Through this article, Matthew Smith, Head of Insurance Clients at abrdn Investments, outlines key risks facing insurance companies in 2025. He explores the impact of geopolitics, macro trends like potential US policy changes, and the ever-present threat of inflation. Smith also highlights the increasing importance of managing climaterelated risks, both in terms of insurance liabilities and investment portfolio exposure, emphasizing the need for active management and close collaboration with asset managers.
What key risks will 2025 bring for insurance companies?
As an asset manager with around 150 insurance clients around the world representing around $250bn of insurance assets, this is a question the portfolio management teams at abrdn’s investments business have been thinking about long and hard on behalf of our clients.
Geopolitics and macro
Several macro trends are shaping the 2025 landscape, with the key geopolitical risk mainly resting in regions like Ukraine and the Middle East.
In the US, how hard and fast President Trump can progress his policy agenda is not yet fully clear, and it is the key macro theme, but whatever happens, it is likely to impact insurers and their investments.
From potential tax cuts (which could increase demand for business insurance) to the possibility of tariffs gumming up supply chains, feeding inflation and an expected halt in the rate-cutting cycle, insurers have a lot to manage.
They will also need to think carefully about how geopolitical uncertainty could impact the health of their investment portfolios.
Despite global tensions, at abrdn, we remain optimistic about the most significant asset class held by insurance investors worldwide: investment-grade corporate bonds, whether issued publicly or sourced privately. That optimism is driven by positive risk sentiment and our expectations for higher nominal economic growth in the US. An attractive all-in yield and the potential for performance in both economic upside and downside scenarios underpin this confidence.
Conversely, we remain neutral on high-yield debt. While some of Trump’s policies could support higher-risk debt markets, stretched valuations and refinancing risk warrant caution. These concerns drive a significant portion of our ongoing assessment of credit positions in our clients’ portfolios.
We expect a degree of divergence in growth and monetary policy between the US and the rest of the world to support the US dollar, so we remain positive on the currency. Some of Trump’s advisors have expressed an aversion to a strong dollar, but significant challenges exist in achieving an international agreement to weaken the currency.
And now for the perhaps inevitable, more cautionary view. The first weeks of the new presidency have brought a barrage of tariffs, giving rise to the spectre of retaliation and a global trade war. Trump has insisted that these tariffs should not be inflationary, but even a rudimentary knowledge of economics suggests that is far from obvious. Looking at Emerging Markets, some will face uncertainty and inflationary pressures, while others may benefit from evolving global supply chains.
It’s an unclear picture—highlighting the need for close consideration of insurers’ asset allocations and open conversations with your asset manager.
Inflation
A situation where we see higher-than-expected inflation in the US would have wide-reaching implications for the insurance industry.
As an industry, insurance is particularly vulnerable to inflation. Companies could see all their assets impacted—whether directly or indirectly - by inflation.
A situation where we see higher-than-expected inflation in the US would have wide-reaching implications for the insurance industry. As an industry, insurance is particularly vulnerable to inflation
Even more concerningly, a jump in inflation expectations could negatively impact both sides of an insurer's balance sheet simultaneously, potentially leading to a fall in investment values and an increase in liability values.
Sticking with Economics 101, a return to inflationary conditions is not suitable for bond markets, which, in turn, is not generally ideal for insurers. And let us not forget that the recent memory of the enduring impacts of post-COVID global inflation still gives insurance investors like us reason to shudder.
Active asset managers will be looking closely at ways of mitigating the impact of volatile and uncertain inflation expectations on clients’ portfolios. A particularly effective way of doing this is through actively managed funds investing in short-dated bonds—a strategy we have been developing at abrdn. These kinds of strategies are designed to outyield both cash and short-dated credit while performing throughout the market cycle and changing inflation expectations.
We expect strategies like this will be focused on as question marks remain over the path of inflation.
Climate risks
But politics and economics do not alone contribute to an uncertain world. We only have to look at the tragic confluence of multiple wildfire events across Los Angeles County to see that the world is becoming increasingly volatile.
It is too early to assess damages and the scope of the economic impact of the wildfires honestly. However, based on estimates so far and past events, the financial damages could be more than $100bn, with insured losses somewhere in the $20-30bn range.
In an insured loss scenario (wildfires, hurricanes, floods, etc.), the two most significant considerations are:1) density of population and 2) valuation of structural loss. Unfortunately, this wildfire hit LA on both points—the city and its surrounding areas are densely populated, and the area is one of the most expensive in the US.
In California, we have seen climate-related risks such that a state-run insurance fund (the California FAIR Plan) has had to help fill the gap where private sector policy writers are pulling back
From the outside, figuring out how well the California FAIR Plan is funded is difficult. More than likely, it will only be able to cover a small percentage of insured losses, meaning the discrepancy will be charged to private sector insurers active in the market via assessment fees based on market share in the state. Whatever the Plan cannot pay for will be spread out across the insurers and will be an earnings event for those insurers, with knock-on impacts for investors with exposure to those names. Insurance is a significant sector for credit issuance and something that investors like abrdn Investments will be monitoring closely for our insurance clients.
The bigger question is what will happen to insurers assuming the FAIR Plan is depleted and needs to be replenished ahead of what could be another active wildfire year.
In late 2024, California passed regulation that allowed insurers to pass down a sizable portion (up to 100 percent) of assessment fees charged by the FAIR Plan directly to policyholders. We will be watching for the impact of that.
As the number of climate-related catastrophes ramp up, insurers will increasingly be grappling with these kinds of questions –look at last year, when we had devastating flooding in Spain and Typhoon Yagi, which left more than 500 people dead across Southeast Asia.
Climate change can also significantly impact assets held within investment portfolios, and actively managing this risk is crucial to any successful investment strategy.
To conclude, 2025 is another year of heightened risk, and insurers should be cognizant of the potential implications for their business and investments, directly and indirectly.
Happily, though, they do not need to navigate these uncertain waters alone. If you are not already having conversations with your asset manager about how they are managing these risks on your behalf, now is the time.
