Just like the astronomical clock in Prague, we can always count on new annual forecasts for the insurance industry each year. One line of business is expected to have a 10% rate increase while another is expected to have a 5% rate decrease, and a third will be flat. Or maybe the entire industry’s outlook is for a small rate decrease or increase? Couple that with the traditional idea of a hard market (increasing rates) and a soft market (decreasing rates) and we are left with no real insights. We all finish reading these and then think that it is interesting, and then we think what does that mean for our business and what decisions or changes should we make to adjust to this changing landscape. More often than not, the answer is extraordinarily little or maybe we are not in a traditional rate cycle any longer.
Just because the industry forecast is for a 3-5% rate increase, does that mean a specific business in a specific geography, with specific controls in place will experience a 3-5% rate increase? Of course not. In any given year there are myriad factors that impact a given rate on a given line of business for a given business. And in the following year, other factors may push the rates in a slightly different direction. While this might impact short-term cash flow, none of this is instructive to a business strategy. What then, can the insurance industry say about the outlook for 2025 that can be instructive and insightful to provide value to a business’ long-term strategy? What is going on in the industry in 2025 that will impact every insurance buyer and what trends can instruct longer term strategic decisions?
Healthcare costs. Rising healthcare costs have a profound impact on the insurance industry, especially in the areas of workers compensation and employee benefits. Historically, healthcare costs have been on an upward trajectory, driven by factors such as medical advancements, increased demand for services, and aging populations. According to the Centers for Medicare & Medicaid Services (CMS), U.S. healthcare spending is projected to grow at an average rate of 5.5% per year from 2022 to 2030, reaching $6.8 trillion. According to the National Council on Compensation Insurance (NCCI), medical costs per workers compensation claim have increased by 4.6% annually from 2016 to 2021. Similarly, employee benefits packages are becoming more expensive to provide, forcing companies to either absorb the costs or shift a portion to their employees. A survey by the Kaiser Family Foundation (KFF) found that annual premiums for employer-sponsored family health coverage reached $22,221 in 2021, up 4% from the previous year. The future of healthcare in the United States is unclear, however, what is clear is that the status quo of continual escalating costs is not sustainable.
To control healthcare costs, businesses can take several proactive steps. First, they can invest in wellness programs that promote healthy lifestyles among employees, potentially reducing the prevalence of chronic diseases and lowering healthcare claims. Second, businesses can implement preventive care initiatives, such as regular health screenings, to catch health issues early and avoid more costly treatments down the line. Third, businesses can explore cost-sharing arrangements with employees, such as high-deductible health plans paired with Health Savings Accounts (HSAs), which encourage employees to make more cost-conscious healthcare decisions. Additionally, businesses can negotiate with healthcare providers for better rates, join a collective bargaining group to leverage their purchasing power and utilize telemedicine services to provide
employees with convenient access to healthcare, reducing absenteeism and lowering costs associated with in-person visits.
Yes, for 2025 and in the short term, rates for insurance products that are impacted by healthcare costs may fluctuate, but only through a sustainable healthcare model can we make strategic decisions that can impact the future growth and profit of a business.
Technology. Technology is revolutionizing the insurance industry, particularly in the realm of underwriting. Telematics and cameras are transforming auto insurance by providing real-time data on driving behavior, leading to more accurate risk assessments and personalized premiums. Similarly, the use of drones in property insurance allows for efficient and detailed inspections of construction sites, enhancing risk evaluation and promoting sustainability in building practices. In the cyber insurance space, technology such as security monitoring tools helps identify vulnerabilities and prevent breaches, thus reducing the likelihood of claims.
Internally, technology is streamlining operations and improving efficiency within the insurance industry. Pricing automation driven by real-time data enables insurers to adjust rates dynamically, ensuring predictability and accuracy. Artificial intelligence (AI) is also playing a crucial role, with capabilities such as predictive analytics allowing for better risk modeling and fraud detection. For instance, AI-powered chatbots can manage customer inquiries and claims processing, significantly reducing administrative costs and improving customer satisfaction.
Strategically, businesses can embed technology that enhances their risk profile and minimizes potential losses. For example, companies can invest in telematics for fleet management to monitor and improve driver behavior, reducing accident rates and lowering insurance premiums. Implementing advanced security measures for cyber protection can make a business more attractive to underwriters by demonstrating proactive risk management. Additionally, using drones for regular property inspections can identify maintenance issues early, preventing costly claims. By leveraging technology, businesses not only improve their operational efficiency but also position themselves favorably in the eyes of insurers, leading to reduced insurance costs and enhanced long-term sustainability.
Again, yes, rates in 2025 may rise or fall, but these technological examples are more critical actions related to the insurance industry outlook.
Climate. The insurance industry is on the front line and increasingly facing challenges due to the impact of climate change. According to the National Oceanic and Atmospheric Administration (NOAA), in 2024, there have been twenty-seven confirmed U.S. billion-dollar weather and climate disaster events. These events include: seventeen severe storm events (tornado outbreaks, high wind, hailstorms) five tropical cyclones, one wildfire, one drought/heat wave and two winter storm/cold wave events. The total current cost estimate from these twenty-seven events in 2024 was $182.7 billion. This unprecedented frequency and severity of natural disasters are driving up insurance claims and pushing insurers to reassess their risk models. A report by the Swiss Re Institute estimates that climate change could cut global GDP by up to 18% by 2050 if no mitigating actions are taken, underlining the significant economic threat posed by climate change. As a result, insurers expect to see rising premiums and stricter underwriting criteria, particularly in regions prone to natural disasters.
The insurance industry is adopting several measures to mitigate the risks associated with climate change. Internally, insurers are focusing on climate resiliency in their underwriting practices. This includes incorporating climate models and data analytics to better predict and price risks associated with extreme weather events. Insurers are also reviewing clients’ environmental footprints and actions, rewarding those who adopt sustainable practices. For instance, companies with strong Environmental, Social, and Governance (ESG) scores are often viewed more favorably by underwriters. The industry is creating new insurance products such as parametric insurance and energy production certainty coverage. Furthermore, insurers are investing in green bonds and renewable energy projects to promote a sustainable future and reduce their own carbon footprints.
Businesses can take proactive steps to adapt to the evolving insurance landscape shaped by climate change. One crucial strategy is to take concrete actions such as reducing carbon emissions, implementing energy-efficient technologies, and engaging in sustainable practices which can make the business more attractive to underwriters. Additionally, businesses should focus on climate resiliency in their construction and fixed properties. This includes using resilient building materials, designing structures to withstand extreme weather conditions, and investing in flood defenses and other protective measures.
In the case of climate challenges, 2025 rates may only provide a glimmer of insight into the industry outlook. More likely is the continued emergence of parametric insurance to supplement or potentially replace traditional insurance solutions.
Uninsured exposures. The amount of uninsured exposure to risk continues to rise, significantly impacting the insurance industry. The industry does not receive premiums for these exposures but still faces indirect consequences. This is because uninsured events can lead to substantial financial losses for businesses, which in turn can destabilize the market, affect economic stability, and increase the risk for insurers who cover other interconnected risks. For example, the 2025 California wildfires currently are estimated at about $75 billion in insured loss but could exceed $150 billion in total loss.
In the United States, uninsured exposures are on the rise due to several factors. High deductibles deter individuals and businesses from purchasing comprehensive coverage, leaving them vulnerable to significant financial losses. For example, in 2021, 29% of Americans reported having insurance plans with deductibles of $1,000 or more. Additionally, lower than adequate policy limits fail to fully cover potential damages, resulting in gaps in protection. According to the Insurance Information Institute, nearly 40% of small businesses in the U.S. have no insurance coverage at all for their business operations, leading to significant exposure. Limited availability of certain insurance products, especially for specific high-risk businesses, further exacerbates the issue. For instance, industries like cybersecurity, with expected damage reaching $10.5 trillion annually in 2025, or certain environmental businesses, may face challenges in obtaining adequate coverage due to the specialized nature of their risks.
The situation is even more pronounced in developing countries, where the amount of uninsured exposure is higher. According to a report by the World Bank, less than 10% of losses from natural disasters are insured in low-income countries, compared to about 50% in high-income countries. In 2019, the economic losses from natural disasters in developing countries were estimated at over $70 billion, with only a small fraction covered by insurance. This disparity highlights the vulnerability
of businesses and individuals in developing regions, where limited access to insurance products and financial resources leaves them particularly exposed to financial ruin from unforeseen events.
To mitigate the risks associated with increasing uninsured exposures, businesses can take proactive steps. Conduct comprehensive risk assessments to identify and evaluate all potential risks, ensuring no exposures are overlooked. According to a study by Allianz, 85% of surveyed businesses identified natural catastrophes as a primary concern in their risk assessments. Invest in adequate insurance coverage to ensure that policy limits are sufficient, and deductibles are manageable, thereby avoiding significant gaps in coverage. Implement risk mitigation strategies by engaging in practices that reduce the likelihood of losses, such as improving cybersecurity measures, enhancing safety protocols, and maintaining up-to-date facilities. For example, businesses that invest in advanced cybersecurity measures can reduce their risk of cyberattacks by up to 70%, according to a report by McAfee. Additionally, explore alternative risk transfer solutions, such as captive insurance, which can provide tailored coverage for specific risks that are difficult to insure in the traditional market. The National Association of Insurance Commissioners (NAIC) reports that over 6,000 captives are currently operating worldwide, demonstrating the growing popularity of this risk management strategy.
2025 Outlook. The overall outlook for the insurance industry in 2025 is strong. It is well capitalized, mature, and a healthy financial market. It is also the one industry that every other industry relies on in order to operate. Nevertheless, the industry has challenges on the horizon. The solutions to these challenges are not all determined yet; however, they will impact each and every business and each business can play a role in impacting its future. And for the sake of tradition, across the globe we forecast automobile rates will increase by 7% this year and property will increase by 10%. Workers compensation will decrease by 3% but only in the United States. After all, WC only exists in the United States.