Mitigating credit risks for boards and companies resulting from artificial intelligence

To avoid the risks that AI poses to boards’ compliance with their fiduciary duties, boards must oversee all AI-facilitated operations, ensure adequate data security controls, and conduct at least annual reviews of AI vulnerabilities. Board oversight of and mitigation of AI risks is critical. Therefore, boards should be actively involved in overseeing and implementing the AI ​​strategy.

A comprehensive AI governance policy should include the following risk management considerations:

• Require regular risk assessments of AI systems to identify potential vulnerabilities.
• Develop risk mitigation strategies and implement controls to protect against identified risks.
• Continuously monitor AI systems to detect emerging risks.
• Develop incident response plans to effectively address AI-related disruptions and breaches.

Furthermore, AI governance policies should clearly define roles and responsibilities related to overseeing the use of AI. These assigned roles should include an AI ethics officer, a data protection officer, and AI project managers to ensure accountability and effective management of AI. Furthermore, the company’s AI governance policy should establish a governance committee responsible for overseeing AI strategy, policy enforcement, and risk management. The governance committee, oversight officers, and AI project managers should provide regular updates and reviews to the board on the progress, challenges, and compliance status of all AI initiatives. Upon receiving such updates, it is important for boards to ask critical questions about the strategic potential, risks, and ethical implications of AI. When overseeing the use of AI and developing governance policies, boards should consider the following ethical and legal considerations:

Mitigating Bias: Boards should implement measures to identify and mitigate biases in AI systems to reduce the potential for erroneous, harmful, and discriminatory outcomes.

Transparency: It is important for companies and their boards to maintain transparency and accountability in their AI-related decision-making processes to help consumers understand and trust how AI systems work.

Compliance: Boards must ensure compliance with data protection and intellectual property rights regulations. This includes establishing liability frameworks for AI-related errors and damages.

Using insurance to mitigate AI risks

In addition to governance, appropriate insurance coverage should be explored, such as:

• Errors and Omissions (E&O): Covers negligence and errors in the provision of services.
• Directors and Officers (D&O): Protects personal assets from claims of managerial failure.
• Employment Practices (EPL): Protects against claims of discrimination or wrongful termination.
• The risk of blindly relying on AI could lead to insurance denials!
• Traditional coverages may become inadequate if not regularly reviewed.

Some challenges include:

• Exclusions for data collected illegally.
• Software exclusions that do not account for intelligent algorithms.
• Some policies do not cover fraudulent financial transactions resulting from AI errors.

The solution? Develop new insurance products designed for AI that cover:

• Intelligence “hallucinations.”
• Algorithmic bias. Regulatory investigations.
• Intellectual property infringement. Class action lawsuits.

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