2025 AI Innovation & Insurance Trends
by Brian O’Connell
The U.S. insurance sector is shifting into higher gear in 2025, fueled by the adrenaline rush of new technologies that are changing how the industry engages with customers and business partners.
Exhibit “A” is artificial intelligence, which is quickly becoming pervasive in the insurance realm. A recent study by Digital Insurance shows 78% of insurance leaders saying they’re expanding their technology budgets in 2025, with 36% of survey respondents saying the bulk of their IT budgets are going to AI. This makes AI the highest IT priority among insurers, well ahead of top-tier issues like big data and analytics, cloud computing, and digital infrastructure.
The DI study reports that most insurers are in the speculative and development stage with AI, but specific insurance sectors, like healthcare, “are already in full AI production.
So, what does the AI-led insurance innovation landscape look like in mid-2025? Here’s an inside look.
How AI is changing the insurance landscape.
Major insurance companies have wasted no time in implementing AI. Allstate, for example, is helping agents prepare claim emails. State Farm is swiftly deploying the technology to gather customer data for improved outreach and is using natural language models to speed up the contract analysis process.
Other insurance professionals say they’re quickly getting comfortable with AI in the workplace.
“We’re using AI to streamline underwriting, flag fraud faster and offer customer service that doesn’t include canned elevator music,” said John Espenschied, agency principal at Insurance Brokers Group, a Missouri-based independent insurance agency.
Espenschied said that predictive analytics is the “new” gut instinct. “AI can look at more variables than any underwriter, making quote accuracy better, pricing fairer (most of the time), and claim turnaround faster,” he said. “Claims bots are getting so good they might start asking how your weekend was before denying coverage.”
Other technology experts say insurers are barely scratching the surface with AI.
“Currently, insurers use AI for tasks like processing straightforward data inputs or automatically categorizing claims,” said Stan Smith, CEO and founder at Gradient AI, a Wellesley Hills, Mas.-based insurance industry solutions developer. “In the future, insurers will also leverage AI to provide next best action recommendations for underwriting and claims management.”
Smith believes next best action recommendations will provide underwriters with specific suggestions, such as adjusting coverage limits or gathering additional data sources to better assess risk, based on AI-driven insights. “Similarly, for claims adjusters, AI will suggest next best actions such as seeking out additional documentation or identifying an optimal settlement path based on previous claims data,” he said. “By automating complex decision-making, AI enhances efficiency, consistency, and speed across underwriting and claims operations.”
AI Risks in Play
With innovation comes risk, as insurers begin fully deploying AI tools.
“There’s definitely risk,” said Cole Knuth, chief executive officer at UKON, a cyber insurance marketplace company in Denver, Col. “When models are trained on incomplete or biased data, the result is skewed pricing and unfair denials. That’s why humans still matter in AI-driven underwriting. Advisors must validate the inputs to ensure transparency.”
AI also brings risk to the workplace in all too real forms.
“We’re hearing about job displacement, bias and discrimination issues, consumer errors, and cybersecurity risks with AI,” said Ted Patestos, CEO and founder of Tiger Adjusters, a public adjusting franchise in Houston, Tx. “On the consumer side (outside of job displacement), the biggest risk to consumers is arguably an increase in erroneous claim denials and/or underpayments.”
One of the most urgent concerns is algorithmic bias, where pricing or claims decisions unintentionally disadvantage specific communities. “As AI systems become more embedded in policy and claims workflows, issues of fairness, explainability, and accountability are under closer scrutiny,” said Guy Gresham, climate strategy and global capital markets board advisor in New York, N.Y.
There’s also a growing regulatory response to AI risk.
“Insurers are now expected to have clear governance frameworks in place—covering everything from model validation and vendor oversight to consumer transparency,” Gresham said. “These aren’t just compliance matters; they’re fast becoming indicators of operational maturity.”
Is AI impacting policies and pricing?
AI also helps insurers clarify risks and set up optimized price points.
“Live telemetry gives insurers a clearer view of actual risk, not theoretical posture,” Espenschied noted. “That clarity lets good actors get better pricing. It also helps advisors push for coverage that aligns with what clients are actually doing, not just what they say on an application.”
Insurers are also using AI to boost operational risk assessment on the production side.
“Insurers today typically rely on broad data sets like historical loss data, demographic information, and general weather reports to assess risk,” Smith said, “In the future, we will see AI models that incorporate more specialized data sources to improve the accuracy of risk assessments.
Smith noted that insurers may use climate change information from coastal surveillance or community-based environmental organizations to better assess property or health risks.
Health insurers will likely soon leverage fitness-related information from smartwatches to differentiate between policyholders who may look the same in a policy application but actually represent vastly different risk profiles (e.g., active triathletes vs. sedentary individuals with significant latent health risks). “By integrating precise data into their models, insurers gain a holistic view that enhances risk assessment and policy pricing accuracy,” Smith noted.
Liability impact on autonomous vehicles
The emergence of autonomous systems is forcing insurers to rethink the entire concept of liability.
“Responsibility is shifting from drivers to the technology stack—meaning policies must account for software errors, sensor failures, and data-driven decision-making,” Gresham said. “This is ushering in new coverage models, often developed in partnership with manufacturers and technology providers. These models are more dynamic, tied to real-time vehicle performance and usage patterns.”
The implications for investors are significant. “The ability to underwrite machine-led systems, not just human behavior, will be a key differentiator as the mobility ecosystem continues to evolve,” Gresham added.
Some insurance experts sense a “Wild West” vibe right now, which is not uncommon in AI’s early phase.
“It’s unclear how carriers will handle the rapid pace of technology expansion from an insurance coverage standpoint, but if you had to place a bet, the answer is that carriers are likely to simply issue policies that don’t sufficiently account for these technologies or the unique challenges they introduce,” Patestos said. “That will likely result in the collection of premiums without true coverage or at least inadequate coverage.”
Cryptocurrencies and blockchain are being addressed.
There’s a growing concern that over the next 15 years insurance may shift in part to a tokenized system where risk pools are shifted and manipulated.
“Where your coverage is tied to how many tokens within that pool have been staked,” Patestos noted. “Nexus Mutual is one example of a company playing in the DeFi insurance space.”
Experts also say alternative finance technologies have ample room for expansion and market share. “Blockchain for the first time has joined forces with the reinsurance sector to bring sufficient liquidity to the asset class, and a whole new avenue for alternative capital to enter the industry,” said Ted Georgas, co-founder and chief technology officer at OnRe, a blockchain insurance company in Newham, UK.
Green energy and insurance—how are insurers responding?
Insurers are increasingly being asked to underwrite the transition to cleaner energy systems.
However, these assets, like solar arrays, battery storage, or decentralized grid systems, have new risk profiles that traditional models cannot assess.
“AI is helping insurers make sense of complex, variable risks tied to technology performance, weather volatility, and regulatory change,” Gresham noted. “This is especially important as clean energy infrastructure scales globally and becomes more financially significant.”
From an investment perspective, insurers offering credible, forward-looking coverage for green energy assets are seen as critical enablers of the transition. “They’re not just passive participants in the risk market. “
Parametric and cyber insurance are rising
Increasingly, parametric and cyber insurance are two of the most innovative-intensive segments in the insurance market in 2025.
“Parametric insurance is being used to offer rapid payouts based on predefined triggers—especially in disaster-prone regions where traditional models struggle,” Gresham said. “AI is making these products smarter, more responsive, and more scalable.”
“Cyber insurance is also evolving in real time,” Gresham noted. “As digital threats become more complex and frequent, AI is being used both to underwrite policies and to monitor risk exposure continuously.”
This dynamic risk management model is a major shift from the static coverage of the past and
investors are watching these categories closely. “They offer growth potential in underpenetrated markets and demonstrate how insurers can use AI to shift from reactive coverage to proactive resilience,” he added.
Compliance is a big issue
As insurers expand their use of AI to streamline underwriting and claims management, industry standards for responsible AI use are becoming more uniform across states.
“Recently, the National Association of Insurance Commissioners (NAIC) adopted a model bulletin outlining compliance requirements for insurers’ AI systems,” Smith said. “This bulletin clarifies expectations for development, deployment, and documentation of AI technologies to ensure adherence to state and federal laws.”
To date, at least 11 states and Washington, D.C., have issued bulletins incorporating NAIC’s language. That list includes Alaska, Connecticut, Illinois, Kentucky, Maryland, Nevada, New Hampshire, Pennsylvania, Rhode Island, Vermont, and Washington.
“Expect to see insurers adopt transparent, AI-driven models that align with both NAIC guidelines and specific state regulations this year,” Smith noted. “These models include explainable AI components to ensure clear, auditable insights into predictive processes to meet compliance demands.”
These advancements streamline regulatory adherence and enhance consumer trust by offering transparent, ethical risk assessments for insurers operating across state lines. “This shift establishes responsible AI use as a foundational standard in the industry,” Smith added.
What will AI-powered insurance look like in 10 years?
Insurance industry specialists expect major technology shifts to recreate the insurance sector over the next decade.
“Risk will be priced in real time,” Knuth said. “Protection will be embedded, not bolted on. And advisors will act more like financial strategists, guiding clients through risk exposure with dashboards, not paper apps.”
More automation, however, may lead to more industry upheaval.
“We’ll see deeper exclusions in policies, less human interaction, longer wait times to see true resolution or indemnification on claims and more “Band-Aid models” from smaller companies attempting to capitalize on the vacuum in the market from larger carriers with a Lower risk appetite pulling out of certain markets,” Patestos noted.
