Artificial intelligence (AI) is not an entirely new phenomenon, but in recent years, it has experienced rapid expansion in all spheres of life, including business. AI application improves business, but also cause significant challenges in providing a transparent, safe, and ethical AI application. The development of AI tools can help insurers improve underwriting and monitor and predict risks better. Using digital tools has simplified the claims process, and AI applications can help detect insurance fraud. In addition to these benefits, the authors analyze some legal challenges AI applications can cause, like the lack of regulatory compliance and due diligence, ethical matters, bias and discrimination, data protection, and privacy. Furthermore, this paper provides a brief overview of the regulatory framework for the application of AI in the European Union. The paper analyzes AI applications and digital tools available online in the digitally underdeveloped insurance market in Bosnia and Herzegovina. The authors conclude that the future of AI in insurance depends on the optimal regulation ratio between business benefits and transparent and ethical legal regulation. Regardless of the legal challenges, implementing AI business models is a matter of competitive advantage in the insurance market.