US property & casualty outlook: the past weighs on the present

Our outlook for the US P&C industry in 2025 is evolving. Underlying performance remains strong, but tariffs present a major risk to the forecast, especially in personal lines affected by auto and construction loss cost shocks. Natural catastrophes and reserve uncertainty create additional risks. The California wildfires were a large loss to start the year. Liability reserve additions in 2024 affected profitability for social inflation-affected lines and may indicate more adverse development to come. Sector growth will decelerate toward longer-term averages, as tariff-driven inflation is partly offset by slower economic growth. We expect premium increases of 5% in 2025 and 4% in 2026, with return on equity (ROE) at 10% in both years.

Key takeaways:

• Our outlook for 2025 is for decelerating growth and stable profits, but tariffs create high uncertainty and the potential for loss cost shocks in personal lines.
• We forecast industry ROE of 10% in 2025 and 2026 as higher investment returns offset weaker underwriting profitability.
• We expect premium growth to decelerate to a still-strong 5% in 2025 as inflation pressures may slow rate declines, followed by 4% growth in 2026.

We forecast ROE at 10% this year and next,¹ a slight decline from 11% in 2024. The underwriting tailwinds that drove 2024 improvements – strong premium growth, easing inflation and low claims severity growth – are mostly past. This year, we forecast premium growth to ease with higher competition, especially in personal lines, while expected tariffs could push up claims costs. Investment improvements will likely slow as the gap between portfolio and market yields continues to narrow.

First quarter California wildfires will add roughly 3 percentage points (ppt) to the industry net combined ratio for 2025, depleting nearly half of the industry's annual catastrophe budget (~8 pts). Other catastrophe activity in 1Q25 was slightly above average. We have revised down our 2025 profit improvement estimate and will wait for more severe convective storm season data before making material forecast changes. Reserve adequacy remains another key unknown for future industry profitability. Downside risk from under-estimating past liability claims materialized as USD 16 billion of reserve additions in 2024, raising the calendar year loss ratio for liability lines by 9 ppt. It was offset by favorable development in other lines.

Table 1 US P&C insurance sector outlook

We forecast direct premiums written (DPW) growth of 5% in 2025 and 4% growth in 2026. Tariffs and reduced net migration could put upward pressure on goods prices and wage inflation, which might require premium rate adjustments to compensate. This may be partly offset by slower GDP/exposure growth, although growth is heavily influenced by the underwriting cycle (see appendix for rate change by line of business). Despite growing risk, our core growth message is unchanged: solid but decelerating from a historically elevated four-year period.

Figure 1: Quarterly direct premiums written, y-o-y

Rising competition in personal auto, combined with potential claims cost shocks due to tariffs, will likely reduce profitability. Greater ad spend is an indicator of growth pivots: Personal auto insurers more than doubled their advertising expenditure in 2024 (figure 2, left) as they compete for market share after improving profitability. As a result, the line has driven industry growth deceleration. Personal auto premiums were up 8% in 4Q24 vs. +15% just two quarters earlier. Between 3Q24 and 1Q25, roughly 20% of all personal auto rate filings indicated rate reductions. However, we expect insurers will slow/halt these reductions as tariffs present an additional risk to profitability. Based on data through 16 April, it appears that personal auto insurers have stopped submitting material rate decrease requests following the tariff announcements (figure 2, right). The magnitude and duration of tariffs is a key uncertainty, especially regarding USMCA vehicles. The 25% tariff on imported cars took effect April 4, and the same tariff will apply to imported car parts starting May 3.

Figure 2 (left): Advertising expenditures of personal auto insurance writers, USD billion, 2019-25

Figure 2 (right): Personal auto insurance rate change requested (USD million)

The industry combined ratio will deteriorate slightly, reaching 98.5% in 2025 and 99% by 2026. The industry net combined ratio of 97.2% in 2024 was better than our estimate of 98.5%. A 9 ppt improvement in the personal lines loss ratio drove improvement in underwriting results, partly offset by a 2 ppt increase in the commercial lines loss ratio (table 2). The improvement is mostly past, even before tariff uncertainty. Premium growth is slowing, and economic inflation remains persistent. Potential shocks to construction and car costs pose threats to homeowners and personal auto underwriting performance. Social inflation remains an issue too, contributing to elevated loss ratios in general liability and commercial auto liability lines.

Table 2: Premium growth and loss ratios by line of business, 2024

US insurers added USD 16 billion to prior years' liability loss estimates during 2024 reserve reviews. Over the past decade (2015-24), total adverse development of USD 62 billion for commercial liability lines (excluding medical professional liability) represents a collective under-estimate of "cost of goods sold" equivalent to the damages from two major hurricanes. At the same time, aggregate industry reserve development has been favorable for 19 consecutive years. Workers' compensation has provided the largest offset to liability reserve inadequacies. However, as noted in last quarter's outlook, this benefit will likely slow as workers' compensation becomes a smaller part of industry premiums and the gap between wages (the exposure base) and medical inflation (roughly half of claims costs) narrows.

US P&C portfolio yields to rise to 4.0% in 2025 and 4.2% in 2026, up from 3.9% in 2024 as recurring investment income continues to rise but at a slower pace. The tailwind has been diminishing as the gap between new money yields and portfolio yields shrinks (see chart 5, appendix), but we expect yields on maturing securities to remain above the portfolio average through 2025. Net investment income earned of USD 79 billion in 2024 was roughly 20% higher than in 2023. We expect a positive differential to continue despite anticipated Federal Reserve rate cuts since cash and short-term investments account for only around 10% of the industry's investment portfolio.²