Why R&D in insurance is essential for business
A version of this article originally appeared as partner content sponsored by FM in the Financial Times.
It’s accepted that innovation is fundamental to modern businesses. But for insurers, research and development is especially critical to improve their ability to anticipate risk and mitigate potential damage and losses.
Insurance is, at its core, the art of evaluating and mitigating risk. As risks evolve, so too must the strategies to manage them. For chief risk officers, this means navigating an ever-shifting landscape of emerging challenges: global conflicts, cybercrime, trade disputes, technological change and extreme weather events. Against the backdrop of growing risks, the benefits of investing in efficient monitoring for better mitigation and protection are compelling. A 2024 report by the US Chamber of Commerce estimates that each $1 of resiliency investment can reduce property damage by $6, suggesting a potential return on investment of 600 per cent for disaster preparation in the insurance industry.
R&D can help to identify emerging hazards with greater speed and improve loss prevention measures. More accurate quantitative analysis is exploiting a wealth of data to provide a statistical view of risk, and more informed qualitative analysis can add depth from empirical evidence and real-life scenario stress testing.
“The risk prevention sector must continuously adapt to the evolving world,” says Lucien Hoffmann, Science Director at the Luxembourg Institute of Science and Technology (LIST), who leads a team that studies emerging threats. LIST recently signed a partnership with global insurer FM to monitor cybercrime and climate change. “Knowledge must be constantly updated, and that is only possible through strong investment in research,” Hoffmann explains. “The most resilient insurers will be those that treat research and innovation as core strategic pillars, not optional extras.”
There appears to be an appetite among enterprises for greater partnership with insurers. A 2023 survey of businesses by the Geneva Association, an international association of insurance companies, found that 86 per cent of insurance customers in China, 73 per cent in Germany and 69 per cent in the US would be interested in further loss prevention services.
Loss leaders can make big gains
FM devotes significant capital to research, supported by observations accrued from tens of thousands of regular site visits. This approach provides a more accurate, detailed picture of risk variables. “We think we’ve conducted more research and science into how losses occur, whether that’s from fire and explosions or from natural hazards, than anyone else in the world,” says Pentti Tofte, Senior Vice President, Innovation, Analytics and AI at FM. “So we understand how losses occur, the characteristics that lead to losses and how to prevent them.”
It’s no surprise to find artificial intelligence playing an increasing role in the industry. In a June 2024 survey of 200 US insurance executives conducted by the Deloitte Center of Financial Services, 76 per cent of respondents said their organization had already implemented generative AI capabilities in one or more business functions. Insurers have huge repositories of loss information, and AI now offers the capacity to make valuable extrapolations from the mass of data.
AI tools for risk
FM has developed a suite of bespoke AI tools to spot risk points. One identifies the locations most likely to see a large loss, which helps clients optimize their spending. Modelled estimates around the impact of these new AI tools suggested that, had they been available five years ago, risk improvements would have been 2.5 times as effective, resulting in an additional $2 billion in reduced losses.
Artificial intelligence also has its issues. The Kennedys 2025 Global Forecast report revealed that AI adoption now topped insurers’ evolving risk list, just ahead of cyberattacks. Guardrails are clearly needed. “We apply a stringent vetting process to the data scientists we employ,” says Tofte. “We expect the same level of rigor, when they develop AI models, as we do from our engineering teams. Our rule with AI is ‘human in the loop’ – human oversight rather than blind trust.”
One area that demands increasing scrutiny is Industry 4.0 and the factory of the future. “Technologies are arriving at such speed that it’s difficult for clients to appreciate the risks,” says Dr Roland Schaefer, Research Director for Automation and Cybersecurity, FM. “If AI is making decisions about things such as maintenance or cooling, what happens if the model’s wrong or incomplete?”
Whether with AI, cybercrime or extreme weather, the job of monitoring, evaluating and producing solutions must keep pace. More funding and better collaboration is the only credible response. “Dedicating resources to research and innovation in risk prevention is critically important,” says LIST’s Hoffmann. “Not just for improving efficiency and profitability, but also for societal resilience, regulatory compliance and long-term sustainability.”
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