Fitch Ratings, a provider of credit ratings, research, and analytics, forecasts that the property and casualty (P&C) insurance industry will continue to face challenges from volatile natural catastrophe risks in 2025.
Despite these risks, Fitch believes that the industry’s capital strength will enable re/insurers to absorb the impact of these losses, aided by prudent risk management and the effective use of catastrophe reinsurance.
The company, based in Chicago and New York, highlighted the continued exposure of the property and casualty sector to large-scale natural events during their recent North American Insurance Conference.
While the market has been tested by multiple significant events, it has not yet encountered a “mega catastrophe” in recent years. In particular, the lingering effects of wildfires are fresh in industry minds, but hurricanes remain the largest threat to financial stability.
For example, a direct hit by a major hurricane on Miami could result in losses exceeding $100 billion, while a large earthquake in California, particularly in Los Angeles or San Francisco, could lead to unpredictable outcomes and significant risk.
Property catastrophe rates remain elevated due to the increasing frequency and severity of storms. Larger insurers are more equipped to handle these events, with diverse portfolios and robust reinsurance protections in place.
However, in areas like Florida, the situation is more precarious, as many smaller specialty insurers are highly reliant on reinsurance and state-sponsored programs, including the Florida Hurricane Catastrophe Fund and Citizens Insurance. Should losses surpass reinsurance coverage, numerous smaller companies could face dire financial consequences.
The volatility in hurricane strength, attributed to rising sea surface temperatures, is exacerbating risks. Recently, hurricanes like Helene and Debbie have impacted regions outside of traditional high-risk zones.
Hurricane Helene, for example, generated losses as it moved inland to Georgia, while Hurricane Debbie caused severe insured losses in Quebec, Canada, a region where flood insurance is more commonly covered than in the US.
Fitch also noted that convective storms, including tornados and other severe weather, are becoming increasingly significant contributors to overall loss figures. The last two years saw insured losses of $50 billion from these events, especially in the central US, where new suburban housing developments are now increasingly vulnerable to storm damage.
In 2024, the largest catastrophe events in the US were hurricanes Helene and Milton, with combined insured losses estimated between $30 billion and $45 billion.
While natural disasters continue to be a primary driver of losses, fires and earthquakes are expected to surpass insured losses due to widespread underinsurance and low levels of coverage. The average take-up rate for earthquake insurance in California, for instance, is as low as 10%.
Despite the challenges posed by individual catastrophic events, Fitch believes that the industry remains well-capitalised to absorb substantial losses.
However, the sector is particularly vulnerable if multiple large-scale events occur within a short period. Historical events, such as the 2001-2002 period, which included the September 11 attacks, various hurricanes, and significant equity market declines, serve as reminders of the systemic risks that could strain capital reserves.
A significant market correction could also put downward pressure on capital surpluses, as seen in past years during equity market downturns in 2001, 2008, and 2022. These periods of financial instability further highlight the delicate balance that insurers must maintain when managing their capital.
Social inflation is another critical concern impacting casualty losses, particularly with the rise of mass torts and high-profile jury verdicts. Legal actions are becoming increasingly punitive, with attorneys and jurors holding insurers accountable for higher-than-expected damages. This trend, seen in previous decades with asbestos litigation and class-action suits, continues to push up the cost of insurance premiums.
Additionally, persistent inflation and slower economic growth could lead to an unfavourable shift in loss reserve adequacy.
This is especially true for commercial auto and other liability product lines, where insurers must carefully project claims severity in light of rising inflation and ongoing litigation risks. Any mispricing of long-tail liabilities, if left unchecked, could result in adverse reserve development and necessitate higher casualty reserves.
While the P&C insurance sector faces ongoing pressures from natural catastrophes and rising casualty losses, Fitch Ratings remains optimistic that the industry’s capital strength, coupled with strategic risk management, will enable it to weather these challenges.
However, the increasing frequency of extreme weather events, the threat of market corrections, and rising legal costs represent ongoing risks that insurers must navigate carefully. As the sector adapts to these challenges, the ability to accurately forecast losses and maintain robust reserves will be critical to ensuring long-term stability.
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