December 30, 2024

The insurance industry 2025: What’s ahead?

With so many variables and unknowns swirling around the insurance industry, forecasting what’s ahead for 2025 and beyond is an exercise fraught with unusual difficulty. Climate changes, spiraling costs, political and technological upheavals, legal abuse, labor shortages, along with overall uncertainties, make crystal balling nearly impossible.

“The insurance cycle has increasingly moved from being boringly predictable – knowing exactly where you were going to be in five and 10 years’ time – to a much more volatile environment,” said Tony Tarquini, founder, and CEO of 5189 Limited, a British financial management consultancy.

Nevertheless, the impediments to soothsaying do not prevent many in the business from registering their outlooks for 2025.

“Any one of the factors that contribute to this volatile marketplace could probably impact the balance of the market on its own,” said Tandis Hassid Nili, managing principal of global risk management at EPIC Insurance Brokers and Consultants. “And then all of them together creates an even more unpredictable marketplace for us.”

The crystal ball for 2025 and beyond, Nili said, is murkier than ever. However, she and others in the insurance business agree that instability and volatility can present opportunities.

“The insurers in personal lines have really been able to navigate some of the volatility and regain profitability and stability, particularly in the auto area,” said Jennifer Kyung, CEO, and founder of NextGen Underwriting. “That’s an area where now we’re starting to see a lot of questions around affordability and how do we maintain affordability for insureds in the marketplace. So, I think we’re going to see now that the insurers become profitable, we might see a change there and we might see prices starting to level.”

A report just issued by TransUnion agrees that the auto insurance industry might be turning the corner after some dreary years.

“These lean years gave insurers an opportunity to get their own financial houses in order and cut costs,” wrote Stothard Deal, vice president of insurance market planning at TransUnion. “State regulators, while initially resistant, have allowed premiums to rise to the extent they’re now outpacing the growth of auto-related cost components. This has facilitated insurers’ returns to the auto market and advertising comeback.”

That does not mean all is well in the auto insurance business. Forrester Research Inc. says underwriting still has not kept pace with the notable shifts in auto claims severity and frequency owing to a combination of factors.

“These evolving trends pose underwriting, pricing, and risk management challenges that some auto insurers won’t be able to address,” Forrester said in a recent report. “We predict that at least five of them will simply exit the market.”

And the outlook for 2025 and beyond may be even more dim for the commercial lines. Commercial auto has seen only one profitable year since 2012, and that was 2020 when the COVID-19 pandemic kept many commercial vehicles off the road even as premiums stayed high.

Social inflation, the rapid increase in legal liability from skyrocketing jury verdicts, pro-plaintiff juries, third-party litigation funding, and aggressive legal advertising, has disproportionally affected commercial policies.

About one-fourth of all so-called “nuclear verdicts” (jury awards more than $10 million) involve auto accidents, and one-fourth of those involve a trucking company, according to TransUnion.

“Multiperil policies aren’t spared the impact of social inflation on liability claims,” said TransUnion’s Deal. “And furthermore, small business policies have struggled with expense ratios for years, compounding profitability challenges.”

Meanwhile, the personal property insurance market is still roiling and has not matched whatever turnaround may exist in auto.

“The housing market and its various cost inputs from labor to materials were hit especially hard by the early ‘20s inflation wave,” said Deal “In many markets, property insurers experienced much of the same initial regulatory pushback on rate increases as their auto counterparts. And the issue was exacerbated because most property policies operate on a 12-month cycle, as opposed to six months for auto insurance, which means it takes up to 24 months for a rate change to be fully realized across a property insurer’s portfolio.”

Falling inflation may have eased financials somewhat, but the wave of natural disasters, and predictions for more on the horizon has created a “new normal” in which traditional underwriting formulas are out the window.

“2023 saw the greatest number of billion-dollar, catastrophic weather events on record,” The TransUnion report noted. “2024 will likely not be far behind with four landfalling hurricanes.”

And while flood insurance is generally the purview of the federal government and not covered by private insurance, there will be plenty of covered damage that will fall on the private insurance industry to remediate, Deal said.

“This decade has already experienced five of the highest six years in terms of overall billion-dollar-plus claims events in the history of the industry,” he wrote.

In very general, and somewhat optimistic, terms, prognosticators say the current hard insurance market – one in which premiums are high, coverages and competition are limited – may begin to soften in 2025, with insurance becoming more available and insurers more willing to negotiate and be flexible with their terms.

“There are many, many insurers in the United States primarily focused on lines of business that are hard right now,” said Martina Conlon, executive principal at Datos Insights, which provides insights, and advisory services to clients insurance sector. “We do see an awful lot of insurers. right now trying to expand into softer jurisdictions or softer lines of business, like specialty items where there appears to be more opportunity.”

Advances in technology, particularly Artificial Intelligence, have greatly impacted the insurance business but analysts are divided on how much it will contribute to increased sales and profits.

“One of the biggest challenges was getting accurate data that you could use to effectively underwrite and price a policy,” says Conlon. “Now that we have so many different sources of data, and the whole insurtech world that is able to marry social data with third-party data and internal data, the challenge has shifted a little bit to how to assimilate and analyze the vast amount data that we can use.”

But Forrester thinks the benefits or progress of technology innovation are overblown.

“Continuing demand for tech and product innovation won’t bear much fruit, despite higher budgets,” Forrester wrote. “AI adoption will play a subordinate role to other business priorities.”

There’s little doubt that advanced analytics, AI, and automation technologies can significantly improve operational efficiency, increase accuracy in underwriting, and optimize claims management. But it comes with caveats, Forrester said.

“Technology in the service of the bottom line is only a good tactical move,” Forrester concludes. “It’s a better strategic choice when it serves the customer’s experience.”

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