Despite two decades of tech investment, insurance costs have risen. A new McKinsey report suggests Artificial Intelligence could finally reverse this trend, sharply cutting expenses in underwriting, claims, and customer servicing.

Two decades of investment in automation and digital technology have failed to bring down the insurance industry's overall cost burden, but artificial intelligence could finally change the equation by sharply reducing the cost of underwriting, claims and customer servicing, according to a McKinsey report.

The July 2026 report, How AI will reshape the economics of insurance: A CEO's guide to strategy, said insurance cost ratios globally are around 10 per cent higher than in 2005, despite substantial investment in technology.

Decades of Digitisation Fail to Lower Costs

"In contrast to most industries, insurance has failed to improve its cost efficiency in the past two decades," McKinsey said. While earlier technology investments did improve labour productivity, those gains did not translate into lower overall costs. Productivity improved by 14 per cent in property and casualty insurance and 24 per cent in life insurance, but McKinsey said the benefits were offset by higher technology spending, compliance costs and the complexity of adding new digital systems to legacy operations.

AI Emerges as a Game-Changer

AI, however, could have a broader impact because it can be deployed across underwriting, claims and servicing simultaneously. McKinsey said AI-led transformations are already delivering reductions of 20-40 per cent in customer onboarding costs and improvements of 10-20 per cent in insurance agent productivity.

The findings come days after IRDAI proposed sweeping changes to insurance distribution rules, including lower expense limits, revised commission structures and stronger safeguards against mis-selling, as the regulator seeks to make insurance distribution more cost-efficient and customer-focused. The proposals were released on September 23 under a consultation paper titled Recalibrating Economics of Insurance Distribution. Though McKinsey’s report is global and unrelated to the regulatory exercise, it points to the same cost challenge facing insurers - repeated waves of digitisation have improved individual processes but have not materially reduced the industry’s overall cost burden.

Transforming Insurance Distribution

McKinsey said distribution remains one of the industry’s biggest costs, with commissions and acquisition expenses account for between 10 and 25 cents of every premium dollar in property and casualty insurance and can reach as much as 80 cents of the first-year premium in life insurance.

AI could also begin changing how insurance is distributed. The report said AI assistants could monitor policy renewals, compare coverage and prices across insurers and recommend switches on behalf of customers, potentially shifting part of the customer relationship away from traditional agents and insurer websites.

Role of Agents and Brokers in the AI Era

However, McKinsey does not expect intermediaries to disappear across the industry. For complex commercial and specialised insurance, it said AI is more likely initially to lower costs and make agents and brokers more productive rather than replace them outright.

The report said AI could therefore reshape not only insurers' operating costs but also how value is divided among insurers, distributors and customers as the industry moves towards more automated distribution and servicing. (ANI)

(Except for the headline, this story has not been edited by Asianet Newsable English staff and is published from a syndicated feed.)