Over the past year, the United States has faced devastating wildfires in California, major hurricanes impacting Florida and other Southern states, and numerous EF4 tornadoes and severe thunderstorms in the Midwest. This pattern is not isolated. With climate change accelerating, the frequency and severity of extreme weather events are increasing, leading to rising costs for insurers—particularly in the property and casualty (P&C) sector. To maintain profitability, insurers must implement strategies beyond short-term pricing adjustments.
The challenge of rising claims
Insurers' data highlights the growing impact of natural disasters. According to the National Centers for Environmental Information (NCEI), the average annual loss (AAL) from US natural catastrophes has reached a new high of $149 billion, with projections indicating continued increases in the coming years. These rising costs affect the combined ratio—the ratio of claims and expenses to premium income—making it crucial for insurers to take a strategic long-term approach to ensure profitability, while maintaining customer satisfaction and retention as risks continue to shift.
To create sustainable long-term profitability, carriers can focus on three strategic levers: improving premium adjustment communications, developing innovative product designs, and leveraging AI modeling to inform sales and portfolio growth strategies.
1. Improving premium adjustment communications
While adjusting premiums is a common response to rising costs, natural disasters' inherent volatility makes traditional forecasting models increasingly unreliable. Frequent premium hikes risk driving away customers, especially in stagnant or shrinking markets, further exacerbating profitability challenges.
Strike the right balance: thoughtful adjustments are key
Premium adjustments are pivotal moments in the customer relationship—smart customers expect transparency and thoughtful engagement. A strategic approach requires well-designed processes and clear, proactive communication. Internally, roles and responsibilities must be well-defined to ensure seamless execution. Externally, communication should be tailored to customer preferences—some value personal outreach from an agent, while others prefer digital updates. Hiding a premium increase in the renewal notice erodes trust and leads to shock and frustration when customers see their first post-renewal bill. A more transparent, customer-focused approach is essential.
However, there is a limit to how often premiums can be adjusted without adjusting underlying product and pricing structures. At some point, customers will no longer be able to connect price change to value, and may opt out of coverage altogether, hurting themselves and, by removing themselves from the risk pool, the broader industry.
2. Develop innovative product designs
Innovative product design is essential for maintaining profitability. Rather than relying solely on premium increases alone, insurers should develop new offerings that align with different customer segments' risk tolerance and willingness to pay.
Adapting insurance products to match shifting risk preferences
Customers internalize risks differently, leading to different risk mitigation needs, which then results in their perceived benefits from insurance. Insurers can better meet customers' needs by offering tailored products that align with customer risk preferences. Highly risk-averse customers, for example, may be willing to pay a premium for additional coverage options, such as parametric insurance that provides automatic payouts when predefined disaster thresholds are met. Conversely, segments with lower risk perception may prefer leaner, cost-optimized policies with higher deductibles.
A successful approach requires an omnichannel strategy that integrates all sales and communication channels—both online and offline—offering customers consistent engagement across all touchpoints. The customer journey should be streamlined, providing self-service options, customizable add-ons, and real-time risk-adjusted pricing, ensuring insurers maximize both customer satisfaction and profitability.
3. Use AI to drive portfolio growth
At a strategic level, insurance carriers must balance risk appetite (e.g., probable maximum loss, reinsurance, catastrophe treaties) with the need for premium growth. Currently, these decisions often reside in a corporate strategy group or a CFO’s risk office but do not filter down to regional sales planning, leading to abrupt and reactive underwriting restrictions.
Using AI to Align Risk Appetite with Growth Goals
Instead of making binary, short-term decisions about availability in disaster-prone areas, insurers should integrate catastrophe modeling with AI-driven forecasting to shape sales and underwriting targets proactively. By incorporating CAT modeling data and real-time portfolio risk analysis, insurers can set maximum growth targets for high-risk regions at the start of the year while directing new policy growth to lower-risk areas.
For example, AI models can help identify underpenetrated but lower-risk regions, ensuring policy-in-force (PIF) and premium growth occur in a way that enhances overall profitability rather than exposing the carrier to unmanageable loss volatility. This approach ensures a sustainable, data-driven method for growth planning, rather than the reactionary cycles that currently plague many insurers.
Insurers: transform crisis management into a resilient future
Since 1980, NCEI has tracked billion-dollar disasters. The number of events has jumped from 3 in 1980 to 27 in 2024, while annual costs (adjusted for inflation) have soared from $45 billion to $182 billion. This trend suggests that P&C carriers will continue to experience profitability challenges. A reactive approach to rising claims is no longer sufficient. To ensure long-term sustainability, insurers must think beyond premium hikes and embrace a multidimensional strategy that proactively balances risk and growth.
- Smart pricing adjustments should be strategic and customer-focused, ensuring retention while maintaining profitability.
- Innovative product designs should align with diverse risk preferences, unlocking additional willingness to pay.
- AI-powered portfolio growth planning should balance risk appetite with expansion, ensuring insurers grow in ways that protect their bottom line.
By integrating these approaches, insurers can move from crisis management to proactive risk and profitability management, ensuring their long-term viability in an increasingly volatile world.
Our team specializes in helping insurers navigate the challenges of rising claims costs, enhance risk management, and implement value-driven strategies for long-term success. Get in touch with our experts today to explore tailored solutions for your business.
