In today's digital world, the insurance industry stands on the brink of a technological revolution. The provision, analysis, and protection of data are now industries in themselves, and insurtech is at the forefront, creating unprecedented opportunities to leverage both internal and external data. The ability to harness insights from your data, will be a key differentiator in this competitive landscape.
Insurance firms must also navigate an unpredictable geopolitical climate together with increasing fiscal uncertainty and the impact of climate volatility. There's continued pressure to deliver more with less, while still meeting existing customer, commercial and regulatory expectations. It makes for an uncertain and challenging time ahead, with opportunity for those who adopt innovation first while managing risk.
How you respond to the following themes and challenges will be key to staying ahead this year.
Digital transformation and data
Digital transformation depends on good quality data and it’s essential to review your legacy systems to resolve any ongoing issues and lay the foundation for innovation. Firms will need to invest in data management capabilities and identify short- to medium-term data-mining possibilities in support of digital transformation and innovation.
The insights from this data are essential in meeting the expectations of the savvy digital customer, who increasingly demands a frictionless user journey. With judicious adoption, you can meet these expectations while achieving operational efficiencies and supporting regulatory imperatives.
One of the key challenges will be finding the most cost-efficient ways to source trustworthy data. To maximise value, it's crucial to invest in data that aligns with both your policyholders' and business needs. Measuring the quality and suitability of this data is essential to avoid costly misjudgements and ensure informed decision making.
Incorporating regtech into any transformation will help to support compliance commitments by improving data management and creating synergies across a broad range of approaches.
Blockchain technology is a key enabler in this drive towards digitalisation and the frictionless customer journey. Last year saw a surge in related projects as insurers tapped into its stability and security. The benefits of blockchain include smart contracts, distributed process automation between buyers and sellers of insurance products (more at the corporate level to begin with), and increased cyber security, making it a valuable asset in the insurance industry.
What do insurers need to think about next?
Create a strategic plan, from technology to talent, to determine where and how innovative technology can be embedded in the operational landscape and define a clear roadmap to optimise the potential efficiencies. Transforming the customer journey is not without its challenges. Exceptions handling often results in breaks in the process, creating a frustrating loop for customers who will have to start the claims process again due to disconnected systems, data points and lack of clarity over where they are in the process.
You'll also need to define the data suitability benchmarks to determine if the data is of good quality and if it's fit for purpose. This will allow you to capitalise on the opportunity data presents and give assurance that it's going to do what is required.
Finally, consider how regtech solutions could be incorporated into the tech stack to streamline processes, reduce risk and manage regulatory updates.
Artificial intelligence
Artificial intelligence (AI) and machine learning (ML) are now integral to various insurance processes, including customer engagement, fraud detection, claims evaluation, document verification, and payout initiation. Niche products deliver personalised policy documentation and enhanced decision making. AI can also be leveraged for reinsurance risk management in a volatile climate marked by inflation, climate catastrophes and geopolitical tensions, including the management of financial crime risk.
We're also starting to see the emergence of analytics on customer journeys throughout organisations. These can offer greater insights into the effectiveness of customer service, what drives customer behaviour and where issues of vulnerability might need addressing.
What do insurers need to think about next?
The development and deployment of AI is accelerating at an unprecedented pace, outstripping previous transformative technologies. As such, it’s important to adopt appropriate risk management processes to ensure safe adoption and ongoing compliance.
This includes the adoption of the EU AI Act which promotes safety, transparency, fairness and addresses the inherent risks to society and fundamental human rights. Key considerations include data privacy, avoiding biased decision making, and managing cyber security threats. Compliance includes rigorous testing, documentation, and transparency obligations.
It’s also important to consider AI in relation to Consumer Duty, taking steps to actively prevent harm, with a particular focus on vulnerable customers.
Finance and operational transformation
The buoyant finance and operational model transformation wave shows no sign of slowing down, driven by ongoing changes across people, process, regulation and ongoing M&A. Market dynamics are driving the need for ever-more-detailed financial insight to steer executive decisions and align transformation initiatives to remain competitive and secure in chosen markets. This together with a relentless focus on cost optimisation to better generate value for operations is putting pressure on firms to keep up.
Automated platforms are optimising financial performance and operational efficiency. New service delivery models are emerging as AI takes on the routine tasks of back-office reconciliations, data entry, fraud detection and real-time reporting.
Chatbots and AI assistants powered by generative AI are becoming more prevalent and use cases more sophisticated. Machine learning models are driving data mining activity to generate insights on customer behaviour.
We're also seeing an increase in application programming interfaces (APIs) allowing connectivity from the core systems to external applications and third-party services. This is underpinning the agility and flexibility of insurance operations needed as part of the wider digitalisation of the business. Incorporating API transformation into the overall strategy will help maintain a competitive advantage.
What do insurers need to think about next?
Insurers should align their business and technology strategy to make sure the right change programmes are prioritised.
To ensure cost-effectiveness and capitalise on any synergies, transformation activity should be mapped and aligned.
The value of any new data points should be determined during the design phase to ensure the architecture allows for data mining and capture.
Redress
The Mansion House speech saw the Chancellor seeking action on the uncertainty caused by mass redress events, and its impact on growth and competitiveness in the financial services industry. In a subsequent joint call for input, the Financial Conduct Authority (FCA) and Financial Ombudsman Service (FOS) published the approach to modernising the redress system to achieve a balance between protecting the customer and protecting investment. This dual approach is hoped to address any misalignment between the two regulatory bodies.
Further clarity on the ongoing discretionary commission arrangements (DCA) on motor loans is expected in Q2, after the Supreme Court judgement. The FCA will then confirm whether it proposes an industry-wide redress scheme and consult on next steps (as required) in the second quarter of 2025.
The industry is also awaiting FCA feedback on its market review of Premium Finance, which could also lead to a widespread need for firms to take remedial actions if shortcomings are identified.
What do insurers need to think about next?
In the spirit of ‘be the change you want to see’, answer all calls for input (CFI) into regulatory reform and engage in any further proposals arising from the CFI for the FCA and FOS, expected in the first half of 2025.
Vulnerable customers
The cost of premium finance is under scrutiny. At the end of 2024 the FCA began a market study into the use of credit for car and home insurance payments, and whether this represented fair value. It covers consumers who have used credit to pay for insurance in the form of monthly instalments and whether they were aware of the explicit difference in cost in choosing this over making payments upfront. This is of particular interest to the FCA because the profile of customers using this product are often vulnerable customers; those experiencing financial difficulty or less financially resilient.
However, vulnerability extends beyond financial difficulty. It encompasses a broader range of factors including health conditions, significant life events (often the subject of insurance claims), low financial or emotional resilience, and low financial capability. Customers with communication difficulties, reduced physical or mental capacity, severe or long-term health issues, and those facing personal circumstances such as bereavement, caring responsibilities, or redundancy are also considered vulnerable. All of these vulnerabilities can have an impact on customer outcomes throughout their relationship with an insurer. This should be clearly considered within firm’s mapping of customer outcomes, not just price and value.
In 2025 we should see the evolution of the Consumer Duty requirements where firms are fully embedding the regulation into their operations with demonstrable raising of standards and a better understanding of vulnerability within the four outcomes. The FCA will continue to fine-tune sector-specific priorities, and we can expect an industry-wide fact-finding activity on realising the benefits of Consumer Duty.
What do insurers need to think about next?
Key considerations for premium finance compliance include: documenting the APR justification, demonstrating pricing transparency for premium options across the entire customer journey, and ensuring tailored communication that is clear and accessible. Insurers and insurance intermediaries should proactively identify vulnerable customers and offer tailored support, provide training for staff to recognise and support vulnerable customers effectively, and collaborate with external agencies to provide additional support and resources.
Operational resilience
The Prudential Regulation Authority's (PRA) key focus areas in 2025 include facilitating a smooth market entry and exit to support better market operations and competitiveness. Scrutiny has ramped up with the need to better demonstrate resilience through a more robust recovery plan together with an enhanced resolution framework.
Operational resilience is a key regulatory priority, and firms must be able to operate within impact tolerances for each important business service by 31 March 2025. This will mark the end of a three-year transition period, during which time firms were expected to have refined and tested their operational resilience frameworks.
What do insurers need to think about next?
Complete scenario testing to determine whether impact tolerances levels for each of the key business areas are realistic. Complete self-assessments that should be board-reviewed and approved. Operational resilience does not end with the March deadline. Firms will need to continue to determine how all the work to date will be embedded into business-as-usual activities. They should ensure that identified impact business services and impact tolerances continue to be aligned to the business profile and that key vulnerabilities identified continue to be relevant.
Solvent exit planning
The PRA published SS11/24 setting out solvent exit planning requirements for insurers in January 2024. This outlined the expectation that insurers prepare for a solvent exit as part of BAU activities, and meeting the supervisory statement requirement by 30 June 2026. As such, we expect to see firms to look to implement solvent exit planning activity over 2025.
This activity should include: establishing and monitoring triggers to a solvent exit; financial modelling; and identification of, and planning for, operational activities that will be required to take place. Insurers should produce a solvent exit analysis (SEA) and update every three years (or sooner if the risk profile changes). When solvent exit becomes a reasonable prospect, insurers should prepare a solvent exit execution plan (SEEP).
What do insurers need to think about next?
As well as producing the SEA, additional requirements include establishing adequate governance over the preparation of the SEA and assurance over the adequacy of the solvent exit planning activities. The next step should include the identification of a single owner for SEA ,supported by a suitably diverse senior steering committee.
Firms should also consider how they can make use of existing aspects of their risk management framework to shape their thinking about potential triggers. This is to ensure that they implement a process for producing their SEA in line with existing processes and practice which captures synergies across the activities. In addition, the monitoring of any triggers should sit as an extension of the existing framework to increase the ease oversight.
Solvency UK
The UK’s amendments to the Solvency II regulations were finalised by the PRA last November with the majority of updates taking effect from 31 December 2024 (some of the changes were already in effect). The changes are intended to result in a more streamlined and flexible regime which facilitates entry into the UK insurance market, supports increased competition and growth, and encourages investment.
There are a range of changes: from the risk margin and the matching adjustment (which primarily impacts life insurers), to changes to reporting, third-country branch requirements, internal model applications and how group capital requirements can be temporarily calculated following acquisitions. There are also changes to the minimum thresholds at which insurers become subject to Solvency UK, and the mobilisation regime for new entrants.
What do insurers need to think about next?
Ultimately, the changes will reduce the burden for insurers, particularly smaller insurers and third-country branches, but additional work is needed to address the changes in the interim. If they have not done so already, firms will need to identify the challenges in implementing Solvency UK and plan how these are addressed. For 2025, the PRA will prioritise ensuring that the reforms already in action are embedded within the relevant firms.
Additionally, insurers should consider how to capitalise on the opportunities created by changes to matching adjustment. With strong government emphasis on boosting investment in productive UK assets, the ability to effectively source, allocate, and manage these assets could offer a significant competitive advantage within the life insurance market.
Governance, internal controls and director obligations
We're witnessing increased focus on the effective functioning of governance forums and transparency over the effectiveness of internal control environments brought about by the FRC's new corporate governance code, as well as other regulatory pressure.
Firms are revisiting and investing in combined assurance frameworks to enable directors to confidently execute their obligations and make the necessary attestations. This has led to many looking at their governance, risk and compliance (GRC) system solutions to support a combined view of their risk and controls framework. We've also observed a focus from insurers on more sophisticated risk prediction and risk management, such as improving their emerging and forward-looking risk processes.
What do insurers need to think about next?
Directors need to make attestations on their obligations in their reporting and accounts, including signposting what’s on the horizon.
Mergers and acquisitions
After a quiet couple of years, we've seen an uptick in M&A activity with some of the major players undertaking consolidation. We expect this to continue, driven by steady interest rates and the need for growth opportunities. All parties will need to continue to look after clients in the way that they expect with a seamless transition for the policyholder, for the talent pool, and for the impact on legacy and operational efficiency.
What do insurers need to think about next?
Merger, demerger or policy consolidation activity can significantly impact market dynamics and strategic ambitions. Risk should be carefully managed to ensure policyholders experience no disruption.
Consolidating unwieldy insurance legacy systems with cloud-based computing and digital agility activities needs to be handled in a phased approach, managing the risks not only of the integration but of the legacy system itself.
Bulk Purchase Annuities
The growth in the Bulk Purchase Annuity (BPA) market observed in 2023 continued into 2024 with estimated volume of £45 billion to £50 billion (driven by AON). This is expected to continue in 2025 with no signs of the buoyant market cooling. Three new entrants to the market have been seen over the last two years – M&G, Royal London and Utmost – with a further new entrant rumoured for 2025. In addition, we saw the introduction of Solvency UK, which allowed greater investment freedom for both new and existing firms, while also introducing new requirement related to matching adjustment attestation.
Together with innovation in pension risk transfer product and terms, this is a market dominated by change. While the PRA remains supportive of the market, its Dear CEO letter published in January 2025 continues to demonstrate that it is observing the market closely, and has high expectations over pricing discipline and robustness of risk management practices.
Firms managing their pension risk continue to drive BPA activity. As a result, the PRA has highlighted the importance of monitoring the high levels of competition in the market to avoid compromising pricing standards or risk management.
What do insurers need to think about next?
Given the increase in competition on the market we've observed increased focus on development of pricing models to enable more precise and accurate pricing, allowing firms to maintain pricing discipline and write business at the expected margins. Embedding change in respect of Solvency UK can also be expected to be a focus of firms over 2025 given the relative infancy of this new regulation.
Sourcing high-quality scheme data will help insurers to apply appropriate pricing and risk assessment to encourage participation.
Financial crime
For life insurers, the cost and effectiveness of financial crime compliance continues to be a concern. We've not yet seen transformative technology – such as AI for transaction monitoring and dynamic risk assessment – being adopted for financial crime on the same scale as in the banking sector, even where this could offer long-term benefits.
For general insurers, brokers and managing agents, intermediated value chains and differing approaches to customer due diligence can impact the quality and completeness of the data available to firms. These data issues, together with weaker due diligence and screening, mean that a number of firms could find it challenging to maintain an accurate picture of their sanctions risk exposure at a time when sanctions risks are heightened
Key provisions of the Economic Crime and Corporate Transparency Act 2023 come into effect this year, including the new Failure to Prevent Fraud offence from 1 September 2025, and new Identification and Verification (ID&V) requirements at Companies House. The breadth of potential fraud underpinning the new Corporate Criminal Offence will require firms to expand their view of fraud risk scenarios past the traditional perimeters of claims fraud and its financial impact on firms.
This year also brings with some uncertainty in relation to the FCA’s growth agenda and the Government's focus on competitiveness and the effectiveness of current regulation. It's unclear whether this will lead to any changes in the UK Money Laundering Regulations or other relevant legislation, but there are no signs as yet that the FCA is weakening its stance on financial crime prevention.
What do insurers need to think about next?
Insurers need to be comfortable that core due diligence and monitoring activities happen when they should, and to an appropriate quality standard. General insurers should consider whether they have sufficient information on ultimate beneficial ownership and are using this as part of sanctions screening. The new Failure to Prevent Fraud offence requires a risk assessment, and firms need to think about a wider range of fraud risks and controls.
Finally, firms contemplating the use of AI and machine learning for financial crime – or any other new technology – need to think carefully about configuration, data quality, training and testing, before they deploy new tools.
Next steps
The insurance market keenly awaits the decision from the Supreme Court, with the uncertainty around the extent of the redress action looming in the background. There are plenty of other regulatory considerations that need to be planned and executed. However, reducing cost and capitalising on opportunity remains a central goal.
The journey towards greater digitalisation needs to be followed with caution to ensure that any benefits realised don’t compromise the risk profile of the organisation. Equally, firms will need to conduct a robust benchmarking exercise to find the most beneficial data. This will allow them to exploit the inherent opportunity and avoid costly misdirection.
For more insight and guidance, contact Rob Benson.
