it’s also a game changer. It changes every day,” Mackey said. “With fire or property or anything else, the risks are well known. There are risks that are inherent in AI that we don’t know about yet. In my mind, the main risk associated with AI is basically the uncertainty that comes with it. It’s a brand-new frontier.”

“Liability is likely to shift from auto policies to product liability policies; from drivers to product manufacturers.” — Adam Cottini, managing director, cyber liability practice, Gallagher

Kelly Geary, Integro’s U.S. cyber practice leader and managing principal, also said AI is a risk multiplier in the form of increased cybercrime.

“Cybercrime is already at pandemic levels,” Geary said. “The ROI for a cybercriminal is 1,000-plus, and the risk of getting caught is low. AI makes it easier for these criminals to perpetrate crimes en masse.”

Also high on Geary’s radar is what she called a shift from financial risk to personal risk: “AI can now threaten people personally,” she said. “Lives, health and health care are at risk. People with medical devices such as pacemakers could be affected. Criminals can control heating and cooling systems in a hospital ICU. The more connected we become, the more at risk we are,” Geary said.

Manufacturing companies, Mackey said, are becoming ultra-lean, and therefore leveraging AI through machine learning and automation.

If a machine breaks down, it could cause significant business interruption losses and contingent losses. Also, as machines work and learn, they are collecting data. A desire for that data could make manufacturers vulnerable to a cyberattack from a competitor, a bad actor or a foreign entity.

Mitigating the Risk

When it comes to cyber security, AI is a double-edged sword. The same technology that can cost insurers and insureds millions of dollars, enable theft of trade secrets, weaken reputational status and even jeopardize personal safety can help organizations combat the constantly evolving bag of tricks used by cyber criminals.

Protecting your business from cybercrime requires a cultural shift, said Geary. “Someone at the top has to prioritize awareness and solutions and make sure they permeate through the entire organization.”

Kelly Geary, U.S. cyber practice leader and managing principal, Integro

Cybercrime was previously the specialty of the “freelancer,” someone toiling away nights in a clandestine garage. But that’s shifted in the last 5 to 10 years, Geary said. Today’s cyber criminals are sophisticated, organized crime entities with call centers and often unwitting employees doing their dirty work.

“The motivation behind cybercrime is high,” Geary said. “It’s a mature and profitable business model. Organizations need to view this risk like a competitor and protect themselves vigorously.”

To get started, Geary said “organizations should ask questions that include, ‘What is important to us and what is our risk tolerance?’”

Armed with that information, organizations can create tailored, company-specific safeguards. “If leveraged properly and applied for a specific industry, AI can make it more difficult for cyber criminals to prevail,” she said.

Proactive steps also can help protect your organization from regulatory or civil litigation related to a cyberattack, such as the information breeches that plagued national retailers and a credit-rating organization.

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Mackey, too, is a proponent of actively protecting one’s interests.  One very effective way to help combat cybercrime, especially practices such as spear-phishing and social engineering, he said, is to educate human workers to know the signs of these crimes and put in place safeguards and best practices for transferring money and information.

“Hold a mock spear-phishing campaign, during which employees are sent emails and have to decide whether to open them,” he said. Many large companies do this and successfully improve their employees knowledge and “don’t-open rate” for suspicious emails.

Employee training is key. In fact, a Poneman study found that “businesses that roll out training programs see improvements of between 26 percent and 99 percent in their phishing email click rates, with an average improvement of 64 percent.”

“Too many companies are not fighting fire with fire. They are responding in traditional ways to an increasingly sophisticated problem.” — Kelly Geary, U.S. cyber practice leader and managing principal, Integro

When facing changing liability scenarios, insurers and insureds can protect themselves by being very thorough in contract language. Choose your words carefully, because those words determine liability.

The same holds true for unknown risks. “I’d offer the same advice I do on any new risk,” Mackey said. “Pay ultra-close attention to the language. If there is a failure, how does the policy language affect you?”

“Too many companies are not fighting fire with fire,” Geary said. “They are responding in traditional ways to an increasingly sophisticated problem.” &

Mercedes Ott is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

As a professor of business, Jack Hampton knows firsthand the positive impact education has on risk managers as they tackle growing risks.
By: | April 9, 2018 • 4 min read

R&I: Who is your mentor and why?

Ellen Thrower, president (retired), The College of Insurance, introduced me to the importance of insurance as a component of risk management. Further, she encouraged me to explore strategic and operational risk as foundation topics shaping the role of the modern risk manager.

Chris Mandel, former president of RIMS and Risk Manager of the Year, introduced me to the emerging area of enterprise risk management. He helped me recognize the need to align hazard, strategic, operational and financial risk into a single framework. He gave me the perspective of ERM in a high-tech environment, using USAA as a model program that later won an excellence award for innovation.

Bob Morrell, founder and former CEO of Riskonnect, showed me how technology could be applied to solving serious risk management and governance problems. He created a platform that made some of my ideas practical and extended them into a highly-successful enterprise that served risk and governance management needs of major corporations.

R&I: How did you come to work in this industry?

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From a background in corporate finance and commercial banking, I accepted the position of provost of The College of Insurance. Recognizing my limited prior knowledge in the field, I became a student of insurance and risk management leading to authorship of books on hazard and financial risk. This led to industry consulting, as well as to the development of graduate-level courses and concentrations in MBA programs.

R&I: What was your first job?

The provost position was the first job I had in the industry, after serving as dean of the Seton Hall University School of Business and founding The Princeton Consulting Group. Earlier positions were in business development with Marine Transport Lines, consulting in commercial banking and college professorships.

R&I: What have you accomplished that you are proudest of?

Creating a risk management concentration in the MBA program at Saint Peter’s, co-founding the Russian Risk Management Society (RUSRISK), and writing “Fundamentals of Enterprise Risk Management” and the “AMA Handbook of Financial Risk Management.”

A few years ago, I expanded into risk management in higher education. From 2017 into 2018, Rowman and Littlefield published my four books that address risks facing colleges and universities, professors, students and parents.

Jack Hampton, Professor of Business, St. Peter’s University

R&I: What is your favorite book or movie?

The Godfather. I see it as a story of managing risk, even as the behavior of its leading characters create risk for others.

R&I: What is your favorite drink?

Jameson’s Irish whiskey. Mixed with a little ice, it is a serious rival for Johnny Walker Gold scotch and Jack Daniel’s Tennessee whiskey.

R&I: What is the most unusual/interesting place you have ever visited?

Mount Etna, Taormina, and Agrigento, Sicily. I actually supervised an MBA program in Siracusa and learned about risk from a new perspective.

R&I: What is the riskiest activity you ever engaged in?

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Army Airborne training and jumping out of an airplane. Fortunately, I never had to do it in combat even though I served in Vietnam.

R&I: If the world has a modern hero, who is it and why?

George C. Marshall, one of the most decorated military leaders in American history, architect of the economic recovery program for Europe after World War II, and recipient of the 1953 Nobel Peace Prize. For Marshall, it was not just about winning the war. It was also about winning the peace.

R&I: What about this work do you find the most fulfilling or rewarding?

Sharing lessons with colleagues and students by writing, publishing and teaching. A professor with a knowledge of risk management does not only share lessons. The professor is also a student when MBA candidates talk about the risks they manage every day.

R&I: What is the risk management community doing right?

Sensitizing for-profit, nonprofit and governmental agencies to the exposures and complexities facing their organizations. Sometimes we focus too much on strategies that sound good but do not withstand closer examination. Risk managers help organizations make better decisions.

R&I: What could the risk management community be doing a better job of?

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Developing executive training programs to help risk managers assume C-suite positions in organizations. Insurance may be a good place to start but so is an MBA degree. The Risk and Insurance Management Society recognizes the importance of a wide range of risk knowledge. Colleges and universities need to catch up with RIMS.

R&I: What emerging commercial risk most concerns you?

Cyber risk and its impact on hazard, operational and financial strategies. A terrorist can take down a building. A cyber-criminal can take down much more.

R&I: What does your family think you do?

My family members think I’m a professor. They do not seem to be too interested in my views on risk management.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]