Emerging risks compel insurers to modernize

Insights

• Changes in cross-border trade will bring investment headwinds and more costly claims
• Cybersecurity challenges will spread further and require more comprehensive countermeasures and resilience planning
• Climate change and environmental risks reshape underwriting
• Regulators’ desire for greater transparency will lead to expanding compliance requirements
• Pressure to engage in mergers and acquisitions will grow for insurers

The global insurance industry is navigating a rapidly evolving landscape. In 2025, factors ranging from geopolitical tensions to cyberthreats and climate change will converge to reshape the trajectory of insurance subsectors, including life and annuities (L&A), property and casualty (P&C), commercial insurance, and reinsurance. Infosys’s work solving technology problems for global insurers has led us to identify the following as the most critical risks facing insurers in 2025. Drawing on insights from the World Economic Forum’s Global Risks Report 2024, this POV provides predictions associated with these risks across insurance subsectors.

Risk #1: Changes in cross-border trade flows and increasing protectionism

Proposed US tariffs on imports could significantly impact the insurance industry, especially in L&A, P&C, and commercial insurance. These tariffs are expected to increase production and consumer costs, disrupt supply chains, and spur retaliatory actions from other nations. China in early December banned exports of particular minerals critical to semiconductor, electric vehicle, and defense industries. This economic tension may exacerbate inflationary pressures, further complicating actuarial assumptions and underwriting practices across insurance lines.

Predictions: Investment headwinds, costly claims, and trade disruptions

Increased tariffs will fuel inflation, reduce disposable incomes, and cause lapses in life insurance policies, as households prioritize essential expenses. The rising cost of living could also deter new policy purchases. Tariffs will impact equity and bond markets, where insurers allocate premiums for long-term investments. Market volatility leads to weakened returns, affecting insurers' ability to maintain competitive rates. Restrictions or higher costs on cross-border transactions between the US, Canada, and Mexico limit insurers' reach in multinational policy offerings, especially for expatriates.

On the P&C side, increased tariffs on construction materials and consumer goods elevate claims costs, particularly for home and auto insurance. This aligns with previous scenarios where tariffs inflated material costs. When material prices rise, insurance costs increase to match the project’s total value. More repairs and replacements lead to increased rates. Since 2020, more than 80% of construction materials have gone up in price by 19% on average.

Higher operational costs for businesses, compounded by retaliatory tariffs, reduce insurance uptake in commercial lines. A stressed economy could also lead to higher claims frequency due to fraud or negligence in financially strained businesses. As other nations answer tariffs with reciprocal tariffs, P&C insurers covering export-heavy industries face elevated claims due to disruptions in cross-border trades. Businesses relying on tariff-affected goods (e.g., automotive components, agriculture) shrink operations or shutter entirely, leading to lower premium income for insurers and increased claims in trade credit insurance. Supply chain interruptions and rising costs may heighten liability risks, particularly for manufacturers unable to deliver on time.

Reinsurers see heightened demand, as insurers seek to offset escalating losses from inflated claims and trade-related disruptions.

In the face of trade wars, insurers must closely monitor economic policies and advocate for adaptability in product offerings. For example, dynamic pricing models and indexed policies tied to inflation may help mitigate risks. Collaboration with reinsurance partners to design coverage that buffers tariff-induced losses is critical. In February 2024, Techficient, SCOR, and AIMCOR Group, LLC have collaborated to create a next-generation digital term life insurance product, AIMCOR QuickLife, issued by Ameritas Life Insurance Corp.

Risk #2: Cybersecurity threats proliferate and spread across the value chain

Cybersecurity threats, including ransomware, phishing, and nation-state attacks, are among the most pressing current challenges for the insurance industry in 2025. Insurers face increasing claim volumes for cyberattacks, rising costs of underwriting cyber policies, and regulatory scrutiny regarding data security. As cyber-risks become more interconnected, insurers must adapt quickly to ensure operational resilience, foster policy innovation, and maintain customer trust.

Predictions: Insurers sharpen cybersecurity countermeasures, tailor coverage by industry

The L&A sector is increasingly vulnerable to cyberattacks targeting sensitive customer data and payment systems. For instance, a 2023 breach highlighted the risks of holding vast personal data, leading to significant operational and reputational damage. By 2025, insurers in this space will integrate fraud detection tools and advanced encryption technologies to safeguard data while introducing cyber protection riders in life policies to address growing consumer concerns.

P&C insurers are witnessing escalating claims related to ransomware and internet of things (IoT) device vulnerabilities. A 2024 Cyber Claims Report by cyber insurer Coalition Insurance Solutions states that businesses with more than $100 million in revenue saw increases in frequency and severity of cyber-attacks. By 2025, P&C insurers will emphasize proactive risk mitigation through partnerships with cybersecurity firms, embedding risk monitoring tools in policies and offering discounts to policyholders with robust cyber hygiene practices.

Commercial insurers are at the forefront of the cyber insurance market due to increasing vulnerability of businesses. Aon reported in 2024 that midsized enterprises were one of the fastest-growing segments for cyber insurance uptake. By 2025, commercial insurers will focus on industry-specific solutions, such as coverage tailored for healthcare or financial services, and will expand bundled offerings that include cyber-risk assessments and incident response services.

For reinsurers, the systemic nature of cyber-risks poses significant challenges. A single cyberattack could trigger cascading claims across multiple primary insurers, as seen during the 2021 Kaseya ransomware attack. By 2025, reinsurers will adopt advanced modeling tools to price cyber-risks more accurately. Additionally, they will increasingly rely on alternative risk transfer mechanisms, such as cyber catastrophe bonds, to manage exposure.

To bolster cybersecurity and resilience, insurers must design modular policies tailored to diverse business needs, offering add-ons like ransomware protection and cyber extortion coverage. Building awareness among policyholders about cyber-risks will reduce claims and foster long-term client relationships. Partnering with tech firms will help insurers strengthen underwriting accuracy and post-incident support.

Risk #3: Climate change and environmental risks reshape underwriting

The increasing frequency and intensity of extreme weather events are already causing substantial financial losses. Insurers must navigate rising claims and shifting risk landscapes. This dynamic is reshaping underwriting practices, investment strategies, and the integration of climate risk modeling across all sectors. The shift toward sustainability is a necessity for long-term industry viability.

Predictions: Greater volatility, unpredictability, and losses

Climate change directly impacts mortality and morbidity trends, with heatwaves, respiratory diseases, and vector-borne illnesses on the rise. The Association of British Insurers has reported that weather-related claims have hit GBP144 million in the second quarter of 2024 and total payouts rose by 5% to GBP1.4 billion. By 2025, life insurance organizations will factor environmental health metrics into pricing and expand coverage for climate-related health risks, such as heatstroke and chronic respiratory conditions.

The P&C sector is at the frontline of climate-related claims due to property damage and business interruptions. Hurricanes Ian and Ida collectively caused more than $90 billion in insured losses between 2021 and 2022. By 2025, P&C insurers will employ AI-driven geospatial analytics to underwrite climate-sensitive risks and incentivize policyholders to adopt resilient infrastructure through premium discounts.

Commercial insurers are increasingly exposed to climate-related liability claims, particularly for sectors like agriculture, energy, and real estate. In 2023, Allianz expanded its green solutions portfolio to address renewable energy risks, signaling a market shift. By 2025, commercial insurers will offer tailored policies to support clients in achieving environmental, social, and governance (ESG) compliance and transitioning to sustainable operations.

Reinsurers face mounting aggregation risks, as climate-induced disasters grow in scale and unpredictability. The 2022 floods in Pakistan, which caused $1.5 billion in insured losses, highlighted the challenge of managing systemic risks. By 2025, reinsurers will adopt advanced climate modeling tools like RMS’s climate change framework to refine risk pricing and develop parametric products for catastrophic events.

Risk #4: Regulatory and compliance changes aim to deliver transparency

The insurance industry faces evolving regulatory landscapes, driven by increased consumer protection mandates, ESG disclosure requirements, and heightened scrutiny on cyber-risk management, as well shifting frameworks such as IFRS 17 accounting rules and GDPR privacy requirements. While these changes aim to enhance industry transparency and resilience, they also increase compliance costs and operational complexity.

Predictions: Regulations deliver better transparency and create advisory opportunities

In the L&A sector, regulators will require stricter disclosure requirements on policy costs and benefits. Regulators are pushing for enhanced transparency, as seen with the NAIC’s Life Insurance Policy Locator program, which has connected consumers with more than $10 billion in unclaimed benefits from annuities and life insurance policies since the tool's launch in November 2016. By 2025, L&A insurers will integrate advanced analytics to comply with consumer protection laws while optimizing policyholder communication and reducing mis-selling risks.

P&C insurers will increasingly adopt AI-based tools to assess regulatory compliance and refine underwriting processes for climate-sensitive risks, ensuring adherence to environmental and safety standards. This includes navigating new frameworks aimed at climate risk disclosures, such as the Securities and Exchange Commission’s 2023 proposed rules on climate-related disclosures. As such requirements gain momentum, insurers and other enterprises will have to deliver detailed reporting on risk exposure.

Commercial insurers will expand their roles as strategic advisors, offering tailored coverage and risk management solutions aligned with clients' regulatory obligations such as enhanced data privacy laws and industry-specific sustainability requirements. Marsh launched ESG-focused advisory services in 2023 to help businesses navigate compliance challenges.

Reinsurers will see tougher capital adequacy and risk management requirements, as regulators seek to address systemic risks. For instance, Solvency II reviews in Europe are expected to introduce more granular risk quantification for catastrophic events. By 2025, reinsurers will rely on parametric insurance solutions and advanced risk aggregation models to meet evolving standards while managing rising claim exposures effectively.

In the face of climate change, launching products such as climate resilience bonds and green insurance packages, will address emerging client needs. Aligning investments and underwriting practices with ESG principles will enhance brand reputation and attract socially conscious clients. Partnering with governments and NGOs to fund climate mitigation projects, such as flood defenses, can reduce future claims exposure. Insurers who deploy climate AI tools will be able to predict and price risks with higher precision. Leveraging IoT devices and real-time weather data can accelerate risk mitigation.

To prepare for regulatory changes develop streamlined compliance programs and automated reporting systems to meet global regulatory requirements. Leverage AI for regulatory intelligence, ensuring real-time tracking of policy changes and their implications. Offer advisory services to help clients navigate complex regulatory landscapes, fostering stronger relationships and retention.

Risk #5: Mergers & acquisitions pressure builds

The increasing pressure to optimize capital efficiency and embrace technological innovation is driving M&A activity in the insurance space. Consolidation enhances operational efficiency, expands geographic footprints, and drives innovation, but integration challenges and regulatory scrutiny remain key hurdles. Allianz and Paris-based Amundi, Europe’s largest asset manager owned by French bank Crédit Agricole, were engaged in discussions about a potential tie-up. While talks have since halted, it remains unclear whether they might resume at a later stage. Private equity interest, particularly in the P&C market, remains high, suggesting that the industry will continue to consolidate and innovate. Insurers must navigate these complexities while ensuring customer-centric growth.

Predictions: Buyers driven by specialization and diversification

The L&A sector will see increased M&A activity focused on acquiring digital capabilities and expanding into underserved markets. For example, MetLife's acquisition of Versant Health in 2020 allowed it to diversify its offerings into vision care. By 2025, L&A insurers will target insurtech startups and health-focused providers to improve personalization and offer bundled life and health products, enhancing customer engagement.

In P&C, M&A activity will center on global enterprises, adding specializations and expanding geography. Expect to see more deals like the 2021 acquisition of RSA by Intact Financial and Tryg, which highlighted a strategic focus on regional dominance and specialty insurance. By 2025, P&C insurers will increasingly acquire firms with advanced risk analytics tools, positioning themselves as leaders in addressing emerging risks like climate resilience and cyber liability.

Commercial insurers will leverage M&A to diversify their portfolios and penetrate niche sectors. Aon’s attempt to acquire Willis Towers Watson in 2021 (despite regulatory challenges) showcased the industry's push for dominance in risk advisory. By 2025, commercial insurers will focus on acquiring ESG-focused firms and cybersecurity specialists to cater to the growing demand for sustainable and tech-enabled insurance solutions.

Reinsurers will pursue strategic mergers to manage aggregation risks and optimize capital requirements. Swiss Re's collaborations with insurtech startups exemplifies the growing trend of aligning with innovative partners. By 2025, reinsurance M&A will focus on firms with strong catastrophe modeling capabilities and global portfolios, enabling better diversification and risk pricing amidst climate volatility.

In preparation for insurance M&A, enterprises must establish robust post-merger integration frameworks to maximize value from acquired entities. Address antitrust and compliance challenges proactively to avoid deal delays or failures. Ensure seamless service transitions during M&A to maintain trust and retention. Invest in IT integration to unify platforms, reduce redundancies, and enhance data analytics. Mitigate risks arising from merging IT systems by implementing robust cybersecurity protocols.

Strategic recommendations: Innovation, analytics and agility grow more essential for insurers

The insurance industry in 2025 will be tested by a convergence of technological, environmental, and geopolitical risks. Insurers across all sectors will need to embrace innovation — leveraging AI, automation, and data analytics — to navigate these challenges. At the same time, they will need to build resilience against cyberthreats, climate change, and regulatory shifts.

From an IT perspective, insurers must prioritize advanced data analytics, cloud scalability, and automation to navigate the challenges posed by tariff-induced disruptions. Enhanced supply chain risk management measures are crucial to manage increased claims volume and mitigate vulnerabilities from geopolitical tensions.

The future of insurance lies in agility, collaboration, and proactive management of emerging risks while ensuring sustainability and transparency in a fast-changing world.