Four biggest challenges facing insurers in 2026 revealed

Stubborn inflation plus a continued squeeze on household finances are shaping insurers’ underwriting performance and customer behaviour as 2026 gets under way.

Layered on top of these challenges are escalating geopolitical tensions, increasingly interconnected risks and a rapid acceleration of the roll out of artificial intelligence set against the industry’s struggle to pull legacy systems into the second quarter of the 21st century.

Meanwhile, consolidation among Aviva, Direct Line, Ageas and Esure is redrawing competitive boundaries just as the market is softening across most major classes.

Analytically, insurers are looking at their ability to provide loss estimates, capital impacts and other management information at pace to inform management decision making.

Susan Dresksler, partner at KPMG UK

Enough challenges to make your head spin, eh?

Never fear, for Post is here with the four greatest trials and tribulations that 2026 holds in store for the industry plus what you can do to turn these challenges into opportunities in the year ahead:

1) Soft landing and margin pressure

A softening market, slowing rate momentum and persistent (if moderating) inflation are painfully squeezing profits across both personal and commercial lines.

Labour shortages and supply-chain volatility also continue to add frictional cost for insurers.

Robert Greensted, lead insurance analyst at S&P Global Ratings, said softening is “far more pronounced” in commercial lines, with some UK rates falling by 25% or more.

Moody’s vice president and senior analyst Will Keen-Tomlinson warned with UK economic growth likely to remain subdued following chancellor Rachel Reeves’s recent Budget, the recovery of demand for commercial cover is also likely to be slow in the year ahead.

“There is some pressure on companies to grow topline, and we are seeing a rate environment where there is softening across all lines in the UK now,” he said. “Even optimistic expectations are to maintain flat rates.”

Keen-Tomlinson pointed out the results of the last few years have been strong with combined operating ratios in the high 80s and 90s giving a bit of wiggle room to start competing on price and flex margins slightly.

“Where we need to see companies being careful is in giving up too much margin for topline,” he said. “Pressure to take on business that might be outside your risk appetite is something that would be a sign of potential risk further down the line, given the softening environment.”

But opportunities for growth do remain, notably in cyber, according to Moody’s insurance credit analyst Helena Kingsley-Tomkins, who said businesses are increasingly “waking up” to the need for cover after high-profile attacks against Marks & Spencer and Jaguar Land Rover in 2025.

“There are certainly no shortage of risks out there for insurers to actively provide protection against, it is just a matter of being able to properly select the type of risks you want to undertake,” she said.

To succeed in 2026 S&P’s Greensted said disciplined underwriters will have to be prepared to let some top line go to sustain robust earnings and in personal lines he noted significant consolidation and a drop in traffic to price comparison websites also should be considered.

“This could lead to more discipline from the large players and perhaps a fall in the level of competitiveness in the market,” Greensted said.

“However, the market still remains one of, if not the most, competitive in Europe. 

“We believe insurers will be less keen to make up lost earnings on instalment income, ancillary products or fees than in the past due to the Financial Conduct Authority’s current strong focus on value for money.”

On what insurers can do to stay profitable, Ben Diaz-Clegg, associate director of analytics at AM Best, said: “From the consumer’s point of view, price is king, and therefore this is predominantly how the market competes.

“While service quality and additional benefits such as multi car/policy discounts make life easier and the experience more pleasant, when it comes to retail insurance, it always boils down to price and the reputation of the insurer for honouring its liabilities.”

In a softening market, winning insurers will be the ones who hold their nerve as well as their pricing discipline while proving they offer exceptional service plus good-value cover.

2) Uncharted territory

The fast pace of the world we live in means insurers are being pushed into quickly evolving, interconnected, intangible exposures or face the reputational risk of retreating from offering cover.

Tom Hughes, director of underwriting at the International Underwriting Association, said: “Insurers are facing emerging risks at an unprecedented level.”

The shift from physical to abstract risk is accelerating and testing the limits of traditional models, he noted.

“There is a continuous need to monitor and adapt to threats arising from geopolitical unrest, climate extremes, rapid advances in artificial intelligence, malicious cyber attacks and litigation trends that outpace regulation,” said Hughes.

Emerging risks are no longer creeping in from the edges, they’re arriving in waves of geopolitical unrest, climate extremes, AI-driven disruption and litigation trends that outpace regulation meaning providers face the challenge of insuring a world that’s evolving faster than its models.

To keep pace with changing risks, Moody’s Keen-Tomlinson explained data is becoming a very valuable asset in ensuring cover can still be offered without decimating insurer’s reserves.

“What they [major providers] are aiming for is market segmentation, pricing and keeping terms and conditions exactly right for the kind of pool of risks they want to take,” he said.

“That is something very dynamic and we are seeing companies at the top of the market develop that rapidly.

“The more data these companies can get, the quicker they can process it, the more advantage they have, which is an area where scale and consolidation plays into the advantage.”

Alistair Brannan, EY’s UK life, pensions and personal lines leader, said a more holistic approach with integrated resilience strategies, leveraging advanced analytics and real-time data will be key enablers for insurers to understand and mitigate interconnected threats going forward.

So, to thrive in 2026 you had better get your digital data house in order.

3) Digital domino effect

The pace of AI adoption is quickening in the insurance industry, but experts claim legacy systems, inconsistent data plus uncertain regulatory parameters are hampering the sector’s efforts to make the most of this technology at the moment.

Michael Sicsic, founder of Sicsic Advisory, said rather than lament a lack of rules on how to use AI the UK’s technology-neutral regulatory approach should be considered an opportunity.

“This opportunity requires robust self-governance,” he noted. “Our position is that strategy is governance. Investment must prioritise building an AI Risk Management Framework before firms deploy high-risk tools.

“Firms should leverage existing requirements – specifically Consumer Duty, individual accountability (Senior Managers and Certification Regime) and operational resilience – to control AI risks.

“We encourage firms to engage with the regulator’s initiatives, including the AI Lab and the supercharged Sandbox, to test these governance structures safely.”

Full automation without human oversight risks “hallucinations and bias that cause customer harm,” all the analysts Post spoke to warned.

While AI presents opportunities for operational efficiency – and a reduced head count – S&P’s Greensted said providers and brokers need to ensure they are still investing in and building up their decision makers of tomorrow rather than just rolling out this technology.

“Many firms top leadership and senior underwriters will have gone through the ranks starting as an underwriting assistant,” Greensted observed.

“While AI may be able to perform many of the tasks of an underwriting assistant the role itself provides early access to understanding the key inputs into underwriting decisions and an understanding of how the market behaves.”

While Post reported a wave of redundancies at the end of 2025, analysts argued insurers should focus on reshaping their workforces around augmentation, not simply view AI as replacement for human heads, in 2026.

“We frame AI as a junior analyst,” Sicsic said. “The human expert acts as the manager who briefs, supervises, and remains 100% accountable for the output. This requires a mindset shift enabled by training.

“Firms must train colleagues not just on using the technology, but on critical thinking and expert validation to manage automation bias. Human-in-the-loop is a non-negotiable safeguard.”

Building the workforce of the future – AI risk managers, assurance specialists and governance experts – will be as critical as upgrading the technology stack itself to how well insurers do in 2026.

4) Shaking foundations

Regulation returns to the top of the agenda in 2026, but not because of a load of new rules like the FCA’s Consumer Duty or General Insurance Pricing Practices requirements in recent years.

This year it the Prudential Regulation Authority’s turn to challenge the sector with the first Dynamic General Insurance Stress Test.

For the first time, firms will face a live three-week simulation of sequential shocks requiring real-time responses from the sector’s top brass, even when they’ll be on their stands trying to do business at the British Insurance Brokers’ Association conference in Manchester.

Sicsic, the FCA’s former head of supervision for the general insurance retail sector, described the PRA’s test as “a fundamental shift” demanding rapid data aggregation and operational agility. Many legacy systems “may struggle” to meet the demands of the PRA’s test, he noted.

Susan Dresksler, partner at KPMG UK, said firms need to be defining senior sponsors, establishing multi-disciplinary crisis teams with clear governance and escalation routes, and ensuring project management capability right know if they hope to pass the PRA’s test. 

“Some are also dry-running tailored crisis scenarios to test their crisis management frameworks and simulate dynamic, adverse events,” she continued.

“Analytically, insurers are looking at their ability to provide loss estimates, capital impacts and other management information at pace to inform management decision making.

“This is likely to involve identifying acceptable shortcuts and, importantly, ensuring decision makers are aware of the consequent limitations of the management information.”

To prepare for the PRA kicking their tires in May, Loka Venkatramana, senior consultant at professional services provider Pathlight Associates, said firms should be assessing how well their risk models can be flexed under new socio-economic, geopolitical and insurance-specific stresses.

“The PRA has made clear that firms should be able to explain how they model risk, what assumptions they rely on, the limitations of those models, and what management actions they would realistically take under stress,” she said.

“This requires more than just solvency metrics – it requires clear documentation, validated models, and pre-authorised management action frameworks with quantified impacts.”

To overcome the PRA’s challenge Sicsic said insurers should ask themselves: “Can your governance structure approve a management action in 24 hours? If the answer is no, the technology alone is not robust enough.”

Are you ready?

What is clear is 2026 is a year of convergence of challenges and only the most adaptable providers will be victorious.

Inflation and market softening threaten profit margins.

Intangible and interconnected risks are challenging underwriting approaches that have worked for insurers for centuries.

AI is advancing faster than governance can catch up just as the regulator is poised to test the industry’s resilience in real time.

What can turn these challenges into opportunities is the ability to access and interpret data faster for pricing, reserving and stress testing while setting clear governance for emerging risks and AI.

If you can maintain a disciplined approach to underwriting while your rivals lose their heads in a softening market and re-skill your workforce to make the most of technology, then you can thrive in the year ahead.

If you can’t modernise decisively, govern intelligently and adapt at pace in 2026 though you may quickly find yourself in trouble by the end of this year. 

You have been warned.