Quantifying Automation Risk in High-Automation AI Systems: A Bayesian Framework for Failure Propagation and Optimal Oversight

Artificial Intelligence (AI) is increasingly integrated into complex sociotechnical systems, including Critical National Infrastructure (CNI), where harms emerge from interactions between technical, human, and organisational elements. Yet current AI evaluation remains model-centric, offering little insight into how observed behaviours might translate into system-level risk. We propose a framework that links structured hazard analysis, component-level testing, and probabilistic system modelling to bridge this gap. By providing a traceable pathway from model behaviour to system-level outcomes, the framework enables practitioners to answer the "so what?" of AI failures, quantify their systemic impact, and move toward evidence-based and anticipatory governance of AI in complex systems. Applied to the UK's Real Time Gross Settlement (RTGS) system as an illustrative worked example, we derive AI-driven loss scenarios using Systems Theoretic Process Analysis (STPA) and examine adversarial manipulation of LLM-based trading as one such loss scenario. Component-level experiments show that simple adversarial inputs induce measurable behavioural shifts where AI recommendations are followed. Under the component-to-system mapping used here for a financial contagion model, these shifts alter system resilience, increasing bank failures and lowering the threshold at which shocks lead to cascading disruption, particularly under widespread or monopolistic AI adoption.

Deploying AI systems requires deciding when to delegate tasks and when humans should intervene to monitor and mitigate risk induced by AI operations. These decisions are challenging when failures cluster: a hallucination or harmful output can trigger further errors, creating periods of elevated risk. We introduce a continuous-time framework for learning adaptive human oversight under such turbulent AI risk. Existing oversight and delegation formulations condition on history but do not model incident clustering, or its suppression by supervision effort, jointly with the delegation decision and this study fixes this gap. The self-exciting dynamics capture how risk events increase the likelihood of subsequent events, making their timing and history central to decision-making. We formulate a stochastic control problem combining human actions, monitoring effort, and switching between human-AI-assisted operation and full AI delegation, balancing operational rewards against oversight costs, and cascading AI-failures and induced uncertainty. Human participation is an endogenous component of risk management: the policy determines both when oversight is needed and how much effort to allocate. We study a relaxed switching formulation and propose Hawkes-PPO, a policy-gradient method that uses a bank of exponential filters of observed incident times. In a synthetic environment it attains a higher risk-adjusted objective than either fixed regime and approaches an approximate full-information oracle. We illustrate our results with numerical simulations by examining how cascade risks influence intervention and delegation, connecting reinforcement learning with adaptive human oversight of AI systems. In particular, we illustrate the benefit of our switching strategy and Hawkes-PPO algorithm to monitor the project efficiently along time, reducing turbulent risks occurrences and costs.

AI agents can now take irreversible actions in operational systems, but agent-caused losses are still not clearly assigned, priced, or transferred. Providers often disclaim consequential damages, users are left with uncompensated losses, and default human review limits the efficiency gains of automation. We ask when autonomous AI deployment can become economically acceptable despite failure risk. Our answer is to quantify risk at the customer-task-trace episode level and transfer it through insurance. Automation is acceptable when its expected benefit exceeds the premium, control cost, and remaining risk. This requires a defined role with bounded permissions and comparable traces. We introduce trace-economic underwriting, which maps tool-use traces to customer exposure and claimable loss, then uses this representation for pricing, control, and risk transfer. It uses deterministic economic labels rather than an LLM judge. In our trace-to-loss testbed, trace-economic pricing reduces pricing MAE from $17.7K to$569 and removes regressive cross-subsidy. A 300-trace expert audit accepts 295 labels unchanged. On 1,000 real SWE-smith traces, trace-conditioned controls reduce CVaR95 by 72%. Theorem~1 gives a finite-sample scope condition. We release code, labels, and audit sheets.