AI use by insurance carriers will eventually become ubiquitous – or at least that's the prevalent hypothesis as AI development continues in earnest. Indeed, AI-native operating models will be a necessity to fully embrace AI's potential within the insurance landscape.
But we do not need to get to a fully automated environment to identify a significant opportunity for insurance carriers.
AI patents represent the next great competitive frontier for carriers, and most carriers are completely unprepared for what comes next.
Consider that AI patents are mostly filed by a handful of carriers, predominantly in the P&C space. But an estimate is that just three carriers have filed for 77% of all patents. That is a significant concentration of assets among a small number of carriers.
What does that mean for insurance carriers?
Immediate Implications
For insurance carriers, AI investment is likely driven by at least one of three considerations:
- Reducing cost
- Building on an existing strength
- Addressing a deficiency or weakness
AI investment and development is too early-stage to truly address the third item. Lack of data, an inability to successfully drive adoption, and limited resources would not reward carriers for placing initial AI bets on areas where they are weak. For example, an insurance carrier with 30-day underwriting cycle times is not likely to invest in AI in this space. Instead, they will either focus on process improvements or leveraging an out-of-box solution that can instantly reduce 30-day cycle times into 10-day cycle times.
That leaves cost reduction or developing strengths as the primary motivation for AI investment.
In either situation, the development of a successful AI tool and its inevitable patent is defensive. This means it will help to develop a moat that keeps other insurance carriers at bay.
That may seem intuitive, but the concentration of AI patents among a few carriers tells a different story. Either insurance carriers have not achieved AI results strong enough to justify patents, or the industry has chosen to pursue trade secrets to protect its intellectual property. The trade secret route is unlikely – there is too much movement within the industry, and independent development of AI tools is an inevitability.
This lack of strategy is problematic for carriers – it will only widen the gap between performers if unaddressed.
Long-Term Implications
In the long run, carriers that possess AI patents will inevitably focus first on their strengths to solidify their market position. If a carrier already has strong underwriting discipline and cycle times, leveraging AI will only improve that strength within the market. To be sure, some level of trade secret and proprietary knowledge will make the AI tool more successful for one carrier over another, but a patentable AI tool provides strong defensive capabilities to the insurance carrier.
Imagine an annuity carrier that develops an AI tool that automatically reviews new business applications for annuity exchanges that involve an income rider – typically, this would trigger some enhanced, manual review. If instead an AI tool is designed that performs this specific function and a patent were issued on it, the carrier now has a unique position. Not only can it perform this well, but it can effectively block others from being able to do the same thing.
Now as patent lawyers will tell you, there are ways around this – a carrier could create a different process from the initial patent. But the importance is not that there are other ways to achieve it; it is that one pathway has been closed. And as carriers continue to invest in AI and develop AI-native processes, you could significantly increase the cost of doing business for competitors.
Factor in that the carriers filing patents are the strongest carriers, and strengths are enhancing strengths to create chasms between these carriers and their competitors.
But the value of patent development is not just defensive – it can also be an offensive tool.
A Hidden Financial Goldmine
Carriers should not just look at their patents as ways to protect themselves. While the value of patents may first be their protective nature, there is a significant opportunity for carriers to potentially monetize patents by licensing them to competitors.
Consider that in some instances, carriers have out-innovated insurtech firms. This has spurred insurtech from being a competitor to legacy carriers to being a partner.
Developing patents could be the evolution of this relationship where carriers incubate technical solutions, apply them internally, patent them, and then seek to commercialize them.
Will every patent follow this model? No. In fact, a defensive strategy should be the primary consideration to ensure that an insurance carrier maintains a competitive market position.
But in certain circumstances, owning the right technology is only half of the equation. Consider a carrier that has developed a lead-generation AI tool and can successfully patent and defend it. That tool will only be as useful as the data that is provided to it.
The licensing carrier could license the technology to another carrier (Carrier B), knowing that Carrier B does not have access to the same level of data as the licensing carrier.
The result? Carrier B can obtain significant gains, but not as significant as the licensing carrier will see. We see this today with lead generation models, where generic data still provides a significant lift in cross-selling and up-selling efforts, but not as strong as models that leverage proprietary data. But for Carrier B, who may be a laggard in the lead generation area, they have an opportunity to significantly improve their capability's maturity. This coopetition model allows all carriers to compete but provides the lion's share of rewards to the most innovative carrier.
What Carriers Need To Do To Unlock This Value
Insurance carriers that understand the value of these patents need to take concrete steps to be leaders in this space.
1. Identify Strengths: Patents require disclosure of the underlying model. The best patents will be areas where simply having the AI tool is not enough to win. Areas where the insurance carrier has operational expertise, unique data, or capabilities that cannot be easily replicated are good candidates for patents. This ensures that a carrier protects its competitive advantage while also having the capability to leverage its technology for monetization.
2. Develop A Patent Strategy: Not everything should be patented – some things may be internal trade secrets or rely on other protections. And most importantly, not everything can be patented. Insurance carriers should form teams that combine internal and external counsel, operational expertise, and technical leaders to evaluate which options are most likely to be legally defensible and impactful to the organization.
3. Design Commercialization Capabilities: Just as important to the patent strategy is the ability to commercialize the technology itself. Carriers need two capabilities. The first is the ability to implement the technology itself within the carrier successfully and recognize a benefit. That provides proof of concept and reaffirms what makes the tool successful. The second is to develop an incubator that can pursue partnerships with other carriers akin to how insurtech works with legacy carriers.
4. Adopt An Offensive Posture: Insurance carriers need to be aggressive with reviewing the patent landscape. When insurance carriers file patents, it provides a clear perspective on where other carriers are placing their bets. For example, a large number of patents on claims payments probably means a carrier believes they can differentiate in their claims experience. Carriers should review patent filings and prepare to be litigious, particularly mid-sized and smaller carriers. Insurance carriers cannot allow the competition to simply move unimpeded. If they do, they risk being pushed out of the competition.
AI patents provide a significant opportunity for insurance carriers to achieve strong defensive positions, with the potential for monetization in the future. But most importantly, as insurance carriers transition to AI-native operating models, controlling patents secures competitive positioning while successfully blocking others. The carriers that are able to develop the most effective strategies and execute will place themselves in a strong position as carriers begin operating in AI-native environments.
