“A transformative year in insurance …"

“The theme of 'evolution, not revolution' is discernable across the market …"

“The only constant is change—and when change is coming from many directions, the insurance industry may have to pivot in the way it does business to keep pace …"

“In the coming year, the industry must move from 'react and repair' to 'predict and prevent' and explore nontraditional distribution channels ..."

After a tumultuous few years, Celent, Deloitte, WTW and Forrester, among others, have weighed in with their predictions on what's in store for the insurance industry in 2025. From artificial intelligence (AI) to financial performance, here are four predictions for 2025:

1) Investment in AI will accelerate. The impact of AI on business and the insurance industry was top of mind in 2024. In the coming year, Celent, in its “Top Tech Trends Previsory: P&C Insurance 2005" says it expects to see insurers and their partners leverage a collection of AI tools to become more efficient.

The race to effectively deploy AI is already well underway. More than three-quarters—76%—of U.S. insurance executives say their organizations have already implemented generative AI capabilities in one or more business functions, according to a 2024 Deloitte Center for Financial Services survey.

Meanwhile, Forrester estimates tech spending will rise 8% year over year in 2025—an increase of 5% from what was predicted in 2024.

According to Celent, the following types of generative AI are currently in production in insurance software and are expected to ramp up in 2025:

• Natural language understanding: The ability of AI systems to comprehend and interpret human language, allowing them to understand and respond to user queries or commands.
• Large language model (LLM): A type of generative AI that specializes in generating human-like text.
• Speech generation: The process of generating human-like speech or voice output from AI systems, often used in virtual assistants and voice-based applications.
• Conversational capability: The ability of AI systems to engage in natural and interactive conversations with humans, simulating human-like conversation patterns.

However, as businesses embrace AI to streamline operations and boost efficiency, they're not the only ones catching on. Cybercriminals are also exploiting AI's capabilities, using it to elevate their tactics to alarming levels of sophistication.

“Adoption of AI continues to accelerate as companies look to leverage this capability," says Alvito Vaz, business manager of the ID Federation. “This is also true with nefarious actors who are using AI to improve the quality of cyberattacks. Phishing emails with bad grammar or poorly worded requests will be replaced with AI-generated messages."

“Even scarier is the use of AI in generating deep fake audio and video messages," Vaz adds. “Carriers will continue to invest in cyber breach prevention with the adoption of multifactor authentication (MFA) as [the] primary tactic."

2) The industry will adapt to the fact that nowhere is immune from severe weather. For the first time in six years, worldwide insured losses from natural catastrophes surpassed $100 billion without a single event causing over $10 billion in damages, according to Deloitte's “2025 Global Insurance Outlook."

“This indicates a broader spread of smaller, yet costly, events," the report noted. “It also underscores a need for the reinsurance industry to closely monitor and reassess underwriting practices as more geographic areas fall into high-risk zones."

Last year, insurers implemented rate increases across most property & casualty lines to remain viable. While the strategy seems to be improving insurers' profitability, Deloitte notes it's also making it more difficult for consumers to afford coverage options due to the increasing frequency and severity of catastrophes.

“The insurance industry craves certainty and precision, but as the climate changes rapidly, this is becoming more and more unattainable," says Jeff Saye, global insurance claims leader at Genpact. “In response, we'll see insurers be the first movers on AI-driven catastrophe modeling."

“The data and machine learning that are used for risk assessment and pricing will continue to evolve and improve in order to bring certainty, precision and trust into the equation," Saye continues.

As of August 2024, there were 19 confirmed weather or climate disaster events with losses exceeding $1 billion each in the U.S., according to the National Oceanic and Atmospheric Administration National Centers for Environmental Information—which does not account for Hurricanes Helene and Milton in September and October.

“Compared to previous years, this is a significant increase in severe storm activity," says Alison Murphy, private client services, national practice leader, at Risk Strategies. “The annual average for 1980 to 2023 was 8.5 events; the annual average for 2019 to 2023 was 20 events."

“In addition to the impact of severe weather events themselves, natural disasters directly impact the availability and cost of building materials, fuel and labor supplies needed to rebuild and repair damaged property," she says.

In its “Insurance Marketplace Realities 2025" report, WTW notes the definition of natural catastrophe risk continues to broaden from the traditional perils of earthquake, flood and windstorm in high-hazard zones. A heightened concern from underwriters incorporates secondary perils, such as severe convective storms, wildfires and freezes into the new definition.

Specifically, carriers are struggling to understand the impacts of convective storms, WTW says, which have increased claims and costs. In response, in 2025, agents can expect to see continued higher premiums in the homeowners market, as well as other actions, including higher deductibles, reduced coverage limits or limiting roof coverage as a response to the rising frequency and severity.

“In 2025, look for companies to get even tighter with terms and conditions concerning wind or hail damage and roof exposure," says Troy Crawford, head of commercial lines product management at Westfield. “The significant property catastrophe losses, particularly in the Midwest, are driving insurers to explore new ways to help customers keep premiums affordable. This will include more focus on cosmetic damage exclusions and higher deductibles."

WTW says admitted carriers will continue to shy away from catastrophe-prone areas, contributing to the increased reliance on the surplus lines market as a coverage solution. More standard carriers are creating non-admitted solutions to address capacity issues and coverage concerns and are starting to market these options more aggressively, the “Insurance Marketplace Realities 2025" report notes.

“Excess & surplus lines, often the only solution for clients in some catastrophe-prone areas, can address specific coverage circumstances and align well with clients with higher risk tolerance," Murphy says.

3) The agent distribution model will continue to be profitable and mergers & acquisitions (M&A) will increase. Agent and broker organic growth and profitability has been on an unprecedented streak. 2024 turned out to be a pleasant surprise for agent and broker performance, with organic growth at 10% during the first three quarters of the year, according to Reagan Consulting's Growth and Profitability Study.

A strong economy and firming rates across all lines of insurance—commercial, personal and group medical—have been the key contributors as agencies continue to see outstanding EBITDA (earnings before interest, taxes, depreciation and amortization) margins, says Kevin Stipe, president of Reagan Consulting.

“EBITDA margins have continued to be at or near record levels as agents and brokers have successfully kept their expenses growing slightly slower than their revenue," Stipe says. “We are expecting 2025 to be another solid year for brokers, fueled by continued solid economic growth."

“Rate increases across all three lines of insurance will likely taper off at some point, but with the recent losses from hurricanes, we aren't expecting a truly soft market anytime soon," he says.

In parallel to the unprecedented organic growth agents and brokers have seen over the last few years, the last five years have seen a record amount of M&A activity. Aggressive private-equity (PE) buyers were instrumental in driving broker deal activity to a record in 2021, with approximately 1,000 transactions, according to Reagan Consulting.

By mid-2022, with inflation rapidly increasing, the Federal Reserve began an unprecedented upward push in interest rates, making five rate increases totaling 350 basis points from June to December of 2022. Not surprisingly, this updraft in interest rates put a chill on agency M&A, especially for highly leveraged buyers. As a result, 2023 was the slowest M&A year for the industry since 2016, and 2024 is on track to be lower still with only slightly over 500 deals, or half of the peak of 2021.

In 2025, Stipe expects a slight uptick in M&A from 2024 levels—perhaps 550-600 deals. “The bigger story here is that there won't be a big change in activity following the Republican election sweep," Stipe says.

Why? “For M&A deals, it takes two to tango. Buyers will likely want to do more deals due to a more bullish outlook for the economy coupled with an expectation that the current low corporate tax rates will be extended indefinitely," he explains. “But I don't expect this higher level of buyer interest to be matched by a flood of agency sellers."

Agency owners were anxious about a potential increase in capital gains or income rates under a Harris administration. Under a Trump administration, neither of those scenarios seem likely and are no longer a factor in agency sellers' decision-making. This may result in a decrease in M&A activity and could create a larger supply of agencies.

4) Industry financial performance will stabilize. Two concerning themes loom in 2025 for industry financial performance, according to an analysis of NAIC financial data by the Insurance Information Institute (Triple-I) and Milliman.

First, commercial auto expectations continue to worsen, and the analysis expects this line will continue to remain unprofitable through at least 2026. The outlook for general liability has worsened, and it's also expected to be unprofitable through 2026.

On the flip side, the Triple-I and Milliman analysis notes that the 2024 net combined ratio should be better than expected. The personal auto net combined ratio improved to 100 and is on the cusp of underwriting profitability.

While the industry has struggled with combined ratio, Deloitte notes there is reason to be optimistic that p&c industry performance could improve in 2025. “The recent surge in claims severity, driven by higher inflation and supply chain shortages, is waning," the report notes. “This, combined with rapid growth in written premiums from sizable rate increases and higher investment yields, is expected to provide some relief."

Deloitte predicts a reduction in the combined ratio for the p&c sector to 98.5% in both 2024 and 2025, from 103% in 2023. The market is also expected to continue to benefit from a deceleration in claims costs because of lower inflation, which decreased to 3% in June 2024 after reaching a peak of 9.1% in June 2022.

“Let's hope economic conditions in 2025 allow for relative stability we have not seen since 2019," says Bill Martin, president & CEO, Plymouth Rock Home Assurance. “At the moment, there is nothing brewing we can see which will keep us from a more stable insurance environment in 2025 … but it seems like black swans alight on the insurance pond in bevies every year."

Paul Buse, principal of Real Insurance Solutions Consulting, a firm that does in-depth market analysis for a variety of firms, including 40 Big “I" state associations, thinks the industry has shown an ability to take on those black swans and come out the other side—no matter what 2025 might bring.

“I'm a big believer in the resilience of the industry," Buse says. “We want lots of insurance companies, lots of diversification, lots of willing risk takers. And they will figure it out. And they will figure it out using independent agents because agents will bring them the solutions."

Katie Butler is account executive at Aartrijk.