UK insurance in 2025: inflation, tech, and climate risks

The UK is home to the world’s largest insurance market, Lloyds, and is the third largest market in the world for insurance business. In the most recent report on , which ranks 121 locations and has separate sub-indices for banking, investment management, insurance, professional services, government & regulatory, finance, fintech and trading, the highest ranking one for London was insurance, at second place, with New York taking the top spot. In the Chancellor Reeves’ Mansion House speech in late 2024, the ambition was clear – to drive growth and competitiveness in financial services to continue being a leader in the industry.

What does the insurance industry look like in 2025? 

The impact of inflation on interest and insurance rates

With inflation stuck above 2%, the economy struggling to grow, taxes rising and consumer confidence recovering but still comparatively low, the Bank of England (BoE) is needing to very carefully consider how to quickly reduce interest rates. It is anticipated that the BoE will cut rates at a quarterly pace in 2025, ending at 3.75%, however, there is a growing risk that sticky inflation keeps interest rates higher for longer.

Unlike the majority of other sectors, higher interest rates have been a benefit for life insurers, boosting investment yields. However, this has not been the case across the board for non-life insurers. During 2024, inflation, as well as claims inflation, have been pushing the cost ratio up, squeezing returns despite increasing premium rates. The average cost of buildings insurance has increased by . Premiums are anticipated to continue to rise due to reinsurance costs and adverse weather.

Hitting headlines in 2024 was automotive insurance, which saw record claims costs, yet a fall in automotive insurance premiums.  The most recent data from the Association of British Insurers noted a fall in premiums by 2% in Q3 of 2024, to £612, from a record peak of £635 in Q1. Premiums will need to climb to protect margins, which are likely to remain under pressure in 2025 from rising reinsurance costs and claims inflation.

AI and cybersecurity for insurance companies

In order to offset rising claims costs, insurers will look to leverage technology to help streamline claims and focus on internal efficiencies.

By leveraging technology insurance companies will be able to continue the shift to a more proactive predictive and prevention model, interacting with customers more frequently to help minimise losses. Advances in technology, such as connected devices or digital sensors and improved analytics, have enabled insurers to offer more personalised services. For example, smart plugs for electrical faults, leak detection systems, telematics in vehicles and greater adoption of fitness trackers.

An article about the future of any industry in the current market wouldn’t be complete without a mention of generative artificial intelligence (AI). Insurance is a sector that can benefit hugely from automation and generative AI. Increased adoption will be witnessed in 2025 given how much of the work in the insurance industry involves processing unstructured data. Further developments, beyond just the implementation phase, will come to be realised. For example, in underwriting, analysis of vast data from various sources will be able to identify trends to help predict events accurately, enabling more precise underwriting and tailored policies. This would lead to greater efficiency, healthier underwriting profit, lower premiums and policies that better meet the needs of the customer. On top of the benefits from generative AI’s analytic capacities, it will be able to support in content creation. The tools will be able to produce text in the context of claims and be able to communicate the status of a claim to a claimant, capturing some of the details and nuances particular to the context of that claim. It will also be able to support underwriters communicate and negotiate with brokers. However, given that so many insurance companies are dealing with legacy systems, coding and software development will need to be leveraged by the technology for modernisation. This will lead firms to consider streamlining their current talent and assess their hiring strategies to ensure they have access to the necessary digital transformation and change management skills.

Cyber criminals use of AI should not be overlooked. Firms will be considering how they not only leverage the technology to protect themselves but the industry will see a growth in the cyber insurance market, given the rise in cyber risk. Cyber security firm Ventures projects $10.5tn in annual cyber crime costs by 2025, with Allianz’s latest risk barometer citing cyber incidents as the top global risk.

UK financial services reforms: driving growth and competitiveness

In late 2024, the Chancellor announced a package of reforms to ensure the UK’s status as a ‘global powerhouse for financial services’. The reforms include changes to regulation to drive growth and competitiveness, and also include modernisation of the Financial Ombudsman Service framework. There is also set to be further focus on fraud, which is was estimated to cost the consumer , and continuing to grow in insurance, with . 2024 saw the agreement of a , which will see further collaboration and data sharing to prevent, detect and investigate fraud. This comes at a time where many firms will be readying for the ‘failure to prevent fraud’ offence which comes into effect on 1 September 2025, which focuses on where firms themselves benefit from fraud.

The Financial Conduct Authority (FCA) is also conducting a . This study aims to ensure that premium finance products offer fair value given the interest rates are 20% to 30% higher annually, and that competition in the market is effective. Depending on the review outcome, the result could mean tighter regulations so brokers and insurers will need to manage their revenue streams while ensuring fair value for customers.

Climate risks and insurance

2024 was the warmest year on record globally. The first calendar year above 1.5°C (exceeding the pre-industrial average), and for the UK, it was the fourth warmest on record.

Climate change is also resulting in the UK becoming warmer, but also wetter. Six of the ten wettest years across the UK have occurred since 1998 and the . This past year saw the highest number of flood warnings issued in the UK. Floods are the most common natural disaster worldwide, accounting for roughly one-third of economic loss caused by weather and climate-related disasters.

The have already been keenly felt in 2025, and will continue to do so for the rest of the year (and beyond). There is an increased risk of building and structural damage from river flooding, transport disruptions and dangerous driving conditions and increased overwhelm of urban draining systems. In 2024, revealed payouts reached a record £4.1b, and this will lead to continued pressure from the insurance industry on the government to invest more in flood defences and broader reforms to planning consent for buildings in flood-risk areas. Given the frequency and severity of severe weather, parametric insurance products may see a rise in the importance this coming year of the need for quick payouts, simplicity of the process and flexibility for policyholders.

As climate change continues to pose challenges, insurers will need to further embrace technology. The launch of Gencast by Google's DeepMind represents an advancement in weather forecasting, offering accurate 15-day predictions thanks to its use of historical data and Google Cloud TPUs. Tools like in mitigating risks and protecting communities. This innovation will allow insurers to better assess risks and prepare for extreme weather events.

The insurance industry also has a vital role to play in encouraging businesses to invest in sustainability by offering reduced premiums, structuring premiums to reflect the resilience and sustainability of the infrastructure that is being insured as well as having a greater appetite for policies that promote renewable energy and eco-friendly practices.