It wasn’t long ago that the UK’s insurers priced policies and settled claims largely at their own discretion. Now they face greater demands to prove the price was fair, the claim was handled appropriately and any AI behind those decisions has been properly governed. In other words, decisions that once required little explanation increasingly need to stand up to scrutiny from a market doing its due diligence. Meanwhile, inflation and extreme weather events have pushed up the cost of claims and underwriting.
Those factors converge to forge nine challenges that are changing how insurers do business. The priority is to manage those risks while staying profitable and meeting rising expectations.
Key Takeaways
- UK insurers face rising scrutiny under Consumer Duty and must demonstrate that pricing, claims handling and other decisions provide fair outcomes.
- Claims inflation and climate-driven losses are squeezing margins, thereby increasing the importance of risk selection, claims management and cost control.
- Cloud providers, software vendors, claims handlers and managing general agents (MGAs) now form part of the operational infrastructure insurers must actively oversee, with resilience and third-party risk high on the agenda.
- AI is being used to support pricing, underwriting and claims decisions, but insurers remain accountable for the outcomes.
The UK Insurance Sector: What Is Driving Pressure?
UK insurers face pressure from four main directions: regulatory scrutiny, rising claims costs, operational resilience and gaps in data, technology and talent. Together, these pressures are changing how insurers manage risk, control costs and make decisions:
- Regulatory scrutiny and fair value: The Financial Conduct Authority’s (FCA’s) review of general insurance and pure protection products found many firms could not show they were delivering fair value. The problem is that the firms don’t always have the data needed to demonstrate those outcomes.
- Claims inflation and risk complexity: Motor insurers paid out a record £11.7 billion in claims in 2024, up 17% in a single year, as theft and repair costs continued to climb. Electric vehicles are one contributor, with replacement batteries alone costing between £8,000 to £10,000 each. Risk is harder to price, since newer vehicle technologies are changing claims profiles and insurers have less claims history to study.
- Operational resilience expectations: The Prudential Regulation Authority (PRA) requires insurers to assess and manage the risks of the third parties they rely on, such as cloud platforms that host policy and claims systems, software vendors and outsourced claims handlers. Insurers must also be able to keep important business services running if a critical supplier fails.
- Data, technology and talent gaps: As of 2024, insurers had adopted AI at a greater rate than any other UK financial sector (95% of firms surveyed by the Bank of England and FCA were using it), but governing its use depends on having the right data, controls and expertise. The Chartered Insurance Institute warns that the workforce hasn’t yet built the capacity to understand and challenge the technology it’s using. Insurers, therefore, need people who can question AI outputs, understand its limitations, and make informed decisions about where it should and shouldn’t be used.
9 Insurance Industry Challenges Insurers Need to Address
The challenges facing insurers are closely connected. Rising claims costs make it harder to protect margins while meeting fair-value requirements, for example, and both hurdles can be eased with better visibility into what is happening at the claim level. Data can also help insurers demonstrate fair value and identify whether higher costs are driven by a particular repair network, claim type or slow-moving supplier. That overlap means insurers can tackle several of the challenges below by investing in connected data and systems.
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Regulatory Burden and Consumer Duty
Consumer Duty makes fair-value compliance a continuous, ongoing process. Insurers have a standing duty to demonstrate that their products and prices deliver fair value. In practice, firms must assess fair value for each product line, monitor the outcomes customers receive and keep the evidence ready to show on request. The challenge is greater when cover passes through brokers and MGAs, because insurers need visibility into customer outcomes and fair-value evidence for all firms in the distribution chain. One way to manage that burden is to build fair-value checks into pricing and sales processes, so the evidence is generated as part of normal operations.
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Claims Inflation and Affordability Pressure
The bind for insurers is that claims costs keep rising, but the logical response (higher premiums) is largely off the table. One reason is that comparison websites make it easy for customers to shop and switch to lower-priced policies in minutes. Regulation is another factor. Not only must firms be able to demonstrate their pricing delivers fair value, but the 2022 ban on “price walking” ended the practice of charging renewing customers more than new ones as a way to help improve margins. Average motor premiums fell from £622 in mid-2024 to £589 in early 2025, even as motor claims reached record-high levels. With a narrower scope within which to raise premiums, insurers are focusing on cost management. They’re managing what they spend on claims, tightening underwriting and opting out of business they can’t price to a fair return.
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Climate Risk and Natural Disaster Exposure
The scale and trajectory of climate claims are making them harder for insurers to predict and price using historical data alone. UK property insurers paid out £6.1 billion in 2025 (the highest annual total on record), with £1.5 billion of that paid out in the final quarter alone. Every new extreme-weather record chips away at the assumption that the past is a reasonable predictor of the future. Rather than relying on historical averages, insurers are leaning on forward-looking climate projections and modelling catastrophe exposure down to individual postcodes and properties.
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Cybersecurity, Data Breach and Identity Theft Risk
Although a 230% jump in cyber claims in 2024 is sobering, the greater concern is the potential for a single attack on a major software or cloud provider to trigger claims across thousands of policies simultaneously. That concentration of risk makes it harder for insurers to estimate the maximum possible loss and is one reason why they’re capping how much cover they’ll write. To bridge the gap between the cover businesses want and what insurers are willing to supply, the industry is developing a shared way to measure cyber risk, specifically, the more consistently insurers can quantify an exposure, the more likely they’ll cover it. What’s more, insurers themselves are attractive targets to cyberattacks because they hold sensitive customer and claims records. A data breach could expose policyholders to identity theft, so insurers must protect their own systems to maintain customer trust and avoid penalties.
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Operational Resilience and Third-Party Dependency
Insurers depend on third parties for the systems that keep them running and, increasingly, for underwriting decisions. When one of those systems, such as a cloud platform, outsourced function or core business software fails, a critical service can fail with it. That’s why the PRA has mandated operational resilience since March 2025 and why incident and third-party reporting is due to become mandatory in 2027. Meanwhile, MGAs, which are third parties that price and bind risk in an insurer’s name, have assumed a growing share of underwriting judgement. Managing both types of dependency requires insurers to know exactly whom they rely on, set the limits those parties operate within, and be able to show regulators that those limits are effective.
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Legacy Systems and Data Quality Limitations
When an insurer’s core platforms are decades old, data can end up trapped in separate systems. That limits the efficiency that protects margins because staff are forced to rekey data between systems, such as typing up a new claim that came in via email to the claims platform. Routine work (claims and renewals, for example) moves more slowly than it should. It also limits the evidence that satisfies regulators, because fair-value assessments, resilience reporting and AI oversight all depend on being able to merge data, and legacy systems rarely make that easy.Fixing the problem requires cleaning, connecting and governing data. That’s costly, disruptive and complex because insurers are called upon to upgrade their systems without disrupting day-to-day operations. Many insurers put it off for those reasons.
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AI Governance, Automation and Model Risk
As AI moves into pricing, underwriting and claims, it’s the insurer, not the model, that answers to regulators and customers for the outcome. But a model may produce a price or claims decision without a clear, traceable reason, and its accuracy can falter as the underlying data conditions change. That’s why human oversight remains the norm. In 2024, across UK financial services, only about 2% of AI use cases run fully autonomously. The governance task is to make sure that oversight is effective, not an empty formality. Someone needs to be able to understand, question and overrule what the model recommends, and insurers need to be able to reconstruct the reasoning behind a decision if a regulator asks. That gets harder as AI agents begin carrying out insurance tasks from start to finish, with limited human input.
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Talent Shortages, Retirement and Skill Gaps
The sector is losing experienced people to retirement while also struggling to build the skills it needs for the future. In the critical London insurance market, the share of workers under 30 is forecast to plummet from 24% today to just 7% within a decade. That creates a particular challenge, given that experienced underwriting and claims expertise is already in short supply, yet the work increasingly demands new skills. Evidencing fair value, governing models and connecting data all require capabilities that were less central to many traditional insurance roles. Closing the gap means competing for data and online talent against every other industry, as well as giving people reasons to choose insurance and stay. To do that, insurers must offer better training, compelling career paths and work that requires judgement.
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Broker, Distribution and Customer Trust Pressures
Insurers often rely on brokers and other third parties to distribute their products, but they remain accountable under Consumer Duty for whether customers receive fair value and good outcomes. Brokers arrange 77% of all UK general insurance and 94% of commercial business, and new channels are still being added. Comparison sites turn cover into a price contest, while embedded insurance opens the market to new competitors (including retailers, banks and tech brands) selling insurance under their own names, even when a traditional carrier underwrites it behind the scenes. That makes the quality of the customer experience harder to control, particularly when a customer makes a claim.
Finance Futures: Tomorrow’s Vision
Online Priorities for Tackling Insurance Industry Challenges
Transformation in the insurance industry starts with connected data, because a firm needs a consistent view of information between systems. This provides the foundation for the analytics, automation and AI governance needed to respond to the challenges above. In practice, this translates into five practical areas of focus:
- Cloud-based core and finance systems: Replacing ageing core and finance systems makes it easier to connect policy, claims and finance data. Moving them to the cloud can improve business-wide access to that data, which supports faster analysis, automation and more dependable AI.
- Claims and policy system integration: When policy and claims systems connect, claims no longer have to be rekeyed. They can be resolved faster, with less administrative work and fewer opportunities for error. Integration also lets insurers compare how similar claims are handled and catch inconsistent or potentially unfair outcomes.
- Risk analytics and real-time dashboards: Analytics use connected data to estimate risk and cost. For example, insurers can map catastrophe exposure by postcode or see which segments are profitable. Dashboards present those insights to leaders so they can make better informed decisions. The same dashboards can also call attention to unusual changes in claims outcomes or complaints, so leaders will be able to address the problem.
- Workflow automation and audit trails: Automating routine handoffs, for example, capturing a claim, routing it and updating the systems that need it, cuts manual work. That frees up time for skilled people to price complex risks and work through disputed claims. Automated workflows record actions as they happen, so audit trails don’t need to be reconstructed later.
- AI governance and human oversight: Governance is what lets insurers scale AI without losing control of it. Clear accountability, human review and records of how a model reaches its decisions are necessary for firms that want to use AI for pricing, underwriting and claims. Insurers still need to monitor these AI decisions, review them where necessary and intervene when the model gets it wrong.
Building Resilience in the Insurance Sector
Resilience in insurance is the capacity to keep critical services running while being able to demonstrate fair treatment under pressure, whether that pressure is a storm, a cyberattack, a failed supplier or a systems outage. It’s a standing capability, and one the PRA now requires. Building resiliency follows a deliberate sequence:
- Assess regulatory and operational exposure. Map the firm’s obligations, from Consumer Duty fair value to operational resilience and the 2027 reporting rules. Determine which of those obligations it can meet today. Then identify the critical services and dependencies where a failure could have the greatest operational or customer impact.
- Upgrade data and back-office processes. Connect the data trapped in policy, claims and finance systems so it flows without rekeying. For example, at the monthly financial close, an insurance firm’s accounting software would draw figures straight from live claims and policy data, instead of from hand-built spreadsheets.
- Strengthen controls across claims, finance and compliance. Build checks that identify exceptions, trigger reviews and create a record of what happened. This way, teams are alerted to problems early on and establish an audit trail.
- Review supplier and technology dependencies. Identify the third parties and systems that critical services depend on, understand what each is responsible for, and set appropriate limits and continuity plans. For instance, cap what an MGA can bind without sign-off, and line up a fallback so claims can still be paid if the main platform fails.
- Track resilience, claims and customer-outcome KPIs. Monitor important measures, such as loss ratios, claims backlogs, claim-acceptance rates and supplier performance, on dashboards, so leaders can see, and act on, issues early. This also makes it easier to demonstrate the outcomes that customers receive.
Manage Insurance Complexity with NetSuite ERP
Meeting the converging demands of running efficiently while proving fair value, resilience and sound decisions on demand takes connected data. NetSuite Insurance ERP software provides that unified foundation by bringing together finance, commissions, compliance and analytics in one cloud system. It also integrates with the policy and operational systems insurers and brokers already run. With data connected, automated consolidation and reconciliations reduce manual work and audit trails provide documentation for audits and regulatory enquiries. Live, role-based dashboards can be configured to show whatever teams need to see, such as premium trends or financial performance tied to claims, so they can identify issues and act sooner.
AI is built into that connected environment and is capable of using that business data to support more efficient operations. Anomaly detection, for instance, can flag unusual transactions and trends that may indicate potential fraud or errors. Predictive forecasting and AI-generated narratives help teams understand trends, variances and anomalies, while natural-language queries make it easier to explore business data without using complex formulas. AI agents can do still more, by handling routine tasks and suggesting actions within established workflows.
Rising claims costs, climate and cyber risks, legacy systems, skill shortages and growing resilience and customer-outcome demands are reshaping the sector. Meeting these challenges requires connected data, resilient operations and better control over the processes that shape customer outcomes. It also means being able to demonstrate how decisions were made and how they affected customer outcomes.
Insurance Industry Challenges FAQs
What are the biggest challenges facing the insurance industry?
For UK insurers, the biggest challenges are regulatory scrutiny under Consumer Duty, claims inflation, climate-driven losses, cyber risk, legacy systems, AI governance, an ageing workforce and shifting distribution. These challenges are increasing the pressures on profitability.
What are the current trends in the insurance industry?
Current UK trends include AI moving into underwriting and claims, data-led pricing and the rise of embedded and online distribution, all under tighter regulation (such as Consumer Duty). To keep pace, insurers are investing in connected data and governed AI.
What are the biggest risks to insurance companies?
The biggest risks are underwriting losses when claims costs outpace premiums, failures among the third parties and managing general agencies that insurers rely on, cyber exposure to both their own operations and the policies they write and conduct risk under Consumer Duty.
What are the emerging risks in the insurance industry?
Emerging risks include record-breaking climate losses, AI model risk and cyberattacks that can affect many policies at once. The growing use of managing general agencies means insurers increasingly answer for underwriting and conduct decisions that are made in their name but are outside their direct control.
What are the 5 Cs of insurance?
There is no single, agreed-upon “five Cs of insurance”. Rather, it’s an informal shorthand used differently across the industry. One common version lists cost, coverage, customer, claims and compliance.
What is the 80/20 rule in insurance?
The 80/20 rule is a US health-insurance requirement (the Affordable Care Act’s medical loss ratio), under which insurers must spend at least 80% of premium income on care and quality or rebate the difference. It has no direct UK equivalent, although the FCA’s Consumer Duty applies a comparable fair-value principle without a fixed ratio.
