A year ago, we released a forecast for the insurance sector, where we projected the key risks and strategic challenges facing the industry in the year ahead. We predicted that 2025 would be defined by a convergence of macroeconomic pressure, climate and catastrophe risk, and regulatory uncertainty. We anticipated that insurance leaders would be kept on their toes, constantly juggling a space involving higher inflation, shifting catastrophe exposure, and the ethical integration of artificial intelligence (AI).

As we settle into 2026, the data is in. While several predictions held true, the market also behaved in ways few could have anticipated. Read on for a retrospective reflection on the risks of 2025 and our outlook for the year ahead.

2025 Predictions Confirmed: Social Inflation and AI Regulation

The Impact of Social Inflation and Nuclear Verdicts on Claims

In the 2025 outlook, we flagged that public distrust was fueling “nuclear verdicts” and driving up claim costs. Unfortunately, this trend accelerated throughout the year. We saw a continued increase in the severity of liability claims, particularly in commercial auto and general liability lines. In fact, a recent study performed by SwissRe reinforced that there have been specific attitude changes in the American public in 2025: 

• juror sentiment continues to swing towards plaintiffs, and
• a perception that current damages awarded by juries are either too low or just right

The courtroom persists as a primary driver of loss ratios, confirming that thorough underwriting and responsible claims management continue to be critical to insurer stability.

From Ethical AI to Statutory Mandates 

We also highlighted the imperative for fair AI development to avoid discriminatory pricing. AI adoption across the nation continued, and the rules surrounding fair use continued to get hammered out. Through the end of 2025, 24 states and the District of Columbia have formally adopted the NAIC Model Bulletin covering Use of Artificial Intelligence Systems by Insurers. 

2025 Market Curveballs: Secondary Peril Losses and Property Rate Softening

While we correctly identified that climate change was exposing previously resilient areas to new risks, the specific nature of the losses was unexpected.

The industry spent much of the last decade bracing for a mega-hurricane event. Instead, 2025 was the year of the “Secondary Peril.” Historic losses from severe convective storms in the Midwest and unexpected wildfire outbreaks in regions previously considered low-risk drove the bulk of property losses.

The true curveball, however, was the market response. Through the end of 2025, we have continued to see a softening of property rates. An influx of capacity, lower than expected catastrophe losses, and changes in regulatory environments have driven increased competition, despite the looming potential for larger than ever weather events.

Predicting Top Risks – What is on the Horizon in 2026?

As we look toward the remainder of 2026, the landscape continues to shift as old risks change and new risks emerge.

Navigating Loss Reserve Valuation and Adequacy 

With the softening of property rates despite higher severity in secondary perils, the margin for error grows slimmer. If inflation pressures continue, loss cost severity continues to grow, or natural disasters hit highly populated areas (or any combination thereof), insurers writing business at softer rates in 2026 may face reserve adequacy challenges. Accurate exposure valuation and disciplined underwriting will be required to continue to protect the bottom line.

Economic Uncertainty: Interest Rate Cuts vs. Sticky Inflation 

The macroeconomic environment for 2026 will be nuanced for insurance companies. The U.S. is entering a period of monetary easing where the Federal Reserve is starting to cut interest rates, yet core inflation remains high. Additionally, Federal Reserve Governor Jerome Powell’s turbulent second term as chair comes to an end in May 2026, with Kevin Warsh nominated as his successor. As the Federal Reserve prepares for a transition in leadership, it is unclear how the central bank will retool its policy and strategy. 

For insurers, the challenge lies in a growing divergence between potentially lower investment yields and claim costs that continue to climb. Uncertainty regarding future Fed interest rate cuts remains. On the other hand, equity markets have hit multiple all time highs in 2026 already, potentially providing surplus relief through investment portfolios. 

Operationalizing AI Governance and Regulatory Compliance

The regulatory conversation has moved from “what if” to “how to.” The risk for 2026 is not just having an AI model, but demonstrating effective controls and governance over AI. The importance of having subject matter experts present for critical decisions has never been higher. As company leaders, but not necessarily subject matter experts on AI, there is a risk that C-Suites and Boards are making decisions regarding a technology that they do not fully understand. This naturally leads to organizations asking themselves whether AI tool adoption requires a new set of governing principles. In practice, an organization’s core principles of governance should be adapted to include AI, not reinvented. 

The NAIC is currently piloting an AI Systems Evaluation Tool (the tool) across ten participating state regulators. Pilot states will use the tool in different types of work, including market conduct exams and reviews, financial analysis, and financial exams. The tool is intended to help insurers explain their AI governance systems to the regulator and help regulators understand how insurers utilize AI and evaluate broader governance practices.

Moving Forward

The risks in 2025 were multifaceted, and 2026 promises to be equally dynamic. Success this year will not come from predicting the weather or the courts, but from the agility to adjust capital and compliance strategies in real-time.

At Johnson Lambert, we remain committed to helping you navigate these shifts—whether through high-quality attest services, consulting engagements tailored to your unique needs, reviews of AI governance frameworks, or specialized tax insights in a changing legislative environment. Contact us today for more information.