How cost structure constraints are reshaping the insurance sector

The insurance sector faces a critical juncture, where the high costs of digital transformation and artificial intelligence (AI) adoption are exacerbated by mounting compliance demands. Small to medium-sized firms, in particular, face significant hurdles in managing this transition independently. In addition, economic constraints and political tensions are leading to a more volatile market. This makes it even more difficult to maintain growth without finding efficiency gains that offset the increased costs caused by such volatility, without putting too much price pressure on the customer.  

Address diverse sector challenges 

Despite the challenges, optimism remains high with predicting growth. However, while 80% of organisations report increased annual revenue, this reflects a downward trend since 2024.To some extent, growth and revenue expectations vary significantly, reflecting a highly fragmented insurance landscape where operating constraints differ sharply by insurer type and market maturity. For example, European insurance markets are at a mature stage, whereas Asian markets are still in a growth phase. Navigating cost constraints therefore requires insurers to adopt a tailored approach that identifies specific growth and revenue opportunities both locally and internationally. 

Harness AI responsibly 

Transforming company technology and AI implementation are among the top strategic and planned investment priorities for C-suite executives, according to this year’s report. AI enables insurance companies to automate manual data processing, reduce errors and accelerate workflows, particularly in core processes such as claims and treaty management. For example, AI can analyse large data volumes to detect patterns, proactively engage with customers to personalise services and support risk assessment to improve insurance outcomes and reduce the frequency and cost of claims management.  

According to the report, leaders are motivated by AI’s ability to deliver more accurate forecasting and data-driven decision-making that give a competitive advantage. Additionally, for insurance companies with IT legacy issues, using generative AI (GenAI) and machine learning during system replacement streamlines migration and reduces associated time and cost issues. 

Data security may present an issue, with 41% of leaders reporting that it is key to the success of their technology transformation plans. Responsible AI adoption and compliance are a strategic imperative for 63% of the C-suite barometer’s respondents and cited by 22% as a priority investment. Key steps insurance companies can take to achieve responsible AI adoption include building trust and reducing risk. This includes training to fully understand AI’s impact across an organisation and putting governance guardrails in place. In addition, the ability to move forward in a structured way helps mitigate risks. This involves having the capabilities and budgets in place to develop an AI strategy and test use cases. For smaller to medium-sized insurance companies, finding partners to reduce AI’s capacity and cost burdens are essential.  

Optimise private equity plans 

Attracting PE investment is increasingly important for leaders across the sector and sub-sectors. However, in order to maximise value through PE-backed transformation, strengthening digital and operational maturity is key. In addition, PE opportunities differ across sectors and regions. In Europe, for example, PE is increasingly being used to centralise IT infrastructure and processes within the insurance broker sector to gain efficiencies. There is also a PE focus on cash-generating acquisitions such as run-off life companies, where harmonising and streamlining the investment management process can save costs.  

However, challenges remain and private equity’s medium-term exit can conflict with the long-term nature of insurance contracts and must be addressed in plans. 

Explore strategic benefits of M&A 

European M&A opportunities look appealing to large non-listed players seeking diversification, especially property and casualty groups acquiring life entities. Interest is also growing in specialised technology providers and start-ups with unique platforms. However, as market demand drives up valuations, proactive M&A success hinges on early targeting of companies that can fill specific technology gaps. 

For smaller to mid-sized companies, opportunities exist to partner with similar industry players in non-core business areas to optimise back-office and sales services. Also, to share the high costs of renewing or replacing legacy IT systems to enable quick and efficient scaling.  

Assess cross border opportunities 

Cross-border expansion offers international insurance groups new growth opportunities. According to the report, nine in ten respondents have overseas expansion plans. Key challenges identified include complying with local regulations and managing trade and tariff costs. 

However, the complex nature of the insurance sector means expansion plans should factor in a wider range of considerations. Lessons from insurance groups entering the African market in the early 2000s show that projections of high economic growth, a growing middle class and low insurance penetration are unreliable factors alone. Success also depends on considering inherent risks, such as exposure to climate-related disasters, cyber threats or geopolitical tensions. In addition, dependence on insurance-related government policy and the tax environment should also be taken into account. 

What does the future look like? 

As the latest C-suite barometer findings show, the insurance landscape is increasingly challenging, with the sector likely to contract in the coming years as players seek partners to fill business and operational gaps. Cost constraints, regulatory and compliance pressures, geopolitical uncertainty and more frequent, larger climate-related claims remain key concerns. It requires insurance companies to rethink strategies and take a more proactive approach to address existing and emerging risk-related needs. 

In this respect, technology transformation and the adoption of AI are now business-critical. In a sector where products are very similar and comparable, AI’s ability to create, manage and distribute insurance products through technology-led applications requires companies to be on the front foot or risk being left behind.  As we enter a new technology-led era, players need to demonstrate how they can add value by using AI to proactively support and guide customers on preventive measures across the insurance product spectrum. Companies that adopt the ‘protect customers first’ approach and personalise products will not only improve their relationship with customers but also have a competitive advantage going forward.