By Stephen Applebaum and Alan Demers —
Until recently, it was said that the only constant was change – now the only constant is uncertainty.
Uncertainty is at a generational high in almost every aspect of our lives; socially, financially, politically, and technologically. One of the most serious consequences of this uncertainty is its impact on risk assessment across all lines of insurance. However, it also represents a major opportunity for insurers.
Risk is defined as the odds or probabilities that future events can be estimated. The model of risk transfer is centuries old and thrives on predicting when and how much known exposures are likely to happen and the costs involved. Thus, not all risks are insurable such as moral hazards where the incentives are misaligned. Risk transfer is further disrupted when doses of uncertainty distort predictive models.
Uncertainty exists when the magnitude (frequency and severity) of possible future events is obscured, making reasonably accurate forecasts unreliable. As uncertainty grows, the ability to effectively manage risk is proportionally reduced.
The implications of this new normal for insurance are existential for some insurers and more expensive for all, as it becomes harder to assess and properly price risk in the face of so much uncertainty. Not to mention havoc wreaking for most consumers and businesses, including insurers’ ability to plan and adjust. This is translating to uncertainty among insurance availability, degree of premium increases and extent of reduced coverage.
To make matters worse, several carriers seeking to contain risks have been withdrawing from regional markets where recent losses have unexpectedly spiked as a result of unprecedented losses from extreme weather exacerbated by ill-prepared mitigation. These pullbacks, which already target approximately 15% of US property, are not only detrimental to policyholders in the affected regions but also undermine the benefits of risk pooling for all policyholders.
Yet, the idea of insurance is to provide a promise of protection and safeguard against uncertainty. This goes beyond the functional insurance contract and strikes an emotional nerve as well – peace of mind. The proverbial security blanket serves in more than one way and the industry will hopefully find the right balance.
Trade/Geo-political Uncertainty
In the wake of President Trump’s on-again, off-again, up-again, down-again trade tariff announcements – and the retaliatory counter tariffs from the world’s largest countries – economic uncertainty has evolved almost overnight. Markets are similarly volatile, prompted by the uncertainty of how far tariffs and reciprocal action will go. At present, we are now officially in a stock market correction in which a stock market index drops by more than 10% and indicates pessimistic investor sentiment.
Facing unexpected market volatility and geopolitical uncertainties, normally optimistic dealmakers are sounding a more cautious note for the coming weeks and months but are confident the pace of mergers and acquisitions will pick up later this year.
The costs associated with Auto and Property insurance are especially exposed to tariff impacts, from the increased cost of new and used vehicles as well as claims, repair and replacements parts. Bob Passmore, department vice president of personal lines at APCIA (American Property Casualty Insurance Association, the primary national trade association for home, auto, and business insurers), explained that tariffs on imported auto parts could raise repair costs, which insurers factor into their rate calculations. The APCIA estimates that the impact of tariffs on personal auto insurance could range from $7 billion to $24 billion.
Undoubtedly, even higher premiums will follow quickly and the insurance protection gap will continue to widen should retaliatory tariffs actually stick. Either way, insurers are watching loss costs closely.
Consumer Sentiment
Consumers sentiment is down significantly month-over-month and year-over-year. It slid nearly 10% from January and fell for the second straight month. The decrease was unanimous across groups by age, income and wealth. The Consumer Sentiment Index fell to 64.7 in the February 2025 survey, down 9.8% from 71.7 in January and 15.9% below last February’s 76.9.
Consumer sentiment is considered a leading indicator of economic activity. Sentiment levels can also impact consumers’ willingness to make large purchases such as automobiles. Over the last 18 months, policyholder behavior has changed around smaller losses, foregoing claim-making for fear of premium increase or higher deductibles and dropping coverages. Meanwhile, credit card debt is over $1.21 trillion; negative equity in auto loans have reached a record-level and late payments are on the rise.
Executive Stress
More than two-thirds of executives polled in a recent survey reported feeling more stressed at the beginning of 2025 than they did at the start of 2024. The survey, conducted by Wakefield Research on behalf of Sentry Insurance, found stress levels elevated in 67% of participants. At the same time, 74% of executives said they were not completely confident that their company’s current insurance coverage is adequate.
Economic uncertainty (47%), supply chain challenges (44%), costs of employee health care (41%), labor shortages (38%) and inflation (36%) ranked as the top five concerns among the survey participants.
Extreme Weather Uncertainty
The continuous increase in extreme weather events, and the attendant economic and human losses, are not new but is being made worse by what is now emerging as compound weather events. Cascading extreme weather events are unleashing billions in additional damages. This was clearly and tragically witnessed from the LA area wildfires where fire prevention and responses proved shockingly inadequate. Add in regulatory rate suppression and this becomes an untenable scenario.
More than 100 fires ignited in South Carolina, Oklahoma and New York last weekend, fueled by a combination of arid air, dry fuels, and gusting winds, all compound weather events. We have much less data and research on these so-called secondary weather perils as compared to hurricanes. And convective storms have proven to be more challenging to translate into risk management.
Researchers and experts warn that the frequency and impact of compounding events will increase, and that developing better models and preparedness strategies is crucial to mitigate the risks ahead, with some looking to Japan’s earthquake preparedness culture and massive investment as a potential model.
Managing Uncertainty in Insurance
Even in periods of extreme uncertainty, there are several strategies available to carriers aside from rate actions.
Rising catastrophe losses, technological transformation, and evolving risk landscapes are forcing insurers to fundamentally rethink their approaches to underwriting, claims processing, and customer engagement, according to Datos Insights.
Insurers can diversify their portfolios to reduce the impact of any single line. At present, profitable auto lines are now highly coveted as competition has surged. Just a couple of years ago insurers were shedding personal lines policies as rates could not keep pace. Auto insurance lines are forecast to have favorable loss ratios through 2027. The advantage goes to carriers growing their auto books profitably with rate-friendly tailwinds conditions.
Excess and Surplus lines grew 12.1%, reaching $81.6 billion in premiums last year further demonstrating diversification opportunities. Similarly, the MGA distribution model expanded hand-in-glove, serving specialized markets and regions such as coastal exposed areas.
Carriers have always used sophisticated pricing and underwriting models and the application of AI is expected to make them even better when it comes to ingesting more data, testing risk models – as in digital twin comparisons and visualizing impacts well beyond just number on paper. This is extremely valuable in projecting forward since historic models look backwards in order to look ahead.
Likewise, investing in Claims is a priority as worthy efforts to streamline are balanced with controlling loss costs at a time when adjuster resources are squeezed from retirement “brain drain” at the most skilled levels. Technology investment must go beyond core system upgrades to greater digitization while orchestrating the multitude of new tools, integrated provider partners and the numerous insurtech opportunities circling the tower and waiting for a landing spot.
New insurance products, high consumer awareness translating to greater insurer/policyholder engagement and joint risk management are evolving and opportune.
Now more than ever in our insurance history, greater resilience and innovation coupled with a transition to a predict and prevent defensive posture is critical and urgent.
About the Authors
Stephen E. Applebaum, Managing Partner, Insurance Solutions Group, is a subject matter expert and thought leader providing consulting, advisory, research and strategic M&A services to participants across the entire North American property/casualty insurance ecosystem focused on insurance information technology, claims, innovation, disruption, supply chain, vendor and performance management. Mr. Applebaum is also a Senior Advisor to Waller Helms Advisors. WHA is the premier investment banking boutique focused on the crossroads of the Insurance, Healthcare and Investment Services sectors.
Stephen is a frequent chairman, guest speaker and panelist at insurance industry conferences and contributor to major insurance industry publications and has a passion for coaching, mentoring, business process innovation and constructive transformation, applying disruptive technology, and managing organizational change in the North American property/casualty insurance industry and trading partner communities. He can be reached at [email protected].
Alan Demers is founder and president of InsurTech Consulting LLC, with 30 years of P&C insurance claims experience, providing consultative services focused on innovating claims. After initiating and leading claims innovation at Nationwide, Demers collaborates in the forefront of InsurTech, partnering with insurance leaders, startups, design thinking experts and service providers to modernize personal, commercial and specialty claims.
As Vice President of Claims Innovation at Nationwide, Alan conceptualized a vision and road map to build next-generation claims, automating and digitizing claims experiences, progressing from inception through prototype testing. He served as a founding member of the Corporate Innovation Council and played a key leadership role in establishing goals, practices and an innovative culture at Nationwide.
Alan is an accomplished executive leader and has worked for two separate Fortune 100 insurance companies in a number of corporate, national and regional leadership roles among personal, commercial, non-standard and specialty lines claims. Prior to leading claims innovation, he served as head of claims for Nationwide’s commercial agribusiness and non-standard claims. Other noteworthy roles include: field vice president, regional claims officer and national catastrophe director, quality assurance director.
Alan began his career with Aetna as a claim adjuster and advanced to a corporate claim consultant, prior to joining Nationwide in 1995.
