Insuring AI-Based Financial Trading

It’s a brave new world for insurers, says a post from Sarah Abrams, Head of Professional Liability Claims at Bowhead Specialty, as AI is now being employed in an area where mistakes can be notably costly and potential liability is high.

Writing on the D&O Diary website, Abrams says the Financial Industry Regulatory Authority (FINRA) raised the issue in a report issued more than two years ago. “Circumstances not captured in model training,” the report said, “such as unusual market volatility, natural disasters, pandemics, or geopolitical changes – may create a situation where the AI model no longer produces reliable predictions, and this could trigger undesired trading behavior resulting in negative consequences.”

Now the issue has reached the front burner, and with it some looming questions. Which policy, for example, would come into play when there is a trading loss due to AI “error”? Also of concern to traders: cybersecurity – “a tremendous pain point for AI trading platforms,” says Abrams.

Three types of coverage are potentially at issue: director and officer, cyber and/or professional liability. This post looks at a number of scenarios, and how different policies might or might not apply.

Investment advisers and broker dealers need to consider the risks, Abrams says, even as case law in this area has not fully emerged.