Investment banking and financial services firm Goldman Sachs has released an analysis report exploring how artificial intelligence will impact the property and casualty (P&C) insurance industry.
Goldman Sachs said in the report that it has developed “a preliminary framework for assessing the impact of artificial intelligence on property and casualty insurance stocks.”
The company said the framework combines its own assessment of potential revenue and expense risks and opportunities with a review of the company’s own publicly talked about AI strategy and progress.
Goldman Sachs explained that its assessment took into account operational efficiency and competitive positioning, while also analyzing how insurers discuss the technology. The bank wrote that its framework combines “an analysis of revenue/expenditure risks/opportunities with an analysis of each company’s publicly discussed AI strategy and progress.”
Commercial insurers may be among the strongest in the property and casualty industry, Goldman Sachs said in a review of different parts of the market. The firm said it believes “commercial insurers are best positioned in the property and casualty insurance space because they have strong revenue protection, some cost-saving opportunities and generally strong technology awareness.” Goldman Sachs believes these companies benefit from existing market structures that may be difficult for new entrants to replicate.
The bank noted that commercial insurance underwriting is typically a capital-intensive activity that operates within a strict regulatory framework. It also highlights that established insurers have significant proprietary data and long-term market relationships. Incumbents have “significant relationships and proprietary data (claims, pricing, etc.)” that could help maintain their position as the technology evolves, Goldman Sachs said.
Distribution dynamics are also highlighted in the report. Goldman Sachs said it expects the broker channel to remain dominant in commercial insurance, saying “distribution is likely to continue to be dominated by brokerages with strong relationships with insurers.” Early attempts by technology-focused rivals to disrupt the market by offering lower prices have not always been successful, the firm added. As Goldman Sachs notes, “Past technology-driven efforts to lower prices have often resulted in adverse selection of new competitors.”
The company also believes that cost savings from AI are likely to last longer in commercial insurance than in consumer-focused product lines. Goldman Sachs said it believes “AI-related cost savings are likely to be retained longer than in consumer insurance.”
When it comes to insurance brokers, Goldman Sachs said the large brokerage groups it covers are not significantly exposed to markets where AI revenue disruption is expected to be most pronounced. However, it acknowledges that there are some risks in certain areas of distribution. The report noted that “insurance distribution may face some revenue risk in less complex brokerage operations or less complex advisory operations.”
Goldman Sachs, meanwhile, sees brokers as potentially important beneficiaries of AI’s cost efficiencies. The company noted that these companies often incur significant employee compensation expenses in positions that are not directly related to revenue generation. As a result, Goldman Sachs believes that “with the largest non-revenue-generating employee compensation cost base in property and casualty insurance, brokers have the most meaningful opportunity to drive expense efficiencies.”
The report also noted that the brokerages analyzed appear to face relatively limited revenue risks in the short to medium term. Goldman attributes this to their limited exposure to more commoditized insurance products, noting that brokers in its coverage have “minimal exposure to relatively commoditized products such as mass market personal auto/home insurance or micro-small business insurance.”
Discussing the reinsurance industry, Goldman Sachs said prospects for AI-driven change may be more modest. Reinsurers can play a role in developing new forms of insurance related to digital infrastructure risks while continuing to rely on established global market positions, the bank wrote.
However, Goldman Sachs also believes that reinsurers may gain fewer operational savings from AI than other areas. The company said this is partly because their fee structure differs from major insurers and brokers, with compensation accounting for a smaller percentage of operating costs.
The report notes that several reinsurers have spoken publicly about potential AI use cases. Goldman Sachs said some have discussed applications aimed at “increasing submission volume and underwriting efficiency.”
Nonetheless, the firm also reports that reinsurers themselves have indicated that the primary insurance markets may ultimately benefit more from these efficiency gains, with some stating that they “expect primary underwriters to be the main beneficiaries of AI efficiency gains.”
Goldman Sachs concluded that AI is likely to have a different impact on each part of the insurance value chain, depending on factors such as regulatory risk, operating structure and distribution model. The company said its framework is designed to provide a structured way to assess these differences as insurers continue to incorporate artificial intelligence into their strategies and operations.
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