Deploying AI at Scale: Frameworks and Approaches from Frank Schmid’s Perspective

In a recent episode of Insurance Unplugged, Lisa Wardlaw sat down with Frank Schmid, the Chief Technology Officer at General Re, to discuss the intricacies of deploying AI at scale. As an economist by training, Schmid offers a unique perspective on how to approach the implementation of generative AI (GenAI) within the insurance industry, emphasizing the importance of economic theory in guiding technology decisions.

Understanding Generative AI as a General Purpose Technology

Schmid frames GenAI as a “general purpose technology” (GPT)—a rare and transformative force akin to the steam engine, electricity, or the semiconductor.nbsp;

He identifies three key characteristics of GPTs:

1. Pervasiveness: GPTs integrate into many facets of life and business.

2. Ongoing Technological Improvement: They evolve and improve over time.

3. Feedback Cycle: Advances in technology create opportunities for complementary innovations, particularly in application sectors like insurance.

Schmid’s perspective encourages insurers to rethink their approach to technology adoption, urging a focus on long-term adaptability rather than immediate gains.

Real Options Valuation: A Decision-Making Framework

A significant portion of the discussion revolves around the concept of real options valuation—a decision-making framework that Schmid advocates for when deploying AI. This approach is derived from financial options theory and is particularly useful in environments characterized by both learning and irreversibility.

Key principles of real options valuation include:

• Favoring Reversibility: When making technology decisions, it is crucial to choose options that allow for reversibility. This means that initial investments should be portable and not entirely sunk, enabling organizations to pivot as technology evolves.

• Expanding the Option Set: Schmid emphasizes making technology choices that open up future opportunities. By doing so, organizations ensure they have the flexibility to adapt to technological advancements and shifts in the industry landscape.

"So people grow up with quantum mechanics, and then it propagates through the system or relativity theory. So it is actually carried by the young generation. And so I have great hope that those that are going to school now and are soon going to enter the labor market, that they will actually promote this technology. For them, it's native. And they will find the ways of putting it to productive use in ways that we who have been in this industry maybe are not able to envision." -Frank Schmid

Building Foundations, Not Just Tools

One of Schmid’s core messages is the importance of focusing on foundational elements rather than getting caught up in the allure of the latest tools. He draws a distinction between short-term, task-level improvements and the long-term productivity gains that come from reimagining workflows and organizational structures. Schmid offers a clear directive: “Build the foundations. And then things will fall into place. You will have options to choose from. Don't focus on the tools.” This approach resonates deeply, particularly in the context of generative AI. As he explains, the value of GenAI increases with the quality of the underlying data architecture, which itself is enhanced by being hosted in the cloud. Therefore, investing in cloud migration and modern data architecture is not just about current needs but also about preparing for future capabilities.

"Emphasize foundations. Build the foundations. And then things will fall into place. You will have options to choose from. Don't focus on the tools." -Frank Schmid

The Role of Workflow Redesign

Schmid also discusses the critical role of workflow redesign in realizing the full potential of generative AI. He warns against the temptation to chase the latest AI tools without considering how they fit into the broader organizational workflow. Instead, he advocates for a strategic approach that involves orchestrating data and AI components in a way that supports new workflows and possibly new organizational designs. This strategic orchestration is where the real productivity benefits lie, even though it requires more effort and co-invention than simply deploying task-level enhancements.

Embracing Patience and the J-Curve Effect

Schmid introduces the concept of the J-Curve effect in productivity, which explains the delayed realization of productivity gains from new technologies. Drawing parallels to the introduction of the personal computer in 1981, he notes that it took until 1995 for significant productivity gains to become evident. The lesson here is that while AI offers immense potential, organizations must be patient and recognize that the full benefits may take years to materialize.

A Call to Action: Focus on Foundations and Optionality

As the conversation concludes, Schmid provides a clear call to action for those looking to deploy AI at scale:

1. Focus on the Foundations: Prioritize building a strong foundation with cloud infrastructure and modern data architecture.

2. Don’t Chase Tools: Avoid the temptation to constantly adopt the latest AI tools. Instead, concentrate on how these tools fit into your long-term strategy.

3. Value Reversibility and Optionality: Make technology decisions that allow for flexibility and future adaptation.

In an industry often driven by the urgency of innovation, Schmid’s insights offer a refreshing reminder of the value of economic principles and long-term thinking in technology deployment. By focusing on foundational elements and making strategic decisions that prioritize reversibility and optionality, insurers can better navigate the evolving landscape of generative AI and ultimately achieve sustainable success.

For more, click here to listen to the full episode of "In the Hot Seat" from Insurance Unplugged with guest Frank A. Schmid and host Lisa Wardlaw . Thank you to Tech Mahindra for sponsoring this episode of Insurance Unplugged.

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