The insurance industry is one of the areas which have been highly disrupted by the emergence of artificial intelligence. For example, the underwriting process, which involves assessing the risk of insurance applicants and determining whether to provide insurance, has been predicted to become significantly faster as machine and deep learning models, powered by a dramatic increase in consumer data, facilitate the automation of the process.

Question 1

Discuss how the use of artificial intelligence in the underwriting process could affect the relationship between the insurer and the insurance applicants. Your explanation must refer to the following:

incomplete contracts

asymmetric information

Question 2

Consider Gi-hun who is a graduate underwriter in a major insurance firm. Recently, he has been hearing increasingly often about rival insurance firms automating their underwriting process. He has also heard a rumour that the management of his firm is looking to reduce the size of his underwriting team and create_a large team of data scientists with expertise in artificial intelligence, who will develop the automated underwriting process. Discuss how this recent information about the insurance industry and Gi-hun's firm would affect his incentive to supply effort at work.

Question 3

It turned out that the rumour was true. Soon, the management of Gi-hun's firm announced its restructuring decision. In addition, the firm also announced that it is to acquire a few smaller insurance firms in near future. Discuss the effect of these decisions (expected by the management) on its production cost and market power.

Your discussion must refer to

economies of scale

elasticity of demand