How does automation affect a business’ insurance risk?

At a Glance

Discover where automation poses a significant business risk

Find out how businesses can mitigate against these risks

Learn how automation can deliver on its potential

No longer limited to large corporations, automation is helping SMEs scale up and innovate, despite often limited resources. Using technologies such as artificial intelligence (AI) and robotics, it reduces the need for human intervention, improving efficiency and cutting costs.

For instance, on production lines, automation is streamlining the manufacturing process and minimising human error. In the service sector, the customer experience has been transformed by chatbots that can respond to queries 24/7. The benefits are significant across every industry. However, automation also brings some serious considerations for risk management.

An emphasis on profit is leading organisations to play lip service to risk prevention

How to protect businesses as they automate

During the Covid pandemic, digital adoption took a five-year leap forward in the space of eight weeks.¹ Automation was a driving force behind this rapid acceleration, bringing about some big changes in businesses insurance risk.

So how can business mitigate against these new vulnerabilities? It starts with knowing where automated processes and systems can fall short. Let’s explore some key areas where they’re having the biggest impact…

Data protection

Automation is often used to manage large quantities of personal and financial data, which requires GDPR (General Data Protection Regulation) compliance. Failure on this front can lead to hefty fines. Under the Data Protection Act 2018, the maximum pay-out is £17,500,000 or 4% of a business’s total worldwide turnover,² whichever is greater.

Automated systems need to obtain informed customer consent, collect only the essential information, manage it securely, and respond to requests for data deletion. This requires checks and measures to be put in place to prevent any errors and reflect operational changes as they occur. Insurance can help guard against GDPR-related claims. It may also cover resulting costs and loss of earnings, for criminal as well as accidental breaches. However, it’s often on a case-by-case basis.

Reduced human error and operational risk

Automated systems are designed to perform repetitive tasks more efficiently and consistently, minimising the risks of costly mistakes. For example, robotic process automation (RPA) on production lines ensures consistent product quality, limiting the likelihood of defects and associated liability claims. It also reduces the need for human-related insurance policies covering health and safety risks.

However, the same example raises the challenges of defining robotic intervention within a policy. Is it a standalone entity or part of an automated process and if something goes wrong, who’s liable? Is it the robot’s manufacturer, the software designer or someone else in the supply chain?

Equipment breakdown and business interruption

In a recent survey, nearly 90% of workers said they trusted automation systems to get more done without errors and speed up decision making.³ However, automated machinery and systems are not immune to breakdowns. The failure of critical equipment can halt business operations and lead to significant losses. Businesses must have comprehensive coverage to mitigate against the financial impact.

Increasing the risk of flawed systems

Technology is only as good as the humans who put it into practice. Rushing to automate flawed manual systems can lead to poorly conceived digital solutions. They only serve to amplify the negative impact. Without interrogating the available data, the pros and cons of the existing system, and input from all relevant parties, automation could shore-up inefficiencies and increase business risk.

A 24-hour working day

Automation allows companies to work overnight or outside of normal business hours. A digitised escalation process for human intervention is therefore essential, for example in the event of a cyber-attack.

Many businesses are expanding and automating their risk management systems to address AI-related risks. MITSloan⁴ says they’re not doing so quickly enough, suggesting tech advances are outpacing risk management capabilities. In some cases, it may be that an emphasis on profit is leading organisations to play lip service to risk prevention.

Data accuracy

Automation relies on a feed of accurate and reliable data. Without it, error correction, process optimisation, decision making, efficiency, and legal compliance can be affected.

Automation also needs to be monitored to ensure its own output can be trusted. One error in the system can cascade through the entire process, impacting the outcome. This could invalidate existing insurance policies, resulting in the non-payment of claims.

What action should businesses take?

As automation continues to transform the business landscape, it’s essential to understand its multifaceted impact on insurance risk.

Technology is evolving rapidly and staying abreast of developments is key when it comes to devising appropriate risk management strategies and taking out the necessary cover. This will help businesses navigate the complexities of automation, while taking full advantage of its potential.