COMMERCIAL INSURANCE CONDITIONS

A slimmer margin of error for insurers

The P&C insurance market enters 2026 from a position of strength, supported by record earnings, strong capitalization, selective deployment of capacity, and still-elevated investment income. All of this has materially improved carrier balance sheets. (See Figure 9.) A March 25 report from Verisk and the American Property Casualty Insurance Association described 2025 as "a reset after several years of volatility, not a new normal."

U.S. property and casualty insurers recorded an underwriting gain of $60.9 billion in 2025, nearly triple the $22.1 billion gain they recorded in 2024, according to a March 23 report from AM Best. In 2025:

Net premiums earned increased 6.1% to $923.3 billion.

Incurred losses and loss adjustment expenses fell by 0.5% to $615.7 billion, in part due to muted natural catastrophe losses.

Net investment income increased 9.1% to $91.4 billion.

The industry's combined ratio improved from 96.6 to 92.9.

The industry's financial strength, however, is not universal. Performance remains uneven by line and geography, and loss cost trends, social inflation, and natural catastrophes continue to highlight the need for underwriting discipline. While carriers have more flexibility than they did just a few years ago, they have not abandoned selectivity.

Key tailwinds that have boosted carrier performance in recent years are also now moderating or reversing:

INVESTMENT INCOME is plateauing as new money rates decline and portfolio reinvestment rates shrink.

PAYROLLS, SALES, AND BROADER ECONOMIC GROWTH are moderating, reducing exposure-driven premium lift.

COMPETITIVE PRESSURES are reemerging, particularly in better-performing segments.

CATASTROPHIC ACTIVITY, including severe convective storms,4 remains unpredictable.

PREMIUM GROWTH AND STRONG EARNINGS may have masked tail risk and questions around reserve adequacy across certain casualty portfolios.

While market tailwinds are easing, underlying loss trends and volatility have not fully normalized, and the market enters 2026 with less external support than in recent years. As premium momentum and investment income slow, performance will rely more heavily on underwriting precision, reserve discipline, and capital allocation decisions. The margin for error is narrowing, and return on capital will only be maintained through execution and strategic choices.

M&A activity is also beginning to reaccelerate. Strong carrier capitalization, improved earnings, and stabilizing reinsurance markets are providing the confidence and currency for strategic transactions. For some insurers, acquisitions offer a more immediate path to scale, diversification, and expense leverage than organic growth in a moderating premium environment. However, such transactions also increase integration and execution risk at a point in the cycle when margins are tightening.

FOR BUYERS

These dynamics mean capacity remains available, but underwriting scrutiny will persist. Pricing relief may continue in select areas, but a broad-based soft cycle is unlikely to materialize. The market is rational and competitive but disciplined.

Mixed conditions

Across several lines, buyers have opportunities to revisit program structures and capitalize on favorable conditions:

Property rates continue to decline in many areas, supported by abundant capacity, strong underwriting results, and limited catastrophe losses in 2025.

Workers’ compensation remains highly profitable, and buyers continue to benefit from strong competition.

For public companies, the D&O market is stabilizing, with most programs renewing flat after several years of rate reductions. Private companies can expect a slightly more challenging D&O dynamic, with certain classes seeing material premium and retention increases.

EPL capacity remains ample and competition continues to drive favorable results for most buyers, although signs of firming are emerging.

Fidelity/crime and fiduciary liability rates are generally stable, backed by sufficient capacity.

Cyber pricing remains favorable for many buyers, particularly those with strong controls and mature cyber risk management protocols.

Liability remains the exception. While capacity is available, claim severity continues to rise. Buyers should expect continued scrutiny of risk management controls, careful management of capacity, and ongoing rate pressure.

Signs of change are also emerging even in more buyer-friendly lines. Property margins are compressing, and carriers remain concerned about catastrophe exposures. Medical inflation is beginning to weigh on workers’ compensation carriers, who are growing concerned about rate adequacy. D&O insurers are showing greater discipline after years of rate decreases, with the impact felt in public and large private placements. Cyber insurers are becoming more selective, differentiating pricing based on controls, privacy exposures, and incident history.

In short, while buyers are benefiting from improved conditions across much of the market, the window for potential additional relief may narrow if underlying conditions or loss trends apply pressure to carrier returns.

OPPORTUNE TIME FOR BUYERS

After several years of simply reacting to market outcomes, this may present opportunities for buyers to position themselves ahead of the next cycle by strengthening program design, diversifying capacity, and preparing for unexpected volatility.

Marine insurance market in focus

Recent events in the Middle East have prompted marine insurers to reassess their exposure, resulting in the issuance of notices of cancellation (NOCs) for war-related risks for cargo, hull and machinery, and protection and indemnity (P&I) policyholders.

Initial cancellations have focused on marine insurance buyers with ongoing exposures in the Persian Gulf, where pre-agreed policy provisions apply. Insurers have formally expanded high-risk areas identified by the Lloyd’s Market Association Joint War Committee; more information can be found in a circular and interactive map produced by the committee.

P&I clubs have already issued general cancellations for non‑mutual war risks relating to Iran and the Persian Gulf. While coverage has been reinstated for vessels and assets based permanently in the Persian Gulf, much uncertainty still surrounds vessels preparing to make a transit of the Strait of Hormuz. Much of the market is still prepared to quote for this high-risk voyage, but to date, the number of vessels prepared to undertake the journey is very small, and the logjam both inside and outside the strait continues.

Quoted rates are adjustable by the day. As would be expected, rates are currently many multiples of those charged prior to the conflict. However, capacity for each voyage is available in the commercial market.

In the U.S. cargo insurance market, a number of insurers have issued NOCs in respect of war and strikes, riots, and civil commotion (SRCC) coverage; in certain instances, NOCs are being issued on a portfolio-wide basis. Where such coverage is subsequently reinstated, it is generally subject to materially revised terms, including additional exclusions and limitations applicable to cargo exposures within insurer‑designated conflict zones. Individual insurers’ designations of high-risk territories often align with guidance from the Joint War Committee.

Some insurers are applying cancellation on a more targeted basis, issuing war and SRCC NOCs only in respect of policyholders with known, anticipated, or declared exposures in active conflict regions. War coverage under cargo or stock throughput programs is not automatically included and is instead provided through separate companion policies, which are subject to clearly defined limitations as to scope of cover, duration, and geographic applicability. SRCC coverage, where endorsed, remains subject to comparable cancellation provisions and is further conditioned upon defined transit parameters and contractual attachment terms.

Seeking to alleviate traffic logjams in the Strait of Hormuz, the U.S. International Development Finance Corporation (DFC) has announced a maritime reinsurance program that would cover up to $20 billion in losses on vessels passing through the strait. This, however, is not enough to insure anywhere near the full value of maritime trade through the strait. The core issue remains: Shipowners do not want to expose vessels and crew to the obvious dangers of sailing through an incredibly dangerous waterway.

Despite reported reductions in market appetite — particularly for Persian Gulf exposures — capacity remains available. Lockton has secured continued commitment from its war carriers, with market‑leading facilities fully accessible. These include cargo war limits of up to $285 million per shipment, alongside substantial capacity for hull, P&I, and charterers’ war coverage.

Lockton will continue to monitor developments and keep our clients informed of any changes in marine market conditions and sentiment.

Reinsurance remains a boost

The primary market continues to be buoyed by a healthy reinsurance marketplace.

PROPERTY

The property reinsurance market continues to soften, fueled by ample capital, strong reinsurer earnings, and few catastrophe losses in 2025. At Jan. 1, 2026, treaty renewals,5 buyers secured notable rate reductions and broader terms as reinsurers aimed to preserve positions on core programs. Risk‑adjusted pricing decreased meaningfully, with loss‑free catastrophe programs often achieving double‑digit cuts, some exceeding 20%. Per‑risk treaties6 generally declined 5% to 15%. Competition is intense, contributing to improved ceding commissions7 on proportional placements.

Reinsurers continue to monitor rapidly growing data center exposures, geopolitical volatility affecting non‑natural catastrophe covers, and secondary perils such as severe convective storms, winter weather, and wildfire. Attachment points8 remain firm but can be negotiated for preferred partners. Absent major catastrophe activity, favorable conditions for buyers are expected to continue through 2026, enabling further pricing and structural optimization.

CASUALTY

Capacity is steady, though reinsurers are cautious amid concerns over reserve adequacy, social and economic inflation, third‑party litigation funding (TPLF), and emerging casualty catastrophe exposures. Jan. 1 renewals were stable, supported by improved primary rates, higher interest income, and multiyear reunderwriting. Market dynamics are shifting as alternative capital sources emerge and some cedants9 retain more risk, reducing demand. Reinsurers differentiate cedants based on profitability, claims philosophy, and data quality. Reinsurers with legacy exposures remain selective, while newer or more disciplined reinsurers are pursuing growth.

CYBER

Cyber reinsurance remains robust, with new entrants and expanding retrocession10 driving competition. Ample capacity supports program restructuring, increased non‑proportional buying, and continued rate improvements. Reinsurers are closely tracking evolving litigation and middle‑market loss patterns. Barring a systemic cyber event, favorable conditions are expected through 2026.

Softening in the reinsurance market is certainly a welcome development for primary carriers. However, with treaty renewals becoming more favorable, some carriers may feel emboldened to push pricing down further. This could undermine the margin protection reinsurance is intended to provide.

Abundant capital, increased fragmentation

Industry capital remains historically strong, with U.S. P&C policyholder surplus over $1 trillion. Strong earnings, improved underwriting results, and elevated investment income have strengthened balance sheets across the industry.

However, that capital is increasingly fragmented across a wider range of distribution channels and underwriting platforms. Managing general agents (MGAs)11 and managing general underwriters (MGUs)12 now control a growing share of underwriting authority.

The U.S. surplus lines market, meanwhile, has expanded rapidly, doubling in size in just the last decade and offering flexibility and product innovation that have made it a permanent and increasingly important part of the placement landscape. Alternative capital, including pension funds and institutional investors participating through insurance-linked securities and sidecars,13 has also become an established risk capital option.

At the same time, broker panels and facilities are gaining traction as tools to organize capacity. When structured effectively, they can aggregate volume, streamline placements, and create more predictable outcomes for both insurers and buyers.

The result is not simply more capital, but capital with different targets, incentives, time horizons, and underwriting philosophies. More competition is generally good for buyers, but they must also recognize that nontraditional capital can also be sensitive to market cycles. Appetite can and will change quickly if loss experience deteriorates or capital markets shift.

Fragmentation is also spurring renewed M&A activity. With organic premium growth moderating and returns facing greater scrutiny, many insurers are pursuing scale, diversification, and expense efficiency through strategic deals.

For buyers and insurers alike, the implication is straightforward: Capital is not scarce, but it is more dispersed, more targeted, and less uniform in its behavior. The critical question is no longer how much capacity exists, but where it sits, what motivates it, and how reliably it will perform through market cycles. The key is finding capacity where it is needed and ensuring that capital providers backing it are stable, committed, and capable of paying claims when they arise.

Social inflation challenges persist

Carriers are increasingly focused on tail risk and whether pricing today will still look adequate five to 10 years from now. Insurers remain concerned about a well-organized plaintiffs’ bar, supported in part by TPLF, which is contributing to a sharp rise in frequency, defense costs, and jury awards.

AMONG INSURERS’ KEY CONCERNS ARE:

Normalization of large jury awards. Industry experts believe juries have become increasingly desensitized to multimillion-dollar verdicts, a dynamic that may be reinforced by aggressive legal advertising. In 2024, the most recent year for which data is available, legal services providers spent an estimated $2.5 billion on 26.9 million advertisements, according to the American Tort Reform Association (ATRA). (See Figure 10.) Spending in 2024 was up 39% from 2020 and more than double the amount spent in 2018. Advertisements frequently highlight increasingly large settlements and verdicts — including “nuclear” verdicts of $10 million or more and “thermonuclear” verdicts of $100 million or more — which reinforces expectations among jurors and fuels a vicious cycle of rising awards.

Plaintiff-friendly jurisdictions. Los Angeles and New York top the ATRA’s latest ranking of “judicial hellholes.” Courts in these and other jurisdictions on the ATRA’s list are increasingly entertaining novel or innovative theories of liability and allowing evidence rooted in “junk science” and lacking rigorous peer review or consensus. Perhaps unsurprisingly, juries in these and other jurisdictions on the list frequently return nuclear verdicts for plaintiffs.

States are slowly enacting tort reforms that carriers hope will help to rein in the plaintiffs’ bar. In April 2025, Georgia Governor Brian Kemp signed into law SB 68 and 69, which together represent comprehensive tort reform. SB 68 limits negligent security claims, requires accurate damages, allows for bifurcated trials,14 and reduces litigation costs. SB 69 increases transparency in TPLF and limits the amount of control funders can exert in litigation.

In May 2025, South Carolina Governor Henry McMaster signed H. 3430, which overhauls joint and several liability in the state, limiting liability for defendants found to be less than 50% at fault to their proportionate share of damages. The bill also permits juries to consider the fault of parties not formally named as defendants, including those that may have previously settled.

Also in May, Louisiana Governor Jeff Landry signed HB 431, which bars plaintiffs from recovery in litigation related to auto collisions and crashes if they are 51% or more at fault. In June, Governor Landry signed SB 231, which limits recoverable medical expenses in personal injury suits to amounts paid by insurance or Medicare rather than higher billed amounts.

Elsewhere, core tort reform measures proposed in Alabama, New York, and Texas failed to pass the legislature. However, lawmakers in these and other states are expected to consider fresh proposals in 2026 and beyond.

Discipline becoming essential

“AM Best’s outlook for the US commercial lines segment is Stable, reflecting strong underwriting and operating performance, sustained pricing adequacy, improved investment returns, and generally adequate reserves,” the rating agency said in a Feb. 23 report. “Although casualty lines continue to face adverse development and elevated claims severity, the segment overall remains profitable, well-capitalized, and resilient to economic and capital market volatility. A stable reinsurance market, disciplined underwriting, and expanding capacity further reinforce the outlook.”

For carriers, the pressure is on to maximize returns on equity. Carriers will likely seek to achieve this through sharper underwriting discipline.

If the industry can no longer rely on elevated investment income or inflation‑driven exposure growth to support results, greater emphasis must be placed on risk selection, disciplined pricing, and careful capacity deployment. Carriers must be far more intentional about limits and the risks they choose to write.

This discipline is especially critical in long‑tail liability lines, where both economic and social inflation create uncertainty around how losses may develop. Carriers must price today for losses that may not fully materialize for five to 10 years, even as jury attitudes, regulatory divergence, and litigation trends introduce additional unpredictability.

The result is a P&C market with less room for error. Selectivity and underwriting discipline have already been hallmarks of the past several years, but heightened uncertainty around the economy, interest rates, technology, and long-tail liabilities will require carriers to be even more deliberate in how they price risk and deploy capacity.

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4Severe convective storms: Strong, local thunderstorms that can cause casualties and property damage from heavy rain, lightning, hail, straight-line winds, and tornadoes. Convective storms occur when warm, moist air rises higher into the atmosphere and then cools rapidly to generate powerful storms. (See glossary.)

5Treaty renewals: The periodic renegotiation and renewal of treaty reinsurance contracts between insurers and reinsurers. Renewals commonly occur on set dates — most notably, January 1 and midyear on July 1 — and involve adjustments to pricing, terms, capacity, and structure based on loss experience and market conditions. (See glossary.)

6Per-risk excess of loss treaty: An agreement where an insurer covers losses arising from a single insured risk that exceeds the insured’s retention, up to a specified limit. Coverage applies separately to each loss versus aggregate losses. (See glossary.)

7Ceding commission: A fee that a reinsurer pays to a primary insurer (cedant) to cover certain expenses associated with underwriting policy acquisition and administration. (See glossary.)

8Attachment point: The point at which excess coverage or reinsurance will begin to respond. Once losses exceed the attachment point, excess insurance or reinsurance policies pay claims up to their stated limits. (See glossary.)

9Cedant: A primary insurer that transfers, or cedes, a portion of the risks it has underwritten to a reinsurer in exchange for premium. The reinsurer assumes responsibility for covered losses above the cedant’s retention, according to the reinsurance contract. (See glossary.)

10Retrocesion: A reinsurance transaction in which a reinsurer transfers a portion of its own assumed risk to another reinsurer (a retrocessionaire). Retrocession is used to manage capital, reduce volatility, and limit accumulation risk. (See glossary.)

11Managing general agent (MGA): An insurance intermediary granted authority by an insurer to perform specific functions, such as underwriting, binding of coverage, policy issuance, and sometimes claims handling. MGAs typically specialize in particular lines, industries, or geographic markets and operate under delegated authority. (See glossary.)

12Managing general underwriter (MGU): An insurance intermediary granted authority by an insurer to perform specific functions such as risk selection, underwriting, and binding, MGUs typically do not handle claims or broader administrative functions. (See glossary.)

13Sidecar: A special purpose reinsurance vehicle that allows third‑party investors — often hedge funds or private equity firms — to participate in a defined portfolio of insurance or reinsurance risk. Sidecars provide insurers and reinsurers with additional capacity, typically on a fully collateralized basis. (See glossary.)

14Bifurcated trial: A type of trial that is split into two phases in order to address two distinct matters stemming from the same case. In a civil context, bifurcated trials are often used to determine responsibility in the first phase and damages in the second. (See glossary.)