Cyber and AI-related threats are evolving faster than almost anything else Canadian life and annuity insurers are contending with right now, according to Kevin Varvaro (pictured), an analyst covering the sector at AM Best. Speaking at AM Best's Insurance Market Briefing in Toronto, Varvaro said the risk isn't just that AI tools are getting more capable. It's that bad actors are getting access to the same capability insurers themselves rely on.
"You almost need the AI of the [insurance] companies to fight off the AI of these bad actors," Varvaro said. "It'll be a very quickly changing threat over the next 12 to 24 months. Trying to keep in tune with where AI is is almost a full-time job in and of itself."
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That pace of change is part of what makes the risk hard to pin down, Varvaro said, and the closer he gets to people actually working in AI, the more concerned they tend to sound about where it's headed.
"It seems like the closer you get to people that are working in AI, the more doom-and-gloom they become," Varvaro said.
Some of that concern isn't abstract, according to Varvaro, who pointed to reports of AI models already slipping outside their intended testing environments as an early sign of how quickly the risk landscape can shift. AM Best plans to keep close watch on the issue, he said, particularly as cyber threats increasingly become AI-assisted rather than relying solely on traditional attack methods.
Cyber and AI risk is one of four headwinds Varvaro flagged for the sector, alongside macroeconomic pressure, a widening coverage gap, and ongoing competition among established players. On the macro side, Varvaro pointed to the ongoing trade war and rising gas prices, driven in part by conflict in the Middle East, as contributors to broader inflationary pressure across the industry.
That inflation is feeding directly into the second headwind, Varvaro said: a widening coverage gap at the lower end of the mass affluent market. As household budgets tighten, he said, insurers have increasingly shifted their focus toward high-net-worth clients and the upper end of the mass affluent category, leaving less attention on the segment just below it.
Competition, meanwhile, remains a constant in an already mature market, Varvaro said, with large players often trading premiums or clients over time in a market he described as price-competitive by nature, which he said is typical for an established group of insurers rather than a sign of instability.
Operational challenges round out the list, Varvaro said, largely driven by insurers' ongoing work modernizing legacy systems. That's been a recurring theme for several years, he said, as companies continue investing in digitization and technology spend to find efficiencies.
There are early signs that investment is paying off, according to Varvaro, with expense growth beginning to flatten out or hold steady rather than continuing to climb, something he characterized as a positive signal after years of rising costs tied to system upgrades.
Even with those four headwinds in play, AM Best's official outlook for the Canadian life and annuity sector remains stable, Varvaro said, supported by consistently strong capitalization across the companies the agency rates, diversification across geography and product lines, and continued profitability on both the top and bottom line.
"We see favorable liquidity as well, earnings and underwriting supported by diversified lines of business," Varvaro said, pointing also to insurers' geographic and product footprint and their commitment to rigorous stress and reverse stress testing as reasons the sector has been able to absorb pressure without destabilizing.
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That capital discipline shows up in how insurers are actually deploying capital, Varvaro said, not just how they talk about it. Dividend growth has continued without interruption, he said, and share buybacks have picked up further heading into the fourth quarter, with a substantial share of outstanding shares repurchased over the past two to three years and new buyback programs still being authorized. Mergers and acquisitions, by contrast, have stayed opportunistic rather than aggressive, Varvaro said, with companies typically pursuing deals tied to specific strategic needs, such as acquiring investment platforms or new distribution channels, rather than pursuing broad consolidation.
"It's very specific to the organization and what their needs are," Varvaro said.
Even as debt costs rise alongside interest rates generally, Varvaro said capital preservation remains a consistent priority across the companies AM Best rates, both in what those companies say and in how they actually behave when stress-tested.
That combination, Varvaro said, is what keeps the sector's rating steady even as inflation, geopolitical risk and operational pressure continue to weigh on it from multiple directions at once.
"We continue to see that, and that's again why we are maintaining that stable outlook on the industry despite some macro challenges," Varvaro said.
