STRONG COMPETITION DRIVES FAVORABLE INSURANCE MARKET CONDITIONS
2025 Financial Institutions Market Outlook
Thomas Orrico Financial Institutions Industry Leader Professional & Executive Risk 914.262.6283 torrico@lockton.com
Shane Higgins Senior Vice President, Financial Institutions Professional & Executive Risk 310.697.9550 shiggins@lockton.com
Financial and professional insurance market conditions are generally favorable for banks, insurers, asset managers, and private equity firms at the start of 2025, with abundant capacity fueling strong competition. Amid a generally stable claims environment and some optimism about the regulatory outlook, carriers are generally eager to underwrite professional and executive risks for financial institutions.
Although insurers are eyeing certain subsector-specific challenges, most continue to offer flexible terms and conditions and tailored coverage to buyers, which can see more favorable results by working closely with their insurance brokers to market their programs.
Recent market ups & downs
From 2019 through 2021, rates for financial institutions generally rose, which brought new entrants and more capital into the market. This new capacity came into play as initial public offerings, mergers and acquisitions, and special purpose acquisition company deals slowed.
This surge in insurance supply, coupled with a decline in demand, led to a shift in the market. Starting in 2022, conditions became more favorable for most buyers. This occurred despite several headwinds, including rising inflation, high interest rates, growing bankruptcies, and a challenging legal and regulatory environment.
In 2024, most financial institutions renewed their financial and professional insurance programs with single-digit rate decreases — -2.9%, on average, according to Lockton data — and secured favorable terms and conditions. These conditions were seen across all industry subsectors and financial and professional lines.
Carriers are generally hoping for rates to stay flat in 2025 for most buyers, with some modest rate reductions for buyers with favorable claims activity and/or stable exposures, including revenue, payroll, and M&A activity. After taking action over the last several years to better manage insurance limits and bolster their portfolios’ performance, insurers generally remain committed to the financial institutions market and are seeking continued growth this year.
Banking sector remains resilient
Two years after three regional banks collapsed in quick succession, the sector has shown greater durability than expected, and insurers are eager to grow in the market. Insurers’ appetite for writing banks is growing, and rates and retentions remain stable.
For many insurers, however, bankers professional liability (BPL) is a barely profitable line. Although there has not been a meaningful reduction in capacity, BPL insurers are pushing back against rate decreases.
Underwriters are monitoring banks’ exposure to commercial real estate, particularly the office sector, due to record low occupancy, high interest rates, and looming maturity dates, which has led to an uptick in loan losses for banks. Insurers are specifically concerned about potential credit quality deterioration, reduced liquidity, and compliance issues stemming from this exposure.
The market for nonbank lenders is generally less buyer-friendly than for traditional banks and credit unions. Insurers are more closely scrutinizing these buyers, as they are often perceived to have broader loan underwriting appetites but fewer compliance and risk management frameworks. Insurers are especially concerned about potentially high loan default rates for these organizations and the source of their capital.
Social inflation remains a concern for insurance industry buyers
Similar to BPL, insurance company professional liability (ICPL) is barely profitable for many carriers, largely driven by the persistent challenge of social inflation for property and casualty insurers. ICPL underwriters are seeking higher retentions and single-digit rate increases for insureds writing coverage in problematic jurisdictions and for challenging lines, such as auto liability and property.
Although some state legislatures are exploring tort reform, a number of states — including Arizona, California, Georgia, Missouri, and South Carolina — currently have no caps on damages, which is contributing to a rise in the number of so-called “nuclear” verdicts of $10 million or more against businesses. This is especially problematic for auto liability insurers suffering from a growing frequency of bad faith claims. Key sources of ICPL claims for life insurers include those related to the cost of insurance, product suitability, and oversight of salesforces.
Carriers see opportunities in asset management
Of all the financial institution marketplace sectors, asset managers, registered investment advisors, private fund managers, and mutual funds are the most attractive to insurance carriers. Buyers can generally expect favorable conditions at renewal, including opportunities for most to secure coverage enhancements.
Institutions that are more reliant on third-party service providers and vendors (such as outsourced chief investment officers), involved in cryptocurrency investments, and with exposure to the commercial real estate marketplace should expect additional scrutiny. Insurers are also monitoring cost of correction claims for advisors, employment-related claims — including partner-related disputes and claims by activist shareholders that funds are not effectively overseeing investment advisors and other service providers.
2024 average rate changes
Complex claims environment for financial institutions
Although claims are increasing slightly in frequency and severity compared to prior years, insurers generally view the environment as stable. No alarming trends or new claims types are emerging, but the rising cost of defending these claims has been a concern for several years now and does not seem to be declining.
For the most part, steps taken by underwriters over the past several years to right-size retentions have helped mitigate impacts. Results for individual buyers will vary depending on their circumstances, but widespread changes due to this uptick in claims activity are not expected.
There is some speculation that the regulatory environment will become friendlier under the second Trump administration, but regulatory risk remains high for most financial institutions. Underwriters view the prospect of less regulatory scrutiny as a double-edged sword: Less onerous compliance obligations, more mergers and acquisitions, and other impacts from deregulation are good for business, but underwriters take comfort in strong oversight. It thus remains to be seen how market conditions could be affected by the Trump administration’s anticipated actions, despite some optimism about their potential benefits.
People-related risks represent an important concern for financial institutions. Diversity, equity, and inclusion (DEI) has become an increasingly politicized issue and could contribute to litigation and other risks in 2025. In addition to a push by the Trump administration to eliminate DEI programs, Texas Attorney General Ken Paxton — joined by the attorneys general of 10 other states — sent a letter in January to six global financial institutions, warning of potential action against them because of their support for DEI initiatives.
Other people-related concerns include a highly competitive labor market, growing labor costs, employee and executive safety concerns, and risks related to succession planning.
Financial institutions are also keeping an eye on:
- Economic uncertainty, including concerns about inflation, interest rates, cost of capital, and the impact of tariffs.
- Geopolitical volatility, which has contributed to greater compliance obligations.
- Artificial intelligence-related risks, including the growing use of deepfakes and other technologies to support social engineering and ransomware campaigns.
- Business interruption risks, which can arise from various unforeseen events.
- Climate-related financial risks as institutions navigate the implications of climate change on operations and investments.
Looking ahead
After three years of rate reductions, we do not expect drastic swings in pricing and coverage in 2025. We expect the buyer’s market for financial institutions to continue, with flat pricing at renewal becoming the norm.
Over the last several months, however, some insurers have exited the professional and executive market for financial institutions due to declining profitability in their portfolios, particularly for public company D&O insurance and certain other risks in the sector. The departure of these insurers may be an early sign of what’s to come, as other insurers are also experiencing deteriorating performance or facing pressure from activist investors to exit certain lines.
Should additional insurers exit the market, we may be close to the end of the current period of declining rates. Now may be the best time for financial institutions to market their programs.
With insurers still eager to offer competitive rates and terms to most buyers, financial institutions should work with their insurance brokers to capitalize on current conditions.
To position your organization to see the most favorable results at renewal, risk professionals and others should:
Start the process early. Begin discussions with brokers and underwriters well in advance of renewal dates. This proactive approach allows ample time to navigate any potential challenges.
Tell your differentiating story. Meet with your brokers to discuss how best to effectively communicate about your unique risks to the underwriting decision-makers. Highlight what sets your organization apart and how it contributes to risk mitigation.
Utilize data and analytics. Stress test your insurance programs and leverage data and analytics to justify decisions related to risk tolerance, retention levels, and program structure. Presenting concrete data can help you negotiate better terms.
Update your risk registries. Identify the key risks with the greatest financial and operational impacts on your organization, ensure they are highlighted in your underwriting submission, and pinpoint areas where insurance coverage is needed or can be improved. This ensures that all potential vulnerabilities are well-documented and addressed.
Challenge unwarranted increases and restrictions. Don’t simply accept rate increases or other restrictions imposed by underwriters without thorough justification. Develop a comprehensive marketing strategy that actively addresses and mitigates any rate increases or other limitations. This includes gathering supporting data, engaging in negotiations, and presenting a well-rounded case to demonstrate the value and stability of your risk.
Foster internal communication and collaboration. Promoting a culture of risk awareness and aligning stakeholders with risk management objectives should result in improved risk profiles and better outcomes for your financial institution.
Claims severity bringing underwriting scrutiny for private equity
For many carriers, the large private equity segment — firms with $10 billion or more in assets under management — is not performing well, largely due to greater claims severity. General partnership liability insurers are specifically concerned about inadequate consideration claims and allegations of seller misrepresentations; carriers believe these claims should largely be covered under representations and warranties insurance policies. Insurers are also growing concerned about dividend recapitalization claims.
Buyers in this segment should expect significantly greater underwriting scrutiny during upcoming renewals. Insurers are likely to seek higher rates, tighter coverage terms, and/or increased retentions. Individual results, however, will be driven by claims histories, fund focus, and/or the amount of new capital raised.