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The real estate market is in a tumultuous state, and the increasing influence of AI is affecting underwriting and claims management

AS THOUGH the tumultuous real estate market were not enough to contend with, the explosion of what AI can and cannot do is having a major impact on underwriting risk and claims management in the real estate agencies errors and omissions market. Skyward Specialty Insurance’s John Burkhart, president, specialty lines, and Jim Mormile, senior vice president, professional liability, have a front row seat for how underwriting of the real estate sector is coming up against the latest AI technology – which seems to evolve weekly, daily, even hour by hour. From a risk perspective, Burkhart said he is seeing a “substantive impact on commercial” real estate holdings in the current rate environment. Meanwhile, with residential real estate, “we certainly haven’t seen demand wane quite as much because supply has been underrepresented relative to demand. So I think we’re going to continue to see the transaction volumes decrease,” said Burkhart.

Skyward Specialty (Nasdaq: SKWD) is a rapidly growing and innovative specialty insurance company, delivering commercial property and casualty products and solutions on a non-admitted and admitted basis. The company focuses its business on markets that are underserved, dislocated, and/or where standard insurance coverage is insufficient to meet the needs of businesses. Skyward Specialty customers typically require highly specialized, customized underwriting solutions and claims capabilities. The company develops and delivers tailored insurance products and services for its chosen niche markets. Skyward operates through eight underwriting divisions: accident & health, captives, global property & agriculture, industry solutions, professional lines, programs, surety, and transactional E&S.

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“We’re at the very edge of getting to a deeper utilization [of AI]. But we’re also extremely connected to the limitations and the pitfalls”

John Burkhart, Skyward Specialty Insurance

Mormile noted that rising interest rates normally “dampen the demand on real estate.” There has been a lack of transactions in that sector, and demand has been decreasing this summer. The Skyward underwriting team is mindful of managing this when working with their agency partners: “How do we make sure we are underwriting those risks appropriately?” Mormile asked. On the claims side, one of the two more common claims that Mormile is seeing “has to deal with … the real estate agency acting as both the seller and the buyer, so it’s definitely something we’re mindful of,” he said. From an underwriting perspective, his team is striving to keep track of when these agencies are acting as a dual agent in those transactions. The second claim he is seeing a lot of is failure to disclose, which is prevalent in the real estate agent portfolio.

For Burkhart, it’s all about the company you keep. From both an underwriting perspective and risk-selection standpoint, Skyward is looking for the right partner with the right experience, good ethics, and healthy financial modeling. “Financial difficulties within firms can be one of the items that lead to behaviors that we’re trying to avoid in terms of risk-taking,” said Burkhart. He and Mormile look deep in the underwriting criteria and make it known to a client when they see “shortfalls within their contract language, or shortfalls within their training curriculum,” and so on. They also ask whether there is a willingness to change once these have been pointed out.

“While we haven’t seen any claims coming out of virtual, we can see real potential out there,” Mormile said. For example, while the virtual world allows more prospective buyers to “view” a property, it also creates the potential for claim activity regarding the actual accuracy of those virtual worlds. Meanwhile, any technology talk today has to include AI, which Burkhart says presents a lot of opportunity and risk. The insurance industry has invested in image recognition and how to take unstructured data and make it structured, along with machine learning. “That presents a great opportunity for analysis of content and summarization of content,” he said. But there are limits to language models, and AI may not be great at generating original ideas and text ingestion, nor is it great at math, “which I think is a commonly misunderstood element,” Burkhart said. “They’re not actually doing the systemic math behind it.”

Those limitations can be important for an insurance provider because there may be difficulty seeing the base data behind it. “[If] we can’t verify the source data, living in a regulated world, I can’t use that [data] as a dependency for an underwriting decision, because I cannot replicate that point to the source data,” he said. While cautious, Mormile anticipates that a future AI iteration could be used for claims predictions and even prevention, as a type of “avoidance tool, to be better prepared,” he said. This could set AI up as a risk-management tool.

Technology is allowing work to be done more quickly – but not always better. One area in which Mormile is starting to see some technological errors regarding data management is from real estate agents. “Computers only take ones and zeros. Somebody has to input those ones and zeroes. And so there’s still human error regarding a lot of technology,” Mormile said. “If you’re not inputting the right data, then technology can’t help you manage the process.” For Mormile, emerging technology opens up the possibility of broadening real estate agents’ prospects. But that’s not without its risks.

He believes that brokers and trading agents look to Skyward for its experience and expertise, plus speed and accuracy of decision-making. Mormile agreed. “Our value proposition is our experience. We can’t speak to that enough. The level of experience of the underwriting staff handling transactions at a frontline level is well beyond anything that I’ve ever competed against.”

The pros, and perils, of AI technology

Published 04 Dec 2023

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About us

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“Our value proposition is our experience. We can’t speak to that enough”

Jim Mormile, Skyward Specialty Insurance

Mormile noted that another important aspect to consider is legal and regulatory compliance.

For all of the change already washing over the industry, and more waves yet to come, Skyward is ready to handle the future with a deft hand. “Our proposition is fairly clear in that we present ourselves as a true specialist insurance market,” said Burkhart. “We only participate in parts of the market where we believe we can rule our niche. We hire deep levels of underwriting expertise at the point of sale.”

Skyward Specialty Insurance’s value-added proposition

Source: Forbes magazine

$407 billion: Estimated AI market size by 2027 21%: Estimated increase of AI as part of America’s GDP by 2030 Over 70%: Percentage of consumers concerned about misinformation on AI 1 million: number of users ChatGPT had within its first five days One in 10: Proportion of cars that will be self-driving by 2030 65%: Percentage of businesses expecting AI to increase productivity

THE IMPACT OF AI ON LIFE IN THE US

2022: $351.9 million 2023: $392.44 million 2024: $437.85 million 2025: $488.06 million 2026: $544.29 million 2027: $606.99 million 2028: $676.92 million 2029: $754.9 million 2030: $841.86 million 2031: $938.85 million 2032: $1,047 billion

(all figures USD)

Source: Precedence Research

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