Industry Insights Vol IV, Issue 1

In this Section

California Wildfires Draw More Attention to State Insurance Regulations
Organic Growth Rates Show Signs of Deceleration
Terrorism Insurance: Protection in an Uncertain World
Seven Insurance Industry Trends To Watch In 2025

California Wildfires Draw More Attention to State Insurance Regulations

As weather events and other natural disasters continue to escalate and lead to poor underwriting results in some states, the insurance regulatory landscape is evolving. There have been some significant shifts in state insurance regulations recently, with more attention than usual being drawn to the topic by the tragically destructive wildfires in Southern California. These challenges in California are part of a broader trend: insurers are reassessing their exposure in high-risk areas.

The overarching theme, which best defines the relationship between private insurers and state regulators, is how to strike the proper balance between profitability and consumer protection.

Insurance brokers can benefit from awareness of these evolving regulatory trends since the developments could impact insurance demand as well as pricing for certain products.

California’s insurance market: before and after the wildfires

Many of those whose homes were destroyed by the Southern California wildfires were not insured against such losses. That’s because insurers had already been pulling out of California due to several factors, including regulatory constraints on pricing that created an inability for insurance companies underwriting admitted products to sufficiently adjust rates and other policy terms to achieve acceptable levels of underwriting profitability. California’s insurance landscape is highly politicized, being one of only 11 states in which the State Insurance Commissioner is an elected (rather than appointed) official.

California’s Proposition 103, passed in 1988, gives the state’s commissioner significant power to approve or reject rate increases for home and auto insurance. In addition, just a few weeks prior to the start of the fires, California’s commissioner announced a new regulatory policy prohibiting insurers from using catastrophe modeling to predict potential future losses. Instead, insurers were told they can only base rates on historical loss data, meaning they can’t proactively adjust prices in anticipation of worsening risks and thus factor future risk into pricing.¹

Finally, after major disasters, California often imposes temporary moratoriums preventing insurers from canceling or non-renewing policies in affected areas, and California did pass such a moratorium following the recent fires.² While these measures protect consumers, they also force insurers to retain policies they might otherwise drop, increasing their financial exposure.

The combination of strict rate regulations, rising claims costs, and political pressures created an environment in which insurers felt they could not operate profitably. This exodus began before the most recent wildfires, but those fires have only intensified concerns about the long-term viability of California’s insurance market.

In response to the wildfires, such as the Palisades and Eaton fires, which are reported to have caused approximately $30 billion in losses and destroyed over 17,000 structures, the state sought an additional $1 billion from insurers to bolster the Fair Access to Insurance Requirements (FAIR) Plan – a state-backed insurance pool designed for homeowners unable to secure private coverage.³ This move mandates that all insurers in California contribute to the fund, with the option to recoup costs through a one-time fee imposed on policyholders over the next two years. Consumer groups have expressed concerns about passing these costs onto consumers and are considering legal challenges.⁴

Alternative options for coverage

The situation in California underscores a broader national trend: insurers are reassessing their exposure in high-risk areas. Major companies, including State Farm and Allstate, have limited or ceased issuing new policies in certain regions, citing unsustainable financial risks. This has led to increased reliance on state-backed plans and has raised questions about the long-term viability of current insurance models in some areas.⁵

In that context, the role that Excess & Surplus lines (E&S) can play is becoming an important topic of discussion, with some seeing the growing exposure in both high-value and high-risk areas as proof of the need for expanded E&S property solutions. Surplus lines premiums in California have increased 213% since 2014, or at a 12.1% CAGR (compound annual growth rate) basis.

California isn’t the only region seeing a surge is surplus lines premium. The U.S. Surplus Lines Service and Stamping Offices reports that overall surplus lines premium for the U.S. surpassed $81 billion in 2024, a 12.1% increase from 2023.⁶

Along these lines, MarshBerry estimates the E&S market generated ~$210 billion in premiums in 2024, which comprises nearly one in every five dollars of premium placed in the U.S. property & casualty (P&C) market. This is up from a 10% market share a decade ago.

Other key regulatory developments

While the devastating California wildfires rightfully captured the most attention, there have been other, recent developments in insurance regulation. Here are some key trends:

Artificial Intelligence: There is a growing regulatory focus on the use of artificial intelligence (AI) and electronic data collection in insurance practices. For example, in July 2024, the New York Department of Financial Services (DFS) issued a guidance statement (“Circular Letter No. 7”), emphasizing the need for insurers to adopt robust governance and risk management frameworks when utilizing AI and electronic data collection. Some experts are also anticipating “the possibility of regulatory frameworks from the federal government…as AI and machine learning are increasingly being used to manage claims, underwriting, and other processes throughout the insurance industry.”⁷
NAIC’s (National Association of Insurance Commissioners) Strategic Priorities and Data Collection Initiatives: State insurance regulators, coordinated by the NAIC, initiated a comprehensive data call in March 2024 to collect and analyze data from approximately 350 insurance companies. This effort aims to provide regulators with a clearer understanding of the home insurance market amid rising property insurance costs and coverage challenges.⁸
Potential Shift to “Systemically Important” Status: As insurance regulators explore and implement new compliance frameworks designed to protect both insurer solvency and consumer interests, there is the possibility that federal regulators could decide to classify insurers as “systemically important financial institutions,” a distinction that comes with heightened regulatory oversight.

Implications for carriers, brokers, and consumers

Recent regulatory changes, and active discussions on possible future changes, reflect a dynamic insurance environment. For insurance carriers, the evolving regulatory landscape necessitates a reevaluation of risk assessment models, especially in regions prone to natural disasters. Brokers must stay informed about these regulatory changes to provide accurate guidance to clients. Understanding the nuances of state-specific regulations and the implications of insurers’ strategic withdrawals from certain markets is crucial for advising clients effectively.

Consumers may feel the most immediate effects. With major insurers limiting coverages via admitted products in high-risk areas, many homeowners may find themselves: a) Turning to state-backed plans, which could come with higher premiums or reduced coverage options, or b) Seeking coverages from markets in the surplus lines segment as carriers look to increase pricing and/or modify policy terms to generate acceptable underwriting results.

Additionally, the potential for insurers to pass on the costs associated with state-mandates could lead to increased insurance expenses for policyholders. Either way, these developments will require more resources (i.e., relationships, know-how, value-adding resources) from the insurance distribution system to meet the needs of an evolving industry.

Organic Growth Rates Show Signs of Deceleration

2024 was another year of strong growth for the insurance industry, driven by the ongoing hard market conditions, rising premiums and increased exposure base. However, while total written P&C premium rose to a new high – organic growth rates for all brokers, including the Best 25% of firms (based on financial performance), saw a decline from the record levels reached in 2023. Through the first three quarters of 2024, the Best 25% averaged 18.2% organic growth (down from 18.4% in 2023), while all firms averaged 8.7% (down from 9.8% in 2023).

Organic growth rates may be headed lower in 2025

While favorable macroeconomic conditions in 2025 will likely support long-term above-average organic growth rates for insurance brokers, growth rates may decelerate from 2024 levels due to a possible slowdown in economic growth, the stabilization of inflation and possible downward shifts in some P&C premium.

Although 2024 was still considered a hard market environment, some signs of rate stabilization did appear, with commercial P&C premium across all lines of business rising in Q4 2024 by 5.4% and Q3 2024 by an average of 5.1% – down compared to 7.7% and 5.2% in Q1 and Q2 respectively.⁹ A continued moderation in rate increases would contribute to a slowdown in overall premium volume growth as P&C direct premiums written (DPW) growth is forecasted to decelerate to 5% in 2025 (and 4% in 2026), down from the nearly 10% estimated for full year 2024, according to Swiss Re.¹⁰

Organic growth also often tracks with movements in GDP growth. Inflation and an increase in demand for some lines of coverage have expanded the total insurable value of the U.S. economy even as economic growth has settled between 2.5% to 3% for the past few years. The Philadelphia Fed’s “Fourth Quarter 2024 Survey of Professional Forecasters” from November 2024 shows a median forecast of 2.2% real GDP growth in 2025, a slowdown from the 2.8% growth in 2024. December 2024’s headline CPI, a key measure of inflation, came in at 2.9%, above the Fed’s longterm 2% goal.

Profitability for insurance brokerage firms

As organic growth potentially decelerates, insurance brokerages could also see their margins impacted. EBITDA as a percentage of net revenue has also seen a decline from 2023 to 2024 (through Q3), for both the all firm average and for the Best 25%. If this trend of declining margins continues through final Q4 numbers, average EBITDA for 2024 could be under 19% for the first time since before COVID (2020).

With top-line revenue growth and organic growth showing signs of softening, there may be an increased focus on operating expense management. Brokerage firms may also be more inclined to pursue consolidation to achieve expense improvements.¹¹

Underwriting profits begin to rebound in 2024

In the previous few years, the P&C combined ratio registered over 100, indicating underwriting losses for the year. These losses were driven primarily by weakness in personal lines, with commercial lines as an aggregate registering combined ratios below 100 in 2022 and 2023. Catastrophe losses had driven much of the unprofitability in those years. Combined ratios under 100 indicate underwriting gains, while ratios over 100 indicate losses.

Through the first three quarters of 2024, the P&C combined ratio registered well below 100, with preliminary results indicating a ratio of 97.5. However, with hurricanes Helene and Milton making landfall in the U.S. on September 26 and October 9, it is yet to be seen how losses from these events will impact the combined ratio. In general, it does seem as if the industry is beginning to adjust to the increasing regularity of extreme weather events, as evidenced by the significant rise in the size of the E&S lines market. As a result, the negative impacts of these catastrophes may be minimized, but underwriting profitability for the year was certainly impacted by these events.

Deteriorating underwriting profitability can have mixed effects on the insurance brokerage space. An unprofitable year means less profit-sharing paid to brokers. On the other hand, carriers often increase premiums to account for an increase in losses, which means higher commission income for brokers. However, increased premiums also could prompt insureds to seek coverage elsewhere or even to drop coverage entirely, resulting in lost business for brokers. MarshBerry’s data indicates that, in general, brokers have benefitted overall from rising premiums, with organic growth rates in recent years registering near record highs despite low levels of sales velocity.

What can insurance brokers do to boost organic growth?

Despite some challenging macroeconomic factors that may impact growth and profitability for insurance brokerages, leaders should consider specific areas where they have control. With the right people and the right processes in place, firms can survive, even thrive, in any market condition. Firms can consider implementing a growth strategy to boost business organically. This may involve:

Sales leadership: Sales leadership is an important concept for organizations of any size. Most importantly, leadership must clearly define the expectations, establish accountability, and set an appropriate compensation structure for those responsible for driving revenue.
Specialization and diversification: Most firms, particularly as they grow, will naturally find certain areas or specializations in which they have expertise and competitive advantages. The key to success is understanding the markets and the market players and having clear objectives and milestones that everyone in the firm understands.
Recruiting: Having clear and long-term objectives related to the hiring strategy is critical. Creating and protecting a culture that people are excited to be a part of will go a long way in recruiting and retaining key talent. Firms with aggressive growth targets will need to intentionally hire ahead of planned growth to prepare for future expansion.
Accountability: With the right team in place, having clear expectations and a culture of accountability is critical for sustained growth. This applies to producers, the business development teams, and corporate resources that support their sales efforts. Once expectations are clear, there must be a system of accountability, possibly including some non-compensation related incentives.

Terrorism Insurance: Protection in an Uncertain World

On January 1, 2025, two separate attacks, one in New Orleans and one in Las Vegas, put terrorism insurance back in the spotlight. Terrorism insurance is a specialized type of coverage designed to protect businesses and individuals from the financial losses associated with acts of terrorism. Commercial terrorism policies cover losses due to damaged or destroyed property, including buildings, business equipment, products, or supplies. Since standard insurance policies do not cover losses from terrorism-related events, terrorism insurance fills this crucial gap.

Terrorism Risk Insurance Act

After the 9/11 attacks, much of the financial impact fell on reinsurers, who subsequently withdrew from the market. This left a gap for terrorism coverage, and in 2002, President George W. Bush signed into law The Terrorism Risk Insurance Act (TRIA), providing a backstop for insurance claims related to acts of terrorism by placing the federal government in the role of reinsurer. Under TRIA, if an act of terrorism occurs, the federal government pays 90% of the losses above the insurer’s deductible, with the insurer paying the remaining 10%. Under this program, all P&C insurers in the U.S. are required to offer terrorism coverage, but the Act limits potential losses for insurers while also increasing the availability of terrorism insurance in the private market. The most recent extension, signed into law by President Trump in 2019, is scheduled to expire on December 31, 2027.

Protection specifics: What’s covered and what’s excluded?

Many large insurers offer terrorism protection programs, including Liberty Mutual’s War and Terrorism coverage, The Hartford’s Political Violence and Terrorism Risk coverage, and Munich Re’s Terrorism & Political Violence coverage. Programs like these protect losses due to:

Property damage: This is coverage for physical damage to property caused by terrorist acts, such as explosions, bombings, and attacks on infrastructure.
Business interruption: Provides compensation for lost income and increased expenses resulting from a terrorist attack, including the inability to operate due to damage or evacuation orders.
Cyberattacks: Some policies now extend coverage to include losses arising from cyberattacks that could be deemed acts of terrorism.
Civil authority costs: Reimbursement for expenses incurred due to government-ordered evacuations or shutdowns in the aftermath of a terrorist attack.
Contingent business interruption: Coverage for losses suffered by businesses that rely on a disrupted supplier or customer due to a terrorist attack.

Notably, terrorism insurance typically does not cover acts of war, nuclear, biological, chemical, or radiological (NBCR) attacks, and is generally not included in personal lines like homeowners’ insurance, meaning damage caused by these events would not be covered under a standard terrorism policy.

Potential terrorism insurance clients

Offering specialized products like terrorism insurance can give insurance brokerage firms a competitive edge in the market, particularly firms who serve businesses most susceptible to attacks. High-risk categories include:

Urban locations: The higher the population-density of the business location, the higher the risk for a terrorist attack. Residential and rural businesses are rarely targeted.
Crowded areas: Shopping centers, office parks, “Main Streets,” airports and train stations are frequently at risk due to the larger crowds and bustling activity.
Target industries: Financial districts, law enforcement, government, faith-based organizations, ethnic and religious minority associations, healthcare infrastructure, transportation, and the energy sector have a higher risk of being targeted for terrorist attacks according to a report from the U.S. Department of Homeland Security.
Critical infrastructure: Terrorists may try to target key infrastructure, that would create disruptions. These may include key IT infrastructure, water treatment systems, key communications, financial, and manufacturing infrastructure.

Commercial property owners of office buildings, factories, shopping malls, and apartment buildings, may have experienced specific threats or have concerns about terrorism and require this specialized coverage.

Growth potential and future outlook

It’s difficult to predict growth or create risk models for terrorism insurance due to the lack of historical data. Adding to the complexity is the fact that, while terroristic incidents happen infrequently, compared to other insurable events, they cause significant loss of life, injury, and property destruction. Despite these factors, there is evidence of demand for the product, particularly in industries with vulnerable populations, such as hospitals and schools. The chart on the next page, demonstrating the take-up rates of key industries (as a percentage of industry sector premium), shows a strong interest in the product.

While large-scale terrorist attacks are thankfully rare, single perpetrator violence is increasingly common and occurs across geographical areas and businesses. “An increase in terror-related events could lead to more triggered coverage in commercial property terrorism endorsements, terrorism insurance, or active shooter policies,” said Sridhar Manyem, director, industry research and analytics at AM Best. Many standard insurance policies may have exclusions or limitations for losses resulting from acts of terrorism, which increases the market for supplemental terrorism insurance among insured parties.

Seven Insurance Industry Trends To Watch In 2025

The insurance industry is currently poised to undergo significant transformations, driven by technological advancements, competition for profitable growth, and global economic forces. Trends that have existed for a while now, such as workforce-related challenges and the increasing need for product innovation to stay competitive, have now become the new normal.

A softening market cycle: Whether the insurance market is entirely soft or hard is always debatable, as it depends on business line and location. But there is recent evidence of softening due to premium decreases in areas such as workers compensation and cyber insurance. While the hard market is predicted to continue through 2025, brokers are starting to prepare for a softening market.
Technology, AI, and everything in between: Insurtech, AI, and other new technology options will continue to transform the insurance industry, which means that new risks — and new products — will emerge.
Cyberthreats: With increased technology comes increased risk, meaning cyberattacks will become more frequent and more complicated. Since brokers and insurance providers carry large amounts of sensitive personal information, they are vulnerable to bad actors looking to commit identity theft, fraud, and other malicious activities. Experts suggest investing in top-level protection software, training for employees, and ongoing education.
Evolving client expectations: Insureds expect for personalized options in products and services, more digital tools, increased self-service options, and faster claims processing. While insurance brokers can’t change their service model overnight, building trust is a vital first step as consumers
seek more transparency in the insurance relationship.
Data expansion: Firms that use data-based insights to understand client behavior will be more successful and prepared for industry challenges. However, there is the added complexity of understanding regulatory expectations related to consumer data. Legal compliance is never simple for insurance firms, but even more changes are forthcoming due to increased data privacy, cybersecurity concerns, and consumer protection laws.
Climate-related losses: Due to recent high-damage weather events, homeowners’ insurance premiums have spiked significantly. Traditional models struggle to predict damage claims from escalating natural disasters, causing problems in areas like underwriting, pricing, and fraud detection. Add in higher reinsurance prices, inflation, and hefty lawsuits, and major providers are withdrawing from certain affected states. Today, residents in states that experience frequent fires, floods, and hurricanes are in an “insurance crisis” that is sure to continue through 2025.
Impact of President Trump’s policies: President Trump’s push for local manufacturing and his pro-business stance are predicted to drive growth in smaller businesses, leading to a greater demand for insurance and increasing opportunities across industries and geographic areas. Trump has also promised to lower interest rates, likely to fuel capital borrowing and greater investment in the insurance brokerage sector. On the other hand, the possibility of increased tariffs on imports could drive up manufacturing costs in industries such as automotive and construction. Increased manufacturing costs means increased claims costs, which could lead to higher premiums for those policyholders, who may already be struggling to carry insurance.

These elements are interconnected, so trickle-down effects are likely. Overall, the outlook is positive, if not unpredictable. MarshBerry will report on these and other topics shaping the insurance landscape throughout 2025.

Sources:

In This Issue

Focused Insights: The Supercycle Is Under Pressure: Will the "Best of Times" Come to An End?

U.S. Macroeconomic Indicators

M&A Market Update

Public Broker Performance