It’s expected that in 2025, rising claims costs will continue to push insurance rates higher, frustrating customers and forcing insurers to customize products, according to a new report by global market research company Forrester.

Embedded insurance will grow by at least 30 percent, predominantly in personal lines, the market researcher said, with 32 percent of global business and technology professionals at insurance firms planning to invest more in embedded finance capabilities in 2025.

By integrating insurance products into platforms with large customer bases, embedded channels are gaining dominance and providing a gateway to new customer segments by “making products easier to understand and purchase while reducing the coverage gaps that currently leave consumers and small businesses underinsured.”

Growth in usage-based insurance will help offset customer frustration over rising insurance premiums, the Forrester report added.

“Leaders at insurers should redouble their efforts to sell usage-based products to create a more personalized and transparent customer experience,” the report said.

Forrester forecasts tech spending by insurers will rise by 8 percent year over year.

Driven by the accelerated adoption of data and AI, especially genAI, the insurance industry’s tech spend will increase compared to 2024.

More than one-third of insurers will increase spend on super apps, omnichannel experience, and claims management systems, the report outlined.

Carriers will also focus on data, AI, and analytics to improve customer experience, employee productivity and automated processes.

As increased spend on tech occurs, carriers are expected to cut back on new multiyear and complex transformation programs.

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

“Insurance tech teams must invest 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 to use new technologies and tools, such as data, AI and analytics platforms,” the report added.

Fewer than 5 percent of insurers will reap tangible AI gains because interest and execution aren’t same, according to Forrester.

Legacy systems and the associated challenges of integration into existing processes, as well as the AI-related skill gap in the workforce, will limit the use of AI technologies, the report noted.

Forrester recommends insurance tech teams focus on obtaining high-quality data, including unstructured data used for GenAI applications; partnering with vendors that can provide AI skills or applications; and adopting AI for specific use cases.

A grim prediction for auto insurers is that at least five carriers will exit the market due, in part, to rising claims costs, advanced auto technology and social inflation.

The market research company suggests insurers incorporate models like those offered by connected insurance programs so that auto carriers can adjust underwriting policies and pricing appropriately to avoid having to exit the market.