The State of the Insurance Market-The State of the Insurance Market

The State of the Insurance Market

Video Transcription

Hi, welcome to today's webinar, the State of the Insurance Market, hosted by Inland Marine Underwriters Association. I'm Eileen Monreale, Education Training Specialist at IMUA.  Thank you for joining today. We're excited to offer the first webinar of 2025. I still cannot believe it's a new year, 2025.  If you would like a copy of today's presentation, Dr. Hartwig will share how to access a copy at the end of today's webinar.  And if you do lose audio at any point, you can always dial in. You can find the phone number and access code on your toolbar under the audio section.  If you have questions, you can type in your questions to the questions box, and we encourage you to do that throughout the webinar.  And Dr. Hartwig will keep an eye on it, but we do plan to address the questions at the end of the presentation.  To encourage your engagement, IMUA will award a $25 Amazon e-gift card to the most engaged attendee as a token of our appreciation. We all learn better when we're engaged.  So please do share your questions, because this is certainly a fascinating topic that I'm sure all of us will have many thoughts and questions.  We encourage questions, but I also want to reference the IMUA policy statement reminding all to refrain from discussing matters affecting rates or conditions of insurance.  And now I'm honored to introduce today's presenter, Dr. Robert Hartwig. Dr. Hartwig is a clinical associate professor of finance and director of the Risk and Uncertainty  Management Center at Darla Moore School of Business at the University of South Carolina.  He makes frequent presentations to insurance industry management, board of directors, regulators, and legislators.  Prior to joining the Darla Moore School of Business, among other prestigious positions, Dr. Hartwig was president and economist for the Insurance Information Institute in New  York and held prior positions, including at Swiss Re. Dr. Hartwig holds the Chartered Property Casualty Underwriters CPCU credentials and speaks frequently  in the media on all issues related to insurance markets. We're delighted to have him with us today.  However, just before we begin, I'm honored to make a special introduction of IMUA's new president, Matt Derrick.  Matt joins IMUA with extensive experience with professional associations, driving innovation and growth. He is a strategic leader with a passion for education and technology.  I'll turn it over to Matt to say a few words. Welcome, Matt. Thank you, Eileen, and thank you, everyone. I'm really, really honored and excited to be here.  This is my second official day, so I'm diving right in, and I couldn't be more thrilled to be here and listen to Dr. Hartwig and questions that you all may have.  And I hope to be able to meet many of you at the annual meeting coming up in just a few months. I'm really excited and looking forward to this journey.  And with that, I will turn it over to Dr. Hartwig. Well, thank you, Matt. And again, welcome to the IMUA.  I'm very proud to have had a, I think at least a 20, 25-year association with this organization. I'm very glad to continue it here today.  And this is a great time for having this webinar. Not only is it the beginning of the year, but it's the beginning of a very, very busy year. I think we'd have to all agree on that.  The combination of what's going on and everything from California to Washington, D.C., it's been a really busy start to the year.  And so I think we have to ask ourselves, what does that portend for the year ahead? And I think everyone who's on the call today understands that if there's one thing that  we know is in store for the year ahead, and that's a lot of uncertainty. So that's going to be a large theme here, and I believe a lot can be learned in terms  of helping to divine the future by studying the past a bit and what the current trends are. So we're going to take a look at how the industry's doing, how it's performing today.  To the best information that we have at this point, of course, we're very new into 2025, so we don't have final data for 2024 at this point, but there are a lot of trends that  can be discerned. And not only in the industry overall, but in terms of the economy, of course, that has  a major influence on how this industry is going to grow and to be profitable over the next year and several years ahead.  And we'll have a little focus still on this problem of inflation, which doesn't quite seem to want to go away, and so that's going to have a major impact on the industry as well.  We'll focus a bit on commercial lines, trends, and some special topics like legal system abuse.  And feel free to submit your questions throughout the presentation, and again, we'll probably answer most of those at the end, but do that throughout, and maybe I'll catch a few as  we move through. So without any further ado, let me just talk about where we are. Where's the industry today, given the current economic challenges that we've seen, record  catastrophe losses or near-record catastrophe losses? And I'm very, very happy to say the industry remains strong, stable, sound, and secure.  And when we look at the industry's underwriting performance over so far the first 25 years of this millennium, if you will, you can see it's up and it's down, and there's nothing  unusual about that. We have good years and we have bad years, and we had a few bad years from high catastrophe losses recently.  Last year, not a particularly good year for cat losses, but you may be surprised that this combined ratio, as low as it is, it could drift up a little bit, but I think we may  come in under 100 for 2024, not so much on low cats, but on the strength of the premium being earned in a lot of lines, particularly something like commercial auto.  And so that's a little bit of a drill down right here, taking a look at the numbers for the last decade or so.  So quarter century, and now drill down to the most recent decade, and again, same story. It doesn't matter what time period we're looking over, we've got good years, we've got bad  years, and that's just the nature of this business. In terms of top line, it's great to be able to say that in 2024, at least by my estimate,  this industry became a trillion dollar industry in the United States. We surpassed the direct written premium $1 trillion mark in 2024 for the first time ever.  Those numbers will continue to grow in 2025, there's no question about that. But one very important development with respect to 2025 versus 2024 in the last several years  is the pace of growth is going to slow down. We have already seen that, for instance, the pace of growth in commercial lines is well  off its peak from a few years ago, and some of the edge is now beginning to come off in terms of personalized premiums, auto at home.  So that's all going to translate into a slower growth in 2025 than we saw in 2024, or either of the past couple of years coming out of the pandemic.  That doesn't mean there's a problem, it just means we're getting back to a more normal pace of growth.  In terms of growth, the growth has been predominantly, it's been the last couple of years, stronger  even on the personal line side than on the commercial line side, though prior to that it was stronger on the commercial line side.  But where the strength is across the market is in the ENS space. So in these specialty markets, whether we're talking about excess or surplus lines, we've  seen fairly substantial growth here, close to 15% in the most recent piece of data that I have, and I expect that growth to continue.  There just are a lot of challenges out there in property markets and in casualty markets, and so we see more and more of the market drifting into the non-admitted space, and  quite frankly, I even see that in the hiring patterns of companies. I have a lot of students who are being hired to ENS carriers and ENS brokers these days.  In terms of the industry's profitability, I have more than 30 years' worth of data here, and again, up and down and up and down, and you can see the last couple of years more  down than up, with very high catastrophe losses in some years, but also in 2022, the numbers  hit hard by higher interest rates as the effect on the net investment income is a bit delayed.  And so what we saw during the first half of 2024 is pretty good numbers, and all indications are,  despite the challenges in the second half of the year with Hurricanes Milton and Hurricane Helene,  from a net income after tax perspective, it'll probably be a fairly good year, in part based on very strong investment results, and again, strong results in, say,  personal auto line, for example. So some improvements, and that's part of what's driving lower premium growth now. In terms of profitability, return on equity here, again,  here you've got almost 40 years' worth of data. You see the familiar ups and downs, but here I've kind of annotated it. You can see, you know, when major catastrophe losses happen,  you can see how they have an impact on the ROEs. When they don't happen, they have the opposite  effect. They have a beneficial effect on the business, and economic events like the financial  crisis have significant impacts as well. We saw a bounce back in the first half of 2024 in terms  of ROEs that might have gotten hit a little bit in the second half with the major storms,  but it'll be a somewhat stronger year, I think, than we've seen recently.  Now, moving along from here, what we can see is comparing the ROE of property casualty insurers  to a broader range of industries, the Fortune 5, the Fortune All Industry Group. Think about,  like, the S&P 500. Again, about 40 years' worth of data, and what you see here is something quite  remarkable. Despite what the average person might think, that the property casualty insurance  industry is wildly profitable, it, in fact, has actually underperformed the Fortune Group every year since 1987, with the exception of one year. That would be 1987 itself.  Came close a couple of years, but generally, it does underperform. So, there's a huge misconception  about the profitability of the industry. It's always a struggle in this business to generate an appropriate rate of return. Now, in terms of underwriting performance,  we've said that there have been some ups and downs, and we did see, we don't have these numbers  for 2024 yet, but for 2023, we could see there were a significant number of downgrades among  P&C insurers. It's up 83% from 2022, but that was concentrated in the personal line space. So, if you take a look at it, if you were to take a look at the actual list of companies,  you'll see a lot of, not all, but many of them sort of smaller, mid-sized companies,  oftentimes with a lot of Midwest exposure, and a good number of mutuals in the mixed here  that perhaps didn't have the geographic diversification that some other larger insurers had, and they were exposed to a lot of tornado risk, hail risk, all of those sorts of things.  You combine that with some weakening in the balance sheet as interest rates up, pushing down fixed income security valuations. And so, it's really a multi-year process that  led to these downgrades in 2023. And those downgrades, if you look on the left-hand side of the chart, were largely the result of a combination of two things, deterioration in  operating performance, in other words, essentially higher combined ratios for the most part, and then  balance sheet strength. I interpret that as meaning a decline in policyholder surplus.  And we did see that industry-wide in 2022, with only a partial recoupment of that in 2023.  And that's what this next slide is about. When we look at the industry's capital or capacity,  what we could see is that it peaked way back in 2021, and then took a good hit in 2022 as  interest rates rose and as we had very high cat losses. And so, again, the good news about 2024  is we ended the year just about where we were in terms of the end of 2021. That's the good news. The bad news is we also ended the year just about where we were at the end of 2021.  So, we've kind of gotten back to where we were, but that's a problem in the sense that the economy  has grown substantially and with inflation. In addition to economic growth, we've seen  insured values and so forth rise fairly substantially. So, there has been some capacity constraint in the industry, and that has been part of what has held the hard market  in the commercial line space, as well as contributed to hard markets in reinsurance and  in personal insurance as well. And so, you can see it here again. So, it is – every decade or so,  we tend to see kind of a material drop in policyholder surplus, but the industry does  tend to trend back upward, and we are getting back on track right now. From everything I can see  barring some cataclysm of unknown proportions, unprecedented proportions in 2025, we should make some good gains in terms of policyholder surplus that not only assures  that we've recouped everything that we lost back from 2021, but that we've run the right track  towards bringing enough capital into this market in order to remove a lot of the capital constraints.  This is true on the reinsurance side as well. We saw a big drop in global reinsurance capacity  in 2022, but that has largely come back. But still, it's only about 3% above its 2021 peak.  When you look at economic growth and inflation, we're still well below where we need to be in order to provide the capital necessary for the higher value risks and the more numerous  risks that we have today. On the reinsurance side, that capacity situation is one element  of what drove property catastrophe reinsurance prices up pretty substantially in recent years. And in fact, we had seven years in a row of reinsurance price increases, which is  the only time that has happened in this 36-year series I'm showing you right here.  We did that peaked out in 2024. And as of 1.1, this year, we had the first  downward renewal in terms of or change, I should say, in the rate in line index  for property catastrophe reinsurance down about 6%. And in similar numbers, we saw in Europe and globally. So there's a bit of the edge. Reinsurance prices are still elevated. Now,  that doesn't mean that attachment points, which have been drifting higher over the period of  years, are coming down. This is just a reflection on price, not necessarily other terms associated  with reinsurance treaties. Now, in terms of cat loss trends, as I mentioned,  we are off to a really, really bad start for 2025. And we didn't end 2024 on a particularly good note. So the 2020s are off to an ominous beginning. The first half of the 2020s,  2020 through 2024, are already in the books. And I'll reveal to you in a moment exactly what that means. But as we started off this year, barely a week into the year,  we had the wildfires out in the LA area, sparked the most recent update, 17,000 plus structures  destroyed or damaged, 40,000 acres burned, tragically, 27 lives lost, at least well over 100,000 residents evacuated. And so the most recent insured loss estimates, they're all over  the place. But taking a midpoint of some of the major modelers out there, you get about $32.5  billion. This is as of yesterday. When you work this out, this is truly amazing. It works out to about 1.9 million claims, at least when you figure it out relative to the number of  structures that have been damaged or destroyed. So I'm not including vehicle claims here or  anything like that. Economic losses, many orders of magnitude higher, not surprisingly. But so what this tells you, this event is unique in the sense that it is very much personal  lines oriented, particularly personal lines, residential structures, so homes, condos,  apartments, those sorts of things, and high value properties. So it's truly extraordinary. When you  think about average claim being 1.9 million, that's amazing. When you look at your typical hurricane, for instance, we're talking about claims that are usually in the few tens of  thousands and sometimes less than that. Much of this, of course, loss is going to reside with the California Fair Plan, which has been extraordinarily mismanaged by the state of  California by suppressing rates for many years in California and whistling past the wildfire  cemetery, just wishing that things, you know, there would never be a major wildfire as the  California Fair Plan continues to grow and grow and grow. As insurers recognized, you know, they  were not allowed to charge rates that were appropriate commensurate to risk. They were not allowed to include reinsurance costs in their rate. They were not allowed to use  climate modeling in terms of helping to ascertain their rates or catastrophe modeling. I'm kind of on a looking forward basis. And so those chickens have come home to roost and,  but the, while this is a tragedy of epic proportions, it need not have been as much of a tragedy as it is. And you can put much of the blame squarely  on the state of California itself for creating a regulatory environment that has been extremely hostile to insurers for years,  forcing insurers to essentially dial back their exposure to state, to the state for years, leading to the increase in the fair plan. And now the fair plan,  basically not having enough money to pay all the claims. So even after it exhausts its reinsurance, it'll probably have to assess. So as you have probably seen,  this issue has become rapidly politicized. Insurers have been demonized  and where insurers are really just the messenger of risk here. You could see that graphic on the right-hand side,  uninsurable California. The only reason California is uninsurable is because the regulators of the state have made it that way.  Okay, and just a few weeks before this wildfire began, I did testify before the U.S. Senate Budget Committee in mid-December and in fact pointed out that California and Florida  are really the two problematic states, not because they, Mother Nature has it in store for them above every other state, but in fact, because those two states are extremely hostile,  have been extremely hostile towards the industry in terms of allowing insurers to charge a premium that is appropriate for the risk.  And that is exactly why insurers instituted moratoria or non-renewals in those states in the months and years leading up to the fires or to major hurricanes in Florida.  Anyway, so I updated my most recent chart in terms of wildfires. Not a lot of commercial losses in here, but mostly residential. But again, with that $32.5 billion estimate,  we could see that really blowing away, quite frankly, any of the other previous costly wildfires in U.S. history. So you see the top 10 in blue  and then the most recent fire in yellow. So this is going to be, you know, two, three times the magnitude of any of those. And these data are all updated for inflation.  What you do notice here, I think, is that nine of the 11 are in California  and all but one has occurred since 2017. So that tells you something, that this risk is very concentrated geographically  and temporally, that it's been happening more frequently as of late. When we look at the last 45 years or so of inflation-adjusted insured cat loss data, what you see in red here,  you can see the black bar and then the red, you see that insured losses, even after adjusting for inflation, have gone up by about $10 billion per decade  until the most recent decade. The most recent decade, the 2020s, so far we're at about $80 billion per year, up from about close to $40 billion in the 2010s.  So rather than an increment of about $10 billion,  we are looking at an increment so far this decade, and we're beginning the second part of this decade in a very ominous manner.  We're talking about an increment of about maybe $40 billion from the prior decade. And there's no end to this in sight. It is, yes, climate change is an element of this,  but as I testified to the committee, the overwhelming driver of higher cat losses in the United States is demographics. More and more people living in harm's way  or locating their property in harm's way intentionally, and quite frankly, knowingly. No one lives on the coast of Florida without at least having some knowledge  that there are hurricanes, same for living in forested areas of California or Colorado for that matter. So it is decisions that individuals are making  that by and large are driving the majority of these losses. You can see the top, I have my top 26 losses on here now. I actually, I failed to update this one.  I had the LA fires here at 20 billion. It should be up to the $32 billion range right now, which in dollar terms would put it right around where 9-11 property losses were.  That figure for 9-11 does not include things like workers' compensation or auto lines or life insurance or things like that. But it's going to put it in the top 10 most likely.  When we look at the sort of events that we've had in recent years, or sorry, in 2024, these are billion-dollar weather events. Now, these are not insured losses.  These are economic losses and compiled by the National Weather Service. And the data aren't complete yet, so we don't have a full accounting of Hurricanes Helene or Milton yet.  But, and you see a lot of storms clustered in the middle, but those are severe convective storm events,  tornadoes, hail, straight-line winds, you name it. And these are very, very costly to insurers as well. And this is part of what, we saw this same thing replayed in 2023  with these Midwestern events. And this is what caused a lot of problems for Midwest insurers that got downgraded. This chart shows the escalation  in the number of billion-dollar weather disasters, again, all adjusted for inflation. So what you see is that the bars are the number of events.  And you see, at least in the right-hand side of the chart, you see a lot of green. So severe storm counts. So again, these are tornadic events, hail events, straight-line winds,  oftentimes occurring in the central part of the United States. And while you have in yellow the tropical events, they don't look too numerous, but they are nevertheless very costly.  Now, let me move along from there and kind of transition over into the economic discussion. It's been a very tumultuous five years. If we think about five years ago where we were,  we were hearing the rumblings of a global pandemic that were beginning. And we were just a couple of weeks from having that really hit our shores here in the United States.  But a lot of other rumbling going on here, wars, global geopolitical conflicts,  affecting what's going on. So here you can see all the way back to 2000 economic growth. And so you can see where we were five years ago.  The economy was beginning to fall off a cliff with the pandemic and then came roaring back. And we managed to avert the recession ever since.  And so what you should pay attention to here is the yellow part. These are the forecasts, the yellow bars.  And fourth quarter of this year is pretty much in the books. We just don't have a final number yet. But what you're seeing is a bit of a slowdown in the second half of 2025,  and then a pick back up in 2026. Why do you see that? These results are among the first that now attempt to incorporate at least the stated policies  of the incoming Trump administration. So what are those policies? And what is driving the slowdown in economic growth in the second half of 2025?  That would be the imposition of tariffs and the assumption that our trading partners will retaliate against us. A tariff is a tax. There's no way around it.  It will raise costs if they are imposed.  And evidence does indicate that in the previous rounds of tariff imposition, both in the Biden and the Trump administration, that the majority of those costs were passed along  at the consumers, generally actually through intermediaries. So many of the tariffs were imposed on intermediate goods. Think about steel, for instance, or aluminum.  And that drove up the price of these inputs for manufacturers and producers here in the US, which drove up consumer products prices.  So that was something that contributed to inflation over the past few years. And that's likely to be the case in the future. But we see a resumption of stronger growth in 2026.  Why is that? The view is that around the end of the year, we will see tax cuts, or at least an extension of the Tax Cuts of Jobs Act of 2017,  get through Congress, signed by President Trump, and that would be stimulative. So you will have a situation in which you have the economy slow through tariffs,  perhaps stimulated through tax cuts that are maybe even more generous than the ones that are here now.  This will involve very substantial amounts of deficit spending. So that in the short run is stimulative. We'll get to the inflation impact of that in a couple of minutes,  because that's very important to insurers. So I can also, I think, declare that we've had the soft landing, the elusive soft landing. The Fed has managed to engineer that.  So in reality, we've already landed. On the unemployment side,  on the unemployment front, we are really just where the Fed wants it today. The ideal unemployment rate for the Fed is 4.1%. That's exactly where we were in December.  And as you can see, on a quarterly basis, that's pretty much where we expect to be  out into the first part of 2026, when it might drift down a little bit, again, with the sort of stimulative spending associated with tax cuts.  This is all great news for property casualty insurers. Why? Strong labor market, usually is consistent with a strong economy, of course.  This generates a lot of insurable exposures directly through, say, workers' compensation, payroll exposures.  And you can see how this can, this is generating exposures indirectly in many other lines. So people are employed, they're building and buying homes, they're buying cars,  they're purchasing goods that have to be transported all across the country, if not all over the world. And so it's kind of a virtuous cycle there.  We have a quarterly survey taken of Wall Street economists, and you can see how the probability of recession over the next 12 months has receded greatly  from, say, late 2022 through late 2024. We should have a new survey next week. And I expect that to remain maybe roughly where it is today.  So good news is a recession seems very unlikely in 2025.  Now, and as I mentioned, all indications are is that the Fed has achieved that very elusive soft landing. Some people say we haven't landed at all.  But one thing we know for sure is we avoided the hard landing, and that's where everyone thought we would be once the Fed began to raise rates very aggressively in early 2022.  You can see that in terms of consumer confidence, consumers account for 70% of spending in the United States, 70% of GDP, I should say.  You can see that consumer confidence took a hit during the pandemic, came back up afterwards, peaked around mid to late 2021, and then came back down as a result of inflation,  and has bounced around ever since. There was a bit of a boost after the election, although in the most recent number that I showed with an X there, it came back down.  There is typically a boost after a presidential election. You see that in 2016 as well. But there have been some concerns among workers  about jobs and business conditions and so forth. When we look at business sentiment,  we could see that there is a huge surge, which very much mirrored what happened in 2016, but a very huge surge occurring in November, and those data are for November  taken right after the election. The economy's not falling apart like it did during the financial crisis, so that's good to know. We did see, obviously,  car sales and truck sales fall during the pandemic. The result, largely, of supply chain issues that bounced back.  But vehicle sales are being held back a bit right now,  not because of supply chain issues any longer, but higher interest rates is one of those reasons today.  So expecting a bit of an improvement when we get out to 2016, but this is gonna be very sensitive to the path of interest rates and to the health of balance sheets of consumers.  But again, when you think this drives an enormous amount of exposure for industries, private passenger autos, about a third of all premiums written.  And then beneath that, of course, is a lot of manufacturing, a lot of transportation, all of this. And also, when we think about housing,  housing sales, new home starts have fallen a bit. Again, interest rates are materially higher than they were. Mortgage rates are still around 7% or so.  But the economy, we did not see it falling off the cliff like we saw during the financial crisis. There's still a lot of demand for new homes. And when you think about,  this isn't so much an issue about home insurers, this is a very potent driver of exposure across many, many lines. You think about construction risk,  surety, commercial auto, workers comp,  everything like this is very sensitive to what goes on in the housing sector. But I'm still relatively optimistic there. But right now, the Fed is basically signaling  there'll only be one additional quarter point decrease this year. So mortgage rates aren't gonna fall that much in 2025, and maybe not that much in 2026 either.  So the new normal might actually be  mortgage interest rates closer to 6.5%, 7% range. That may sound high for people who got their first mortgage in the post-financial crisis era.  But if you're a bit older than that, like I am, and maybe many of our listeners are,  you know that historically mortgage rates are closer to 6%, 7%, and even higher sometimes for the norm. This chart really says it all. So goes the economy, so goes growth  in the property casualty insurance industry. You see economic growth in orange, and you see direct written premium growth in blue. And you can see these two things  tend to move somewhat in lockstep. Now, 2024, we saw faster growth in premiums than we saw in the economy overall. But the essence of the relationship remains pretty tight.  And I expect that to continue into the future. So, you know, again, that makes it very obvious should the economy slow down dramatically or wind up in a recession,  we would wind up with much slower growth as well. When we think about, you know, other sorts of major areas of importance to insurers, thinking about construction drives again  and tremendous amount of exposure inside and outside the construction risks specifically. We see that kind of drifting down with higher interest rates since 2022.  Within this diagram, which may suggest, well, this is kind of more abundant growth. We've got, you know, a couple of different stories going on in here.  We've got residential construction that is overall kind of flat. You saw that from the previous chart. And we've got non-residential construction  that's down across the board with a couple of exceptions.  And I'll get to that in a second, but on the, you know, single family home improvement spending side of things, which again is something that is important that helps drive a variety  of commercial insurance exposures. Now, the numbers aren't all that terrible. We're down off our peak in 2022 when interest rates were still abnormally low,  but the numbers aren't all that terrible by historical standards. So we've got residential construction up a 10th in the most recent data, non-residential down a 10th.  So kind of offsetting one another. Now, depending on who you are and what you insure, this could be a real bonanza for you. I'm sorry, and the title on this is incorrect.  This should actually say construction of data centers. All right, it does say that in a little box, but the title on the top is incorrect. Apologize for that.  And you see it in the box as well, and I'll correct this. But you could see that this sort of thing is up 43%. So obviously a lot of investment in data centers from AI.  This number has been increasing for a long time in general, but it's accelerated as a result of AI. We've had the CHIPS Act, Inflation Reduction Act.  There was all sorts of things that were incentives for this type of construction. And you actually heard President Trump yesterday, along with some tech leaders,  unveil what they say is a $500 billion investment in AI  and presumably the AI infrastructure to go along with it, which would include data centers. And so there could be even more juice behind this.  And that's a great growth area for insurers, insuring the maybe AI technological revolution.  Now, everything isn't all a bed of roses.  Part of the reason why the economy has been growing quickly and is expected to continue to grow is we have out of control deficit spending.  That is one thing that there's bipartisan agreement on is that nobody cares about the deficit anymore. It's about spending.  And so you can see the national debt, 35 and a half trillion  as of late last year, relative to GDP, it's the highest we've seen since World War II. And this is something that is also producing some inflationary pressures today.  So you can see debt as a shared GDP spiked during COVID, not surprisingly, came down a bit, but remained elevated. So, and that's without the US being involved  in some sort of a direct war. So what we would have expected to see is debt to GDP ratio fall back to where it was over the span of a couple of years and that does not  seem to be happening and in fact it's likely to get worse. Federal spending as a share of GDP is expected to greatly exceed revenues over the next decade. You  can see outlays in other words expenditures in blue and you see revenues in red and you can see again across both Democratic and Republican  administrations ever since we last balanced the budget in the late 1990s it's it's just runaway spending which is really unfortunate because the  government's looking for places to save money one of it could be on its cost of debt and by bringing down that debt they could lower interest rates but again  that's not very popular in Washington these days. Now some other issues you know major economic developments that are going to affect insurers as we  mentioned potentially substantially higher tariffs based on Mr. Trump's own comments these estimates suggest that we would see an average tariff rate across  all US imports of close to around 18% which would be the highest numbers we had seen since the 1930s. So this is a little bit back to the future if you  will that and we'll see how this works because again there aren't a lot of things economists agree on but the fact that tariffs are taxes and tariffs  increase prices to consumers is one of the few that they do agree on. So and when we think about how it could affect insurers just one example would be let's  just take motor vehicles and auto parts insurers spend a lot of money on auto parts and vehicles repairing replacing cars millions of accidents that happen  every year they spend tens and tens of billions of dollars and lo and behold more than a third of these parts are manufactured in Mexico 13% in Canada  China these are the three countries that have been promised that they're going to be hit with large tariffs as early as February 1st we just found out. So  there's no question this will increase the price of auto parts and therefore and vehicles themselves as well as then ultimately automobile repairs. This is  true for personal auto as well as commercial auto there's no distinction here. And when we kind of take a look at where our imports are coming from you  look at the panel on the left you can see that more and more of her it's coming from the European Union actually less from China that peak was reached  way back a couple years after the pandemic and Canada has always been one of our largest trading partners as well as well as Mexico. So so perhaps tariffs  in store for everyone but a 25% tariff against Mexico and Canada there's no question it would be painful those countries but I think one thing that is  not appreciated sufficiently is that these countries are not just going to sit idly by and say hit us with as many tariffs as you want they're going to  retaliate. And so Mexico and Canada are sufficiently large especially collectively so that a retaliation in kind could the best estimate right now  would reduce US real GDP by about one percentage point and inflation increase it by about a half a percentage point. So this will feed into the cost of  everything insurers need you know in terms of repair and rebuilding structures and vehicles and so forth even into indirectly through medical  inflation as such. Now back to the inflation issue we had hoped we had inflation beat after it peaked at 8% on an annual basis in 2022 fell by about  half in 2023 we were on the right track but we began to see in 2024 that the economy was still fairly vigorous which is good but inflation was not coming  down the way that we had hoped. A year ago we thought inflation would be in 2024 would be about two and a half percent instead we finished the year at  three percent and we've seen all these numbers revised upwards so we were hoping to be down to about 2.3 percent by 2025 now we're looking at 2.8 percent  so again about a half a point higher than we otherwise would have been. So there is some element of inflationary expectation from tariffs built into this  okay as well as some of the pressures arising from deficit spending and a few other things. Now and we see well where's that inflation coming from it's  coming primarily basically almost entirely from the services sector you could see there was almost no inflation in the goods sector at all as we  finished 2024 so it was entirely in the in the services sector and so overall inflation is uncomfortably high from the Fed's perspective and it's about slowing  down services. Now services involve a lot of discretionary spending by consumers on many many things you know from vacations the  restaurants to haircuts and so forth but when we look at the price we think about the cost to insurers of repairing homes and it's gone up dramatically you know  people probably you know the 2024 election more than anything else turned on inflation and people were upset with inflation and they voted with their  pocketbooks and and you could see that in the period from just before COVID through the middle of last year we saw the overall consumer price index was up  about 21 percent but when we look at construction materials it was double that at about 41 percent and construction trade services like  plumbers electricians and so forth up about 35 percent so very very important to note that and so insurers that you're experiencing inflation at a pace  that's somewhere like twice what the overall inflation rate is. When we look at again these construction goods everything we need to repair rebuild a  structure whether it's a home or a business went up dramatically and it went up and it's kind of it's been flat but it has not come back down motor  vehicles have gone up dramatically but have not come back down same thing for used vehicles prior was for new and what we can see is that medical  inflation has become has come roaring back since it's a post pandemic lows as well so it's right on par with the overall consumer price index so this can  drive up claim severities and workers comp as well as some liability some casualty lines as other casualty lines as well. Let me get into a couple of  other issues here and then we'll take some questions here at the end in terms of renewals we can see that in terms of commercial renewals we are seeing some  of the edge come off of increases so we have a hard market that is the better part of six years old believe it or not in commercial lines and we are seeing  the smallest renewals that we've seen since 2019 at this point so again we've got more adequacy in terms of rate we've got more capacity coming in and so that  is taking a bit of the edge off of these increases but leading the way in commercial lines on renewals is commercial property not surprising with  inflation and high cat losses commercial auto pushing the envelope here with with again not only inflationary impacts but also some issues related to the tort  system driving up commercial auto liability and a commercial umbrella suffering from the same abuses of the tort system that you see in commercial  auto or GL or some other lines as well on the investment side we can see that higher interest rates have been been good for large institutional investors  like insurers so we've seen a substantial increase in investment income so with interest rates likely to be higher for longer this is actually  good news for insurers so well the average non-institutional investor is not happy with this if you're kind of a net saver like the insurers are net  investor it's actually very good news and you could see how the average return on invested assets has risen from its 60-year low in 2021 to something  approaching where it was prior to the financial crisis today so this is helping fuel insurers profitability in the years ahead now we can see short  term interest rates are expected to drift down a little bit but not much maybe about a point during the course of 2025 and but in the longer term 10-year  treasuries which is what mortgage rates and these sorts of things are keyed off of really not much change at all in fact expected to rise a bit in 2025  relative to 2024 and remain pretty much flat in 26 so that was not the expectation long ago not too long ago but that's where we are today so we are  settling in to a situation where again longer-term interest rates are likely to remain higher than would otherwise have been expected the last topic is this  abuse of the legal system I won't dwell on this too long but this is a huge problem for businesses large and small and across multiple lines I'm probably  preaching to the choir here but you can absolutely see that there has been you know an increased propensity to sue jury awards have been rising courts and  juries favoring plaintiffs more frequently growing distrust of large corporations and so you see large where there's pharmaceuticals or what have you  being sued and third-party litigation financing you can invest in lawsuits and an extremely aggressive plaintiffs bar in my view the plaintiffs bar trial  attorneys are the best organized best funded special interest group in the United States bar none and you need only drive down a highway or byway just about  anywhere in the United States look at the composition of state legislatures you'll see that many of them in fact have a large number of trial attorneys  in them and but you can see just a massive amount of advertising out there that the public has been convinced that your first call after an accident should  not necessarily be to the insurer it should be to the trial lawyer whose number is on the billboard that's likely right above your head and you know the  average jury awards rising and and also when we get to very large awards so called nuclear verdicts we could see that these have risen whether we're  talking about you know commercial auto we're talking about products liability and we could see there are a substantial proportion of nuclear verdicts even in  the premises area and certainly in medical professional liability medical malpractice as well so these are driving you know the torque costs upward there  are some reform efforts for instance for instance in federal courts mandatory disclosure of third-party litigation financing is an effort of the industry  trying to get that in at the state level as well but this is a huge problem it's it's not something the insurance industry can solve on its own and we can  see that you know this all states are not created equal in terms of their their torque costs you could see in the southeast and a few other states you  know New Mexico Montana a few in the northeast you could see very high torque costs so for the US overall we saw torque costs stand at 2.1% of GDP and we  think about that as a torque tax and that torque tax per household basis on a household basis amounts to about $3,700 so let me just summarize here and again  we'll go on to the questions so you know please send those in if you have some Eileen will be monitoring those the industry remains strong stable sound  and secure that's the best message I can give to you there are a lot of upset consumers in in California and in Florida and generally across the country  as property insurance rates for instance have been going up and auto insurance rates have been going up but that is a reflection of the risk that insurers  have been assuming and it would be a much different situation if I were here telling you that hundreds of insurers were failing and and so consumers are  better served by an industry that's strong stable sound and secure and that does mean paying premiums that reflect the underlying risks and a soft landing  has been achieved and so no recession is likely in 2025 that's great news and in fact not likely at least at this point in 2026 so we've got a lot of  uncertainty in terms of the future of fiscal policy and monetary policy so that creates a lot of volatility out there markets are a bit frothy and a lot  of geopolitical risks are still looming so expect markets to remain volatile but with interest rates higher that's going to provide a nice tailwind for insurers  the inflationary pressures moderated in 2024 but they're going to persist in 2025 maybe not quite to the same extent but this is going to be a persistent  theme that the Federal Reserve is basically going to sit on its hands I think this year probably until very late in the year barring some unforeseen  circumstances loss cost challenges certainly been easing that's good news with the elimination for the most part of supply chain issues inflation has  eased but but we've got a lot of uncertainty here you know in fiscal trade and labor policies that could you know at least partially reignite  inflationary pressures so and that has a significant impact on claim severities now and as I mentioned the last item this legal system of use remains a  long-term challenge for insurers and it is a major cost driver when you look in the commercial auto line products auto line I started products liability  medical professional liability in areas like this a lot of specialty areas you look in the restaurant sector things like liquor liability are a huge issue  in many states so it's going to take a long time to get these issues resolved so I believe it's time for some questions and I'd be very happy to to  respond to any and Eileen I'll hand it back to you for that excellent thank you dr. Hartwood for a fabulous presentation we have so far seven great  questions I'm going to try and get through them quickly so we'll start with the first as the insurance and this is from Emma Layton as the insurance  landscape becomes more complex particularly with emerging risks like climate related events what kind of new skills or training should claims  adjusters be prioritizing to remain effective in their roles well let me just answer that question very broadly okay there's absolutely no question that  claims adjusters are going to need to upgrade their skills continuously in large response to the fact that we're seeing an acceleration of technology  that can affect how their jobs are conducted the World Economic Forum out in Davos Switzerland just put out their 2025 risk report as well as a prediction  of what they expect to happen in terms of the employment picture globally over the next five ten years or so and they actually targeted I believe they  mentioned claims adjusters as an area that's vulnerable for instance to AI technologies and so I think it's going to be incumbent on a claims professionals  who I think are always going to be instrumental human beings going to be instrumental here to upgrade their skills in terms I'm sorry I'm sorry I'm  sorry to kind of upgrade maintain and then upgrade their skills in order to remain a competitive in the marketplace so certainly when we're talking about  large complex claims that involve complex litigation or complex of property matters you know again the human touch is always going to be  extremely important here I think where a lot of the issue is is going to be on kind of lower value claims I think about motor vehicle claims lower value  property claims where more of that process becomes automated now this is not new but and you know the same report also talks about a continued decline in  administrative assistance that's been something that's been going on for decades but so I do believe there's there is an important future for for  claims professionals but staying on top of your game technology is going to be a technology wise is going to be absolutely critical excellent and Don  a Solon asks do you anticipate that must and the doge will have an impact on the deficit good question so you know Elon Musk who seems to now be the sole person  overseeing doge I think the deck room Swami has gotten out of it now you know Musk started out with the idea that he's going to trim two trillion dollars out  of the federal spending now he calls that aspirational or something like that and is maybe hoping for something less than that I find this a bit optimistic  and again the reason for it is is that there is nobody in Washington who these days who has a passion for deficit reduction okay what members of Congress  whether in the House or the Senate have a passion for is being able to go back their district and tell them about the least most recent project whether it's a  highway project or funding for schools or a new airport or whatever it is this is the sort of thing they they're under pressure to bring home the bacon  That's a whoops. Probably lost you for a second hopefully will bounce back in and see you're still in the meeting.  Try dialing and if you see the audio and we will get your audio you can also shut off your video so it reduces your bandwidth. But audio that a dial an option.  For our attendees, let's see if Dr. Hartwig is able to reconnect, perhaps with his audio.  He can dial in, switching to the audio option, there will be a phone number and then connect to audio directly.  Fortunately, this happened at the very end, but we would like to get a couple more questions and if possible, so let's hold on for a second.  Also, it's a great time to take our event survey. The link is in the chat as we wait for Dr. Hartwig to dial in.  So, everybody, I apologize. Dr. Hartwig did say he is frozen in his computer, so, unfortunately,  he will not be able to come back in. He said he had one minute to go anyway, and he had a hard end at 1 o'clock. So, I will forward these questions, the remaining questions,  to him, and he is happy to share the responses, and we will share them all with you, along with a QR code that will allow you to download a copy of the slides, which Dr. Hartwig has  up on the University of South Carolina website. So, thank you again for your attendance, and as far as winners, for the most last best engaged, Dr. Hartwig said to tell Emma Layton,  congratulations, that's the first question. It was a brilliant question, and you are the winner for the $25 Amazon eClip card, which we will email to you. So, again, thank you,  everyone, for attending. This ends today's webinar, and we hope to see you soon.

Video Summary

In the 2025 "State of the Insurance Market" webinar hosted by Inland Marine Underwriters Association, Dr. Robert Hartwig discussed the current trends and challenges facing the insurance industry. Dr. Hartwig, a professor of finance and director of the Risk and Uncertainty Management Center at the University of South Carolina, addressed several key issues, including the economic landscape, industry performance, and emergent risks like climate change impacts.<br /><br />The insurance industry remains strong despite economic challenges and rising catastrophe losses, maintaining stability and profitability. Dr. Hartwig highlighted an expected slowdown in premium growth for 2025 due to premium rate adequacy and increasing capacity. However, challenges remain, notably the impact of higher tariffs proposed by the incoming administration, potentially increasing costs for repairs and replacements, especially in automobile and property lines.<br /><br />Furthermore, Dr. Hartwig emphasized the persistent issue of inflation which affects claims costs significantly, and the abuse of the legal system exacerbates cost pressures in various insurance lines. Legal system inefficiencies and increased jury awards contribute to higher liability costs, notably in commercial auto and casualty lines.<br /><br />A notable point was the emphasis on technology and skill development for insurance professionals, particularly claims adjusters, to remain relevant amidst technological advancements and AI implementation.<br /><br />The session concluded with engagement from the audience, addressing questions about the evolution of skills needed for claims processing and the potential impacts of fiscal policies on the insurance landscape. Dr. Hartwig's presentation underscored that while the industry is fundamentally stable, adaptability to economic, legal, and technological changes is crucial.

Asset Caption

Politics and economics will dominate headlines in 2025. The return of Donald Trump to the White House and a new Congress guaranties big changes for the year ahead in every industry—including insurance. Sweeping changes in fiscal policy, trade, geopolitics, regulation, and labor policy will impact the property/casualty insurance industry in a multitude of ways. Some changes will likely benefit insurers while others are potentially detrimental. This presentation will provide a fast-paced overview and outlook for the industry for 2025 and beyond, focusing on those areas likely to be most consequentially impacted.

Presented By:
Robert P. Hartwig, PhD, CPCU
Clinical Associate Professor, Finance Department and
Director, Center for Risk and Uncertainty Management
Darla Moore School of Business
University of South Carolina

Keywords

insurance industry

economic challenges

climate change

premium growth

tariffs

inflation

legal system

technology

claims adjusters

fiscal policies