The commercial insurance market finds itself walking a tightrope, balancing strong earnings against looming concerns over potential losses from natural disasters, geopolitical instability, and legal system abuse, according to Lockton’s latest commercial insurance market update.

The broker’s report paints a picture of competitive conditions across many insurance lines, while highlighting persistent challenges in third-party liability. As the industry looks ahead to 2025, a complex interplay of trends, challenges, and economic factors is set to shape the insurance landscape.

Overall Market Stability and Competitiveness

The commercial insurance market is experiencing a period of relative stability and competitiveness, buoyed by a strong U.S. economy and higher investment returns, the broker reports. This favorable environment has created competitive conditions across several insurance lines, including property, workers’ compensation, directors and officers liability, and cyber insurance.

Despite the overall positive outlook, insurers are keeping a close eye on potential disruptors that could upset the market’s equilibrium. The industry’s resilience mirrors that of the broader economy, with insurers benefiting from changes in deployed capacity, terms and conditions, attachment points, and rates.

Improved Financial Performance

The insurance sector’s financial performance has shown marked improvement in recent months. For the first nine months of 2024, the U.S. property and casualty sector recorded an underwriting profit of $4.1 billion, according to AM Best. This stands in stark contrast to the $32.1 billion loss reported for the same period in 2023.

This turnaround can be attributed to several factors, including improvements in rates, risk selection, program design, and portfolio yields. Additionally, results for personal lines have contributed to the sector’s overall positive performance. The industry’s financial strength is further evidenced by its surplus, which stood at an impressive $1.1 trillion through the first three quarters of 2024, reported AM Best.

Key Factors Influencing the 2025 Outlook

As the commercial insurance market navigates a delicate balance, several key factors are poised to shape the industry’s outlook for 2025:

Catastrophe Losses

Natural disasters continue to pose significant challenges for the insurance industry, Lockton said. The impact of Hurricanes Helene and Milton in 2024 serves as a stark reminder of the unpredictable nature of catastrophic events. These two storms alone are expected to generate combined insured losses of nearly $50 billion, highlighting the substantial financial toll such events can exact on the industry.

Moreover, the global landscape of natural catastrophes paints a sobering picture. Projections indicate that worldwide insured losses from natural disasters will reach $135 billion for 2024, with at least two-thirds of these losses concentrated in the United States. The increasing frequency and severity of severe convective storms, particularly in the U.S., are expected to contribute $51 billion to this total, the report noted.

The recent hurricanes have also exposed unexpected vulnerabilities. Helene’s unprecedented rainfall in the Blue Ridge Mountains and Milton’s distant tornadoes along Florida’s east coast underscore the need for insurers to reassess their risk models and for policyholders to reevaluate their business continuity plans, Lockton stated.

Geopolitical Instability

The global political landscape remains a source of concern for the insurance industry. Ongoing tensions in the Middle East and Taiwan Strait, coupled with the unresolved Russia-Ukraine conflict, continue to pose risks that could disrupt international trade and supply chains, according to Lockton. These geopolitical uncertainties have the potential to impact various insurance lines, from political risk coverage to marine and cargo insurance.

In the United States, the aftermath of the November elections adds another layer of complexity to the geopolitical equation, the report stated. Insurers and businesses are closely monitoring the potential implications of new legislative, monetary, and regulatory priorities. The prospect of policy shifts in areas such as international trade, immigration, and domestic unrest could have far-reaching consequences for the insurance market in 2025 and beyond.

Legal System Abuse

A growing concern for insurers is the phenomenon known as social inflation, or legal system abuse. This trend, characterized by a dramatic increase in the size of legal settlements and verdicts in civil litigation, continues to exert pressure on liability insurance lines. From 2017 through 2022, social inflation costs in the U.S. rose at an annual rate of 5.4%, outpacing the 3.7% annual growth of economic inflation during the same period.

The impact of social inflation has been particularly pronounced in the auto liability sector, where claim severity surged by 78% from 2014 to 2023, representing a compound annual growth rate of 6.6%, according to the Insurance Information Institute. The U.S. stands out as especially vulnerable to this trend, largely due to its plaintiff-friendly tort liability system and the prevalence of “mega awards” rendered by juries, the report said.

“Even as insurers generally report favorable earnings, rising loss severity and adverse loss development from prior years — stemming largely from social inflation — remain a significant drag on profitability,” the report stated. Looking ahead to 2025, there are indications that excess casualty rate increases may need to accelerate to keep pace with these trends, potentially affecting pricing and availability across various liability insurance lines.

The insurance landscape is further complicated by the emergence of new litigation risks, Lockton noted Two areas of particular concern are per- and polyfluoroalkyl substances (PFAS) and algorithmic liability. These novel risk categories present insurers with the daunting task of assessing and pricing coverage for largely uncharted legal territories.

Rate Changes and Outlook by Line of Insurance

• Property insurance market conditions continued to improve for buyers in the third quarter, Lockton stated. In Q3, median property insurance prices rose 2.4%, unchanged from Q2 and significantly below the 12.0% increase seen a year earlier. Looking to renewals in the fourth quarter of 2024, Lockton expects results to show non-catastrophe exposed properties with rate changes ranging from a 5% decrease to a 5% increase. Properties with catastrophe exposure are likely to see Q4 rates in a range from a 10% decrease to a 10% increase.
• Workers’ compensation insurance remains favorable. Median guaranteed cost workers’ comp rates declined 2.7% in Q3 2024 while loss sensitive rates fell o.9%, both smaller decreases than in Q2 and near Q3 2023 levels. For the fourth quarter, Lockton projects that guaranteed cost rates will range from a 5% decrease to flat at renewal, and loss-sensitive rates will range from a 3% decrease to a 2% increase.
• Liability insurance is challenged by persistent loss trends, Lockton said. General liability rates rose 4.8% on average in Q3, and auto liability rates rose 8.5%, nearly level with the 4.2% and 8.8% respective increases in Q3 2023. General liability rates are likely to increase 5-10% in Q4 renewals, while auto liability rates may spike 10-15%. Median lead umbrella price per million increased 9.0%, in the third quarter while excess pricing increased 8.5%, according to Lockton data.
• D&O insurance remains competitive, the report finds. In Q3 median total program pricing fell 12.8% for public companies and 3.9% for private companies and nonprofits, compared to flat and a 14.4% decrease, respectively in Q3 2023. Public company D&O rates are expected to range from a 10% decrease to flat in Q4 renewals, while private company rates may fall by 5% to remaining flat.
• Cyber insurance is keeping prices favorable for buyers, Lockton reported. Median pricing for total cyber insurance programs fell 5.1% in the third quarter of 2024, softer than a 4.2% decline in Q3 2023. Cyber insurance buyers are likely to see rates range from a 10% decrease to flat in Q4 renewals.

View the full Lockton report here. &