Forrester’s 2025 insurance predictions: tech spending will surge, but can AI deliver on its promises?

A year ago, Forrester predicted a more stable, if not stellar, performance for insurers in 2024 after a couple of years of higher-than-expected claims costs. In 2025, we predict that insurers will continue to pass on higher costs of rising claims expenses to customers. This improving profitability will translate into increased tech spending as insurers prioritise innovation, data, AI and automation – but most insurers won’t see immediate, material and direct benefits from AI.

 

AI’s promise of transforming underwriting, claims and customer experience remains untapped, and only a tiny fraction of insurers will harness its full potential by 2025. Tech-driven product innovation such as embedded insurance and usage-based insurance may yield faster results, but long-term AI gains remain on the horizon. In 2025, Forrester predicts that:

 

Tech spending will be on the rise 

 

Forrester predicts an 8 per cent increase in tech spending across the insurance industry in 2025. Through tech projects, including advanced analytics and AI, insurers will enhance customer experiences, improve claims management and optimise processes. As insurers prioritise agility and quicker time to value, they will cut back on new multiyear and complex transformation programs.

 

In contrast, more iterative peripheral development will grow, such as building APIs and microservices and hollowing out complex business rules by constructing an abstraction layer around legacy backends.

 

Insurance tech teams must use their budget in modular architecture to ensure seamless integration with internal and external systems, implement agile methodologies to speed up IT development and deployment and improve employee training programs by using new technologies and tools such as data, AI and analytics platforms.

 

Few insurers will see direct AI gains 

 

Despite the excitement surrounding AI, fewer than 5 per cent of insurers are expected to see direct, tangible gains next year from the technology, such as having 10 per cent of revenue attributable to AI.

 

The barriers are significant: legacy systems, lack of AI talent and difficulty integrating AI into existing processes. Many insurers will continue to invest in AI for internal automation, but the true potential of AI, such as improving underwriting or claims accuracy, will remain elusive for most.

 

Insurance tech teams should focus on provisioning high-quality data (including unstructured data used for generative AI applications), partnering with vendors that can provide AI skills or applications, and adopting AI for specific use cases. These steps will still leave most insurers looking for direct gains from AI, however.

 

Embedded insurance will provide a bright spot

 

While AI monetisation lags, embedded insurance is set to grow by 30 per cent, especially in personal lines. In Forrester’s Priorities Survey 2024, 32 per cent of global business and technology professionals at insurance firms said they planned to invest more in embedded finance capabilities in 2025.

 

This model, where insurance is seamlessly integrated into other services at the point of need, offers insurers a way to reach new customers and enhance distribution. While AI has the potential to enhance embedded insurance through the personalisation of offers and the automation of insurance processes, the effectiveness of this strategy hinges on the strategic collaboration between carriers and non-insurance enterprises involved in the embedded insurance experience.

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You can download Forrester’s complimentary 2025 Technology & Security Predictions Guide here