Lockton's 2024 Market Insights: Navigating Stability and Uncertainty

According to Lockton's latest publication, the Lockton Market Update December 2024, the US commercial insurance market remains stable but fragile, with resilience underpinned by a strong economy and disciplined underwriting. The report, titled Commercial Insurance Market Remains in Balance, provides in-depth insights into market conditions, emerging trends, and strategies for insurance buyers.

Economic Resilience and Market Conditions

Per the report, the US economy displayed significant resilience throughout 2024. Real gross domestic product grew at an annualized rate of 2.8 percent in the third quarter, supported by strong consumer spending and export activity. Inflation, while moderated from its peak in mid-2022, remained above the Federal Reserve's 2 percent target. These economic conditions contributed to a relatively stable insurance market, with a more predictable pricing environment compared to the hard market conditions of recent years. However, Lockton highlighted lingering fragility due to factors such as natural catastrophes, escalating social inflation, and geopolitical tensions. "2024 was another year of ups and downs and unexpected events, yet insurers' earnings resiliency is generally strong," said Lockton's Risk Practices Leader Mark Moitoso.

Property Insurance Market Trends

The property insurance market, despite ongoing natural catastrophe losses, has seen improving conditions for buyers. Hurricanes Helene and Milton resulted in combined insured losses of nearly $50 billion but were characterized as earnings rather than capital events, according to the report. Median property insurance rates increased by 2.4 percent in the third quarter, a slower pace compared to previous quarters. "The property market remains competitive, despite losses from natural catastrophes," according to the report. Lockton noted that the market for alternative risk solutions, including parametric insurance, remains robust, with growing demand for aggregate protection from primary insurers.

Workers Compensation: A Bright Spot

Workers compensation continues to be favorable for buyers. Guaranteed cost programs saw a median rate decrease of 2.7 percent in the third quarter, while loss-sensitive programs decreased by 0.9 percent. Lockton attributed this strength to the sustained profitability of workers compensation insurers, with combined ratios projected to remain below 90 percent for 2024. "Workers compensation continues to be a bright spot for insurers," Lockton highlighted in the report. Legislative developments, such as New York's expanded workers compensation coverage for mental injuries caused by extraordinary work-related stress, could, however, introduce new cost pressures.

Liability Insurance Challenges

Liability insurance remains a challenging area, with social inflation significantly impacting profitability. According to Lockton, claim severity in auto liability rose by 78 percent from 2014 to 2023, driven by factors such as mega awards and third-party litigation funding. The report underscored the growing focus on litigation management strategies to mitigate these impacts. "Complex litigation threats and adverse reserve development remain significant concerns for liability insurers," the report noted.

Cyber and D&O Markets

Lockton's analysis indicates favorable conditions for cyber-insurance buyers, with rates stabilizing despite increased claim frequency. However, the report cautioned about potential firming in 2025. Directors and officers (D&O) liability insurance also experienced rate declines, particularly for public companies, driven by increased market competition and favorable loss trends. "D&O pricing continues to fall, particularly for public companies," according to Lockton.

Alternative Risk and Captive Solutions

Lockton emphasized the importance of exploring alternative risk options, including captive insurance and insurance-linked securities, to address complex or unique exposures. The report noted that the alternative market provides innovative solutions for businesses seeking to optimize their risk financing strategies amid evolving market dynamics. "Alternative risk options can be designed to meet a business's unique or complex risks in ways traditional coverage often cannot," Lockton advised.

Recommendations for Insurance Buyers

The report advised buyers to prioritize risk identification and revisit program structures to ensure adequacy and financial efficiency. Lockton also recommended exploring alternative risk options and advanced litigation strategies to navigate the uncertainties ahead. "The market is very focused on pricing, structure, and terms and conditions for third-party coverages," said Mr. Moitoso. "That is one of the most pressing narratives as we enter 2025." 

Outlook for 2025

Looking ahead, Lockton projected that the market would remain competitive across several lines, including property, workers compensation, and D&O insurance. However, uncertainties around social inflation, natural catastrophes, and geopolitical instability could pose risks to this stability. Lockton reiterated the importance of proactive risk management and leveraging market intelligence to make informed decisions. "With a strong US economy and a generally stable insurance market, fears of a recession or a return to a hard market have largely subsided. However, a major unexpected event could still disrupt market stability," Mr. Moitoso stated.