Digital insurance: Opportunities and challenges for insurance companies

Discover the power of digital insurance and find out about particular challenges it might bring for insurance companies.

Insurance digitization has moved past websites and self-service portals. The work that determines market position today is in continuous innovation. In Agentic AI systems that handle underwriting, claims triage, and customer interactions across multiple steps. In an embedded distribution that places coverage at the point of purchase. In a compliance architecture capable of absorbing DORA, the EU AI Act, and FIDA without grinding the business to a halt. Ultimately, insurers that excel in the age of AI can meet higher customer expectations. In this article, we’ll explore what’s changing in digital insurance today and how carriers can adapt to these transformations.

What is driving investment today?

Two forces continue to shape priorities in the insurance industry. The first is cost. European P&C insurers face persistent pressure on expense ratios. The pressure comes from several directions at once: regulatory reporting burdens that consume operational capacity, claims inflation in motor lines that several markets have been slow to address through pricing, and a rising frequency of detrimental weather events that strains reserves and forces capacity withdrawals from some product lines.

The second force is customer behavior. Policyholders compare their insurer to the digital experiences they get from the apps they use for banking, retail, and travel. When a claims notification takes three days to process, they notice. When a competitor offers instant quote-and-bind for the same product through digital channels, they switch. For example, in Germany, 83% of consumers have already purchased at least one insurance policy online, rising to 97% in the 30 to 49 age group. Even the over-65 cohort has crossed the majority threshold at 55%.

Spending reflects this shift across the insurance sector. Global insurance IT spending is projected to grow 9.4% in 2026 to reach around $257 billion, with software the fastest-growing segment at a 13.4% compound annual rate. The European insurtech investment market, after correcting sharply between 2022 and 2024, has stabilized around a smaller and more profitable cohort of B2B vendors that now anchor most digital transformation programs.

Legacy IT remains the structural problem

The structural challenge has not changed, although the language around it has. Most European carriers still operate legacy systems built decades ago, often with multiple layers of middleware bolted on top. Front-end teams ship modern customer interfaces in months. Back-end teams need years to expose the same data through stable APIs. The gap shows up as inconsistent experiences across channels, slow underwriting decisions on anything except the simplest lines, and a chronic inability to combine data across product silos.

The technical response has matured. API gateways, event-driven middleware, and headless front-end layers form a modern digital layer that lets carriers iterate on the customer surface without rewriting core systems. That bimodal approach extends the carrier’s digital capabilities further: insurers run agentic systems on top of legacy data through retrieval pipelines and tool-use frameworks, avoiding a full core replacement for use cases where one is not strictly required.

Four components of a successful digital insurance model

A workable digital roadmap rests on four conditions.

The digital customer journey has to be the starting point of design, not the eventual output of an internal process redesign. Delivery cycles should be short enough to measure outcomes in weeks rather than years, with production deployments tied to your KPIs and overall strategy.

Internal communication should be honest about what is changing and why, especially when AI takes on decisioning tasks previously held by underwriters and adjusters. The shift will change the texture of insurance service across the policy lifecycle. And board-level sponsorship needs budget authority over the program, not advisory involvement, since the changes will reshape how the insurance business generates revenue.

The last condition has become harder to satisfy as AI investment competes with climate adaptation, cyber risk programs, and core system replacement for the same capital pool.

Agentic AI: The trend reshaping insurance operations

Most insurer AI investment in 2023 and 2024 went into discrete Generative AI use cases narrowly applied to specific insurance processes, such as document summarization, chatbot upgrades, and first-draft generation for adjuster notes. These produced measurable efficiency gains.

Agentic AI is a different category of new digital tools. An agentic system does not respond to a single prompt. It pursues a goal across multiple steps, calling tools, retrieving data, making decisions, and adjusting its approach until the goal is achieved or it determines it cannot proceed. In insurance, this changes how three core functions operate.

Underwriting

Agentic systems can pull risk data from third-party sources, apply carrier-specific guidelines, generate a recommendation, draft the policy wording, and queue it for human review on edge cases. For straightforward commercial risks below a defined threshold, the human review step can be removed entirely. This kind of end-to-end solution is being piloted by several European carriers for SME property and liability lines.

Claims

First notice of loss can trigger an agentic workflow that compresses the entire claims process into a single sequence: requesting photographs, running damage assessment models, checking coverage, contacting repair networks, and issuing payment, all within minutes for low-complexity claims.

Customer servicing

These digital interactions route coverage, billing, and endorsement questions through an agentic layer that can read the policy, check the customer’s history, propose changes, and execute them. The human contact center handles escalations and genuinely novel issues.

The regulatory frame for these developments is still in the making. The EU AI Act treats insurance risk assessment and pricing as high-risk use cases under Annex III, with the main high-risk obligations originally set to apply from August 2026. Under a political agreement reached in May 2026 on the Digital Omnibus and pending formal adoption, those obligations may be deferred to December 2027.

Either way, documentation, human oversight, logging, and fundamental rights impact assessments will become mandatory for insurance AI systems on a near horizon. DORA, fully applicable since 2025, adds operational resilience requirements for any third-party AI service in the insurance value chain. Architecture decisions about logging, audit trails, and human-in-the-loop controls are now more consequential than the choice of underlying model, and they determine which digital insurance capabilities can actually go into production.

Key trends shaping digital insurance

Climate and parametric insurance

Rising frequency of weather events has made some traditional insurance products economically unviable. Parametric cover is one of the most consequential new insurance products to emerge in agricultural, property, and business interruption lines, paying out based on measured triggers such as rainfall or wind speed. The technical requirement is data integration with sensor networks and meteorological services, plus smart contract infrastructure for some implementations, which positions parametric cover as a digital solution rather than a paper one.

Cyber insurance

The market has matured from a novelty product to a core commercial line, although consumer penetration remains low: only 2% of German internet users hold a standalone cyber policy, with another 5% covered indirectly through liability or legal expenses policies. Commercial underwriting has shifted from questionnaire-based to telemetry-based through the use of digital technologies that pull client security posture data directly from specialized vendors.

Open insurance and FIDA

The EU’s Financial Data Access regulation will require insurers to share policy and claims data with authorized third parties at customer request, on the open banking model. Implementation timelines are still being finalized, but the digital platform choices made today will determine compliance readiness in 2027 and beyond.

What are the benefits of digital insurance?

Final thoughts

Digital insurance pulls together core system modernization, embedded distribution, AI, and a compliance posture that holds up under DORA, FIDA, and the AI Act. None of these workstreams pays off in isolation, which is why fragmented programs keep underdelivering against their business cases. The carriers that invest in continuous innovation with shared KPIs, instrumentation to see where value is accumulating, and a willingness to redirect investment toward new business lines will pull further ahead in the future.

Avenga supports insurers at every stage of their AI program: designing the operating model, integrating agentic systems into core workflows, and running them at production scale. Contact us to learn more.

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Thorsten May

Managing Director Avenga Germany

As Managing Director of Avenga Germany and VP of Business Development, Thorsten May leads teams across the country and is responsible for growth in the DACH region.

His extensive experience of over 25 years in technology and management enables him to drive client engagement and large-scale transformation initiatives, nationally and internationally. He holds a degree in electrical engineering from RWTH Aachen University, has held senior leadership roles at Vodafone, and served as Managing Director at several technology-driven agencies.

Over his past 15 years at Avenga, Thorsten has supported clients across a range of industries and has specialized in evolving complex, outdated IT-environments into efficient, reliable platforms while ensuring continuity in day-to-day operations.