A new report from AM Best, the credit rating agency, highlights a pressing issue for the US property and casualty insurance sector: nearly half of all US states recorded their highest single-year property catastrophe loss ratio in the past decade at levels more than 20 percentage points above their respective 10-year medians.
While many of these states are historically vulnerable to large-scale weather events, AM Best notes that the increasing frequency and impact of secondary perils—such as severe convective storms, inland flooding, and wildfires—are driving losses in areas previously considered relatively low risk.
This trend is pushing insurers to recalibrate pricing models, strengthen underwriting criteria, and reevaluate risk management strategies.
In the past five years, secondary perils have emerged as a significant source of loss for US property and casualty (P&C) insurers with property catastrophe-exposed lines of business, exemplified by the wildfires in California this January.
In its Best’s Special Report, US Weather Event Risks Highlight Need for Stress Testing, AM Best emphasises that insurers must regularly stress test for evolving threats as risk profiles change. These stress tests are incorporated into AM Best’s credit rating process, as part of the assessments of balance sheet strength and enterprise risk management.
AM Best observes that the number of billion-dollar weather events in the U.S. has surged in recent years, with 27 recorded in 2024 and 28 in 2023—despite the absence of any NOAA-named hurricanes during that time. In comparison, the average for the period from 2010 to 2022 was just 15 such events.
The increasing frequency and broader geographic distribution of these events are creating additional pressure on insurers of all sizes, particularly those with concentrated operations.
While national insurers accounted for nearly 87% of direct losses paid in 2023, AM Best’s research shows that single-state and regional carriers are often more vulnerable relative to their premium volume.
For instance, in Kentucky, local insurers paid nearly 25% of the state’s direct losses last year, despite holding only 18% of its market share in direct premiums—indicating a higher concentration risk.
AM Best highlights the critical need for stress testing in today’s landscape, noting that many insurers operating in areas historically considered low risk for catastrophes have faced unexpected loss spikes due to the unpredictability of secondary perils.
The report stresses that stress testing should go beyond modelling historical worst-case scenarios. It should also account for emerging risks, shifts in geographic risk profiles, and the compounding effects of multiple smaller events.
“Stress testing should consider risk appetite and tolerance, as well as net exposure, the impact from multiple events, liquidity and reinsurance structure and dependence,” added Jason Hopper, Associate Director, Industry Research and Analytics.
“Understanding true exposures and considering all plausible scenarios is important. With the availability of aggregate reinsurance protection limited, some carriers have been severely impacted by the aggregation effects of multiple, smaller events.”
AM Best’s additional findings show that operating losses impacting capital and surplus over the past decade are most significant for smaller, single-state carriers, with performance improving as companies grow in scale.
This indicates that insurers with a broader geographic presence can distribute risk more effectively, while those with a limited footprint may face greater balance sheet volatility during high-loss years.
AM Best also points out that most insurers, regardless of size, have established Enterprise Risk Management (ERM) frameworks. However, consistent risk assessment and stress testing are more commonly embedded in the operations of larger, national firms.
“Market disruptions continue as some of the national carriers curb their risk appetites, creating opportunities for single-state and regional writers,” said Jacob Conner, Associate Analyst, AM Best.
“However, the operating loss-drag on capital and surplus over the last 10 years has been worse for single-state and regional writers in catastrophe-prone states, and so stress testing helps companies determine the strength of the balance sheet and ability to absorb shocks.”
AM Best notes that reinsurance conditions have evolved in recent years. Renewals for January 1, 2025, were orderly, but terms and pricing were less favourable for companies in regions with higher catastrophe exposure.
As a result, many insurers are assuming more direct risk through higher net retentions and increased co-participation. Limited availability of aggregate reinsurance has further exacerbated this pressure, especially when multiple events compound losses.
This trend is particularly evident in markets like California, where wildfire risk has significantly increased in both severity and financial impact. Many insurers are hesitant to offer coverage in these areas due to complex regulations and rising claims burdens.
The report also highlights that smaller and regional insurers have faced more frequent rating downgrades in recent years. Between 2021 and 2024, single-state carriers accounted for 31% of all property catastrophe writer downgrades, despite holding 38% of the market.
Regional insurers also experienced more downgrades than their market share suggests, indicating rising stress within the industry due to weather-driven losses.
Despite these challenges, AM Best reports that balance sheet strength remains favorable overall, with companies that have a broader geographic presence receiving stronger assessments.
Insurers with established Enterprise Risk Management (ERM) frameworks are more likely to conduct thorough stress testing across their organisations, better positioning them to manage volatility in both capital and underwriting.
AM Best’s process includes using the Capital Adequacy Ratio model, which simulates losses from extreme events, factoring in net post-tax losses, reinsurance recoverables, and reserve adjustments.
The report concludes that, given the shifting geographic risk patterns and increasing unpredictability of loss events, stress testing is now a core necessity for insurers. As weather-related events become more frequent and costly—even in areas not traditionally seen as disaster zones—carriers that fail to model, monitor, and mitigate these risks will face growing exposure and financial strain.
AM Best’s findings emphasise that proactive risk assessment and strong governance structures will be essential for insurers in navigating an increasingly volatile future.
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