The insurance industry is failing to keep pace with the risks emerging from burgeoning use of artificial intelligence, according to a report by global reinsurance brokerage Gallagher Re.

The report, released yesterday and entitled Smart Systems, Blind Spots: Rethinking Insurance for the AI Era, highlights a widening protection gap, even as the industry adapts to to create relevant products to cover fast-evolving risks.

“A widening gap exists between AI-related exposures and available insurance protection,” stated the report, produced in association with Testudo, a Lloyd’s coverholder that provides AI-specific liability coverage.

“Gen-AI related litigation in the US grew 978 per cent from 2021 to 2025, yet traditional policies offer only fragmentary coverage.

“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.”

The report notes that the insurance industry is responding. It cites stand-alone products to cover AI-native risks from Munich Re, Armilla and Testudo, while carriers including Axa XL, Hiscox and Beazley are clarifying coverage boundaries through endorsements and sector-specific products.

Gallagher Re also notes the potential for systemic events involving AI.

“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.

“Unlike traditional catastrophe scenarios with geographic or sectoral boundaries, AI failures can propagate instantly across industries and borders.

“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.”

Gallagher Re notes that closing the protection gap will require coordinated action from all market participants.

Enterprises deploying AI should review vendor contracts for liability caps and disclaimers; pair traditional coverage with dedicated AI products; and adopt governance frameworks.

Insurers should seek to build AI-specific underwriting expertise; define coverage boundaries explicitly; and design products around AI-native failure modes.

Gallagher Re recommends that reinsurers managing accumulation should develop frameworks to quantify systemic exposure; refine correlated risk modelling; treat AI risks as marketwide perils; and build aggregation limits.

The report concludes: “The question is no longer whether AI will create liability, but whether the insurance market can adapt quickly enough to address it.

“As adoption accelerates, closing the protection gap will create an opportunity for enterprises to take greater ownership of their risk profiles, insurers to build products that reflect how AI actually fails, and reinsurers to continue evolving capacity frameworks suited to correlated, borderless exposures.”

• To learn more, read the Gallagher Re report here