The Uninsurable Algorithm: Why Carriers Are Flinching at AI Risk

Corporate leaders have held a mantra close to the chest for the past two years: ship AI, ship it fast, ship it everywhere. As 2026 unfolds, a harsher reality is cutting through the hype—some AI-fueled risks are drifting into the uninsurable category.

Carriers that once marketed themselves as innovation partners are now quietly redlining anything that smells like algorithmic exposure. In broker conversations, exclusions are spreading, and the message between the lines is that the market is losing its appetite for open-ended AI risk.

The Underwriting Nightmare

Insurance is built on a simple bargain, which is that if the future looks enough like the past, actuarial models can reframe uncertainty into something insurable. Unsurprisingly, that logic falls apart when the technology driving losses evolves faster than the loss data itself.

Generative AI lacks the decades of claims history and stable frequency patterns that underwriters rely on; they are essentially being asked to sign multi-million-dollar limits while squinting at a moving target.

The deeper threat is correlation. Unlike a localized warehouse fire, a single glitch in a widely used model can metastasize across thousands of clients instantly. When one update simultaneously triggers mispriced loans or faulty medical triage, it isn’t an isolated loss—it’s a systemic risk that keeps underwriters up at night.

The “Big Three” Anxieties

Behind the scenes, carrier conversations revolve around three core anxieties—errors, bias, and fraud. Although each one is technically familiar, they’re amplified and reshaped by the way AI scales. Let’s break each one down for a more in-depth understanding.

1. Hallucinations: Confident Errors with Real Victims

To err is human, and every industry has always known it. What unnerves insurers is not that AI gets things wrong; it’s that AI gets things wrong with extraordinary confidence and reach. A hallucinating model does not shrug and second-guess; it invents citations or produces plausible-but-false outputs that users are encouraged to trust. If that sounds scary, it’s because it is.

Consider a legal research assistant that surfaces “authorities” that never existed, pulling information from thin air. The immediate harm is obvious, but the liability chain is messy.

Responsibility can span the provider, vendor, and developer—making reserving nearly impossible. In insurance, mistakes don’t just add up; they compound.

2. Bad Automated Decisions: Bias at Scale

Bias is not new to insurers. What changes with AI is scale and opacity. A human making a discriminatory hiring or lending decision typically generates an isolated E&O claim or an HR incident. However, a “black box” algorithm embedded in HR, underwriting, or credit operations can encode that bias into every decision it touches. And the ripple effect begins.

For instance, in mid-2025, student loan provider Earnest Operations reached a $2.5 million settlement with the Massachusetts Attorney General. The issue wasn’t a single biased decision, but an AI underwriting model that failed to account for disparate impacts on minority applicants. A single “black box” oversight didn’t just affect one borrower; it triggered a multi-million dollar regulatory event, proving that in 2026, an error is no longer an incident—it’s a systemic liability.

From an insurer’s perspective, this is a nightmare combination:

• The pattern of harm might not be visible until regulators or plaintiffs’ attorneys connect the dots.
• Once exposed, the affected population is rarely small.

One flawed model can trigger a class action alleging systemic discrimination in lending, pricing, or hiring decisions. Carriers worry that, under the wrong circumstances, an AI-powered decision engine can behave like a liability time bomb—quiet for months, then explode.

3. Deepfake Fraud: the Death of “Trust your Gut”

For years, crime and cyber policies have treated social engineering as a manageable risk, and it’s worked—until now. Deepfakes are now eroding those controls at the root. When voice and video are no longer reliable signals of identity, the old “trust your gut” advice collapses.

When a synthetic CEO can perfectly mimic the face, voice, and context of a live video call to authorize an urgent transfer, the very concept of “reasonable verification” erodes.

It only makes sense that insurers are increasingly skeptical that traditional social engineering coverage can survive in a world where (well-trained) human beings cannot reliably distinguish genuine from fake. If the very notion of “human verification” is compromised, the risk swerves toward unquantifiable. That is where appetite disappears, and exclusions snowball.

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What This Means for Your Coverage

The real danger isn’t the tech itself, but the “Silent AI” lurking in old contracts—vague policies that never mention AI yet leave insurers on the hook for its mess.

As a result, organizations should expect more explicit AI exclusions, endorsements, and carve-outs in everything from cyber to professional liability. If it is not clearly covered today, there is a growing chance it will be clearly excluded tomorrow.

Relying on standard policies to catch AI misfires is a dangerous gamble that often fails. When hallucinations or deepfakes strike, the bill usually ends up right back on the company’s own balance sheet. These scenarios are especially true if policies have been quietly narrowed, which is a tech insurance trend unfolding.

Building Your Own Safety Net

In this environment, risk transfer is no longer a given; it is an outcome you earn. Insurers are beginning to look for credible AI governance artifacts before they quote terms. Things like model risk frameworks, “AI manifestos,” or clearly documented approval pathways. A company that cannot explain how its AI is designed, tested, and monitored will increasingly look uninsurable, or at least expensive to insure.

In high-stakes use cases, an empowered human “kill switch” is no longer a luxury—it’s the price of admission for coverage. We call this “human orchestration,” and it’s the only way to yoke wild AI innovation to real-world accountability.

If an underwriter cannot see where and how humans can intervene, they will assume the exposure can spiral beyond control. And, in reality, it probably will. To fight deepfake fraud, old-school email and video aren’t enough. The new baseline is “out-of-band” security—think multi-channel callbacks and hardware identity checks that a synthetic voice can’t spoof.

The Uninsurable Algorithm—Managed, Not Abandoned

Calling AI “uninsurable” is a radical stance, but it isn’t a signal to abandon the technology; it is a call to abandon the fantasy that AI can be treated like standard software. At this scale, AI looks less like a tool and more like a powerful executive—capable, influential, and dangerous if unsupervised.

In this landscape, the best “insurance policy” is a solid governance framework that prioritizes accountability and human oversight over eleventh-hour legal endorsements. Insurance still plays a vital role, but only for organizations ready to treat their algorithms with the same seriousness they reserve for their highest-level leaders.