Swiss Re: Tariffs present ‘major risk’ to US P&C forecast

By David Bull

April 23 - (The Insurer) - Swiss Re has said that tariffs pose a "major risk" to its outlook for the U.S. P&C industry this year despite strong underlying performance, with natural catastrophe and reserve uncertainty creating additional risks.

An update from James Finucane and Thomas Holzheu, senior economist and chief economist for the Americas, respectively, at Swiss Re Institute, said that the 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,” said the report.

It said the tariffs could lead to loss cost increases in personal auto and property through the effect on construction.

The report noted that the industry faced a large loss at the start of the year from January’s California wildfires, adding that liability reserve additions in 2024 affected profitability for social inflation-sensitive 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,” said the Swiss Re economists.

They expect growth in direct premiums written to decelerate to a “still-strong” 5% in 2025 and 4% in 2026, noting that inflation pressures may slow rate declines.

“This year, we forecast premium growth to ease with higher competition, especially in personal lines, while expected tariffs could push up claims costs,” said the report.

Meanwhile, return on equity is forecast to slow from 11% in 2024 to 10% this year and next as higher investment returns offset weaker underwriting profitability.

It added that investment improvements will likely slow as the gap between portfolio and market yields continues to narrow.

LA WILDFIRES TO ERODE NEARLY HALF OF ANNUAL CAT BUDGET

The economists said that January's California wildfires will add around 3 percentage points to the industry net combined ratio for 2025, eroding almost half of its annual catastrophe budget of 8 points.

They said that with other cat activity slightly above average in the first quarter, they have revised down their 2025 profit improvement estimate and will wait for more data on the severe convective storm season before making material forecast changes.

They added that reserve adequacy remains another “key unknown” for future industry profitability.

“Downside risk from under-estimating past liability claims materialised as $16 billion of reserve additions in 2024, raising the calendar year loss ratio for liability lines by 9 (points). It was offset by favourable development in other lines,” said the report.

The economists said that despite growing risk around forecasts, the core growth message remains of solid but decelerating expansion from a historically elevated four-year period.

In personal auto, the report predicted a reduction in profitability as rising competition combines with potential claims cost shocks from tariffs.

It noted that personal auto insurers more than doubled their advertising spend last year as they competed for market share after improving profitability.

Between the third quarter of last year and the first quarter of this year, around 20% of all personal auto rate filings indicated reductions, as competition increased.

“However, we expect insurers will slow/halt these reductions as tariffs present an additional risk to profitability. Based on data through April 16, it appears that personal auto insurers have stopped submitting material rate decrease requests following the tariff announcements,” the report continued.

It noted that the 25% tariff on imported cars took effect on April 4, and will apply to imported car parts from May 3.

DETERIORATING COMBINED RATIO

The economists said that last year’s net combined ratio of 97.2% for the U.S. P&C industry was better than the 98.5% Swiss Re had forecast. They added that the metric is expected to deteriorate to 98.5% in 2025 and 99.0% in 2026.

“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,” said the report.

It added that U.S. insurers strengthened reserves for prior years by $16 billion in their 2024 reserve reviews, with total adverse development reaching $62 billion over the last decade for commercial liability lines, excluding medical professional liability.

This represented an under-estimate of cost of goods sold equivalent to losses from two major hurricanes.

However, aggregate industry reserve development has been favourable for 19 consecutive years, with workers’ compensation providing the largest offset to liability reserve shortfalls.

“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,” it said.

The report also commented on investment income, with U.S. P&C portfolio yields forecast to rise to 4.0% this year and 4.2% next year, up from 3.9% in 2024.

It said that the tailwind has been diminishing as the gap between new money yields and portfolio yields shrinks, but yields on maturing securities are expected to remain above the portfolio average through 2025.