There is rising concern in the London D&O market that exaggerated or misleading statements from companies about their AI capabilities could eventually result in a slew of claims, sources told Insurance Insider.
Capital market hype around AI has led to surging company valuations, which in turn is prompting businesses to make increasingly bullish statements about their AI expertise in a bid to ride the share price wave – so-called “AI washing”.
Sources in the D&O market told this publication that firms making bold statements about their deployment of AI left themselves vulnerable to potential claims against directors if their pronouncements do not stand up to scrutiny.
In the US, the Securities and Exchange Commission (SEC) has already settled charges against companies over false and misleading claims around purported use of AI.
As such, underwriters believe there is a need for more rigorous underwriting and higher pricing for these risks, but in the prevailing soft market conditions there is little evidence that this is taking place.
“We are at a stage of the cycle now where there is a home for any risk,” a senior underwriting source said.
Another underwriter added: “There is no way you could charge additional premiums. You would just be laughed at and replaced in a heartbeat.”
The risk is not confined to companies directly involved in the production or development of AI, but is a cross-sector exposure relevant to any company claiming to exploit the new technology for the benefit of its business model.
Sources said there was an extent to which directors are “damned if they do and damned if they don’t”, as there is also pressure on companies to make the most of innovative emerging technologies.
The phenomenon bears similarities to the pre-existing issue in the D&O market of greenwashing, whereby companies exaggerate their ESG credentials in a bid to attract investors, who increasingly factor ESG profiles into investment decisions.
AI disclosure is the latest emerging risk to be raised by D&O underwriters at a time when rates continue to fall substantially, albeit at a more modest rate of decline than last year.
Sources said rate reductions were still typically trending in the low double digits this year, compared to reductions in excess of 20% last year.
Sentiment in the market remains gloomy, and sources warned that widespread C-suite rhetoric around the need for sensible pricing in D&O was having little impact on the ground.
AI pricing hype
The widespread view that AI will send shockwaves through both business and society has contributed to surging valuations of companies well set to capitalise on the trend.
The poster child for stock market sentiment around AI is Nvidia, a market leader in AI hardware and software. Its share price has more than double this year, bringing its market cap to $2.69tn as of Friday’s close, drawing near to US blue chip firms Microsoft and Apple.
In turn, the rapid evolution of AI technology is also at the forefront of investor appetite.
In its 2023 investor survey, consultancy PwC found that the accelerated adoption of AI is viewed as critical to the value equation, with 61% of investors saying that faster adoption of the technology was very or extremely important.
This was despite the fact that investors identified myriad risks associated with the implementation of AI, ranging from data security and insufficient governance to misinformation and bias.
Given the investor appetite, companies are increasingly touting their AI credentials to attract or retain capital support.
Across various sectors, companies are looking to deploy AI into their workstreams in order to enhance productivity and, in some cases, are making bold statements about the opportunities this offers.
Concern from a D&O claims perspective centres around companies exaggerating the extent to which they are AI-enabled, so as to boost valuations and attract investors.
The SEC has warned that investor and market interest around AI is brewing into a “perfect storm”.
In an April speech, the SEC’s division of enforcement director Gurbir Grewal issued a strongly worded warning to companies around “AI washing”.
“If you are rushing to make claims about using AI in your investment processes to capitalise on growing investor interest, stop,” he said.
“Take a step back, and ask yourselves: do these representations accurately reflect what we are doing or are they simply aspirational?”
The official noted that the SEC had already settled charges against two registered investment advisors for making false and misleading statements about their purported use of AI.
“Neither had the AI abilities that they claimed,” Grewal said.
One underwriting source likened the current hype around AI to the dot-com bubble, in which a bull run on technology stocks in the late 1990s came crashing down in the early 2000s, inflicting substantial losses on the D&O market along the way.
No end to D&O softening
The AI risk is emerging in the backdrop of a D&O market that remains in freefall.
Aon’s latest D&O pricing data shows that pricing decreased for the eighth consecutive quarter in Q1 (although the scale of the Q1 decrease was impacted by a very large communications services client which purchased a two-year programme).
Sources said the clear risks associated with the AI phenomenon were not translating into underwriting action, yet another sign of the ongoing levels of competition in the D&O space.
While some carriers have taken a conservative approach to risks with a perceived AI exposure, this has been capitalised on by other markets struggling to achieve growth targets in a declining market.
Hence, brokers can still find a home for the risks at competitive terms.
There is widespread frustration about the speed with which the market has softened, and the risk of squandering the remediation efforts successfully implemented during 2020 and 2021.
However, despite the class remaining a persistent subject of C-suite rhetoric, rates continue to fall.
With yet another new risk emerging on the horizon, sources warned that conditions were rapidly becoming unsustainable, and the market risked toppling back into a state of unprofitability.
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