The insurance industry’s outlook is positive in 2025 but challenges remain, according to Alera Group’s annual Property and Casualty Market Outlook report.
Looking ahead, the US property and casualty industry is expected to continue growing next year, after being on track for higher profits this year. Improved underwriting results, slowing inflation and higher investment yields are all contributing to this positive outlook, the report said.
Barring a major catastrophic event, insurers expect increased competition, softening rate increases and adequate capacity. Pricing competition will likely improve in 2025 and better reinsurance terms and conditions for insurers would likely lead to more favorable terms for insurance buyers.
Still, extreme weather and abuse of the legal system remain concerns, according to the report. The insurance industry’s return on investment (ROI) has also lagged behind the S&P 500 composite ROI by five points. This isn’t the first time as in 2023, amid major rate hikes, insurance rate was at 13% ROI, compared with 18% for all industries.
“Leaders will be challenged to make informed decisions about risk swiftly and decisively in the face of uncertainty,” said Mark Englert, executive vice president and national property and casualty leader at Alera.
Rates are expected to continue increasing in the following year but there are signs of moderation. The steepest rate hikes next year could come from commercial auto, umbrella/excess liability and personal lines, with a 10% to 15% increase, according to respondents asked by Alera Group. Workers’ compensation and employment practices liability will likely remain flat, while prices are decreasing slightly in public and private directors and officers liability.
In terms of availability, at least 20% of the respondents expect broader availability in cyber liability and public and private directors and officers liability. Less availability is expected in commercial property, personal lines and umbrella/excess liability lines, with the decrease in commercial property and personal lines likely being in catastrophe-prone areas.
Capacity, which refers to the largest amount of insurance available from a company or the market in general, is expected to be similar to 2024 levels for all lines except umbrella/excess liability, which is expected to have a significant decrease in capacity. There are also seen capacity decreases, albeit smaller, in commercial auto, commercial property and personal lines. More than 20% of the respondents anticipate an increase in capacity for liability, employment practices liability and environmental liability, among others.
Meanwhile, underwriters are expected to continue being disciplined about the accounts they write but there are signs that they will become more flexible next year. Greater flexibility will probably be seen in private directors and officers liability, surety bonds and workers’ compensation, according to more than 20% of the respondents. Tighter controls are expected in commercial auto, commercial property and medical malpractices.
Despite the positive insurance outlook moving forward, Alera warned of existing risks and new risks that are constantly emerging, for example, PFAs or forever chemicals and artificial intelligence. It is uncertain how these risks will affect the industry so far, but insurers should assess how they can best provide a safety net for their clients.
Existing risks, like extreme weather, also became more aggressive. For the first time in six years, worldwide insured losses from natural catastrophes surpassed $100 billion, according to the report. What makes it harder is that many weather events are happening in places where they are not common occurrences, the report said.
Aside from these risks, the cost of insurance in catastrophe-prone areas is also becoming a huge factor why buyers are choosing alternative funding mechanisms.
To combat the rise in risks, Alera said insurers should leverage on the data they have to personalize underwriting terms and conditions and tailor their products to clients’ needs. They could also use AI to improve their risk assessment and reinforce their policies.
“2025 will inevitably be a year of change, but it will also be a year of opportunity,” Englert said.