Traditional insurance trails the AI era, risking widening coverage gaps
Source: Middle East Insurance Review | Apr 2026
The rapid deployment of artificial intelligence (AI) has outpaced the insurance market’s ability to address the unique risks it introduces, according to a paper published by Gallagher Re in partnership with Massachusetts Institute of Technology and Testudo.
The paper, titled “Smart Systems, Blind Spots: Rethinking Insurance for the AI Era”, says that as organisations integrate generative and non-generative AI into customer interactions, decision-making and core operations, they may inadvertently expose themselves to a class of AI-native liabilities that traditional insurance policies may not fully recognise or respond to.
Hallucinations, algorithmic discrimination, model drift and supply chain compromises create liability through mechanisms these policies were never designed to address. The result is a growing category of uninsured enterprise risk.
Insurers’ response
The insurance industry is responding. Standalone products from Munich Re, Armilla and Testudo now address AI-native risks, while established carriers such as Coalition, AXA XL, Hiscox and Beazley are clarifying coverage boundaries through endorsements and sector-specific products.
The market is also beginning to grapple with accumulation risk — the AI ecosystem’s reliance on a small number of foundation model providers means a critical flaw in one widely-adopted model could trigger claims across thousands of unrelated policyholders simultaneously.
Insurers and reinsurers are actively developing frameworks to monitor portfolio-wide exposure to dominant AI platforms, assess whether inherent vulnerabilities like prompt injection require treatment as systemic perils and calibrate capacity accordingly. This work is essential to long-term market sustainability.
Closing the protection gap requires coordinated action from all market participants. The following takeaways outline priorities for each: