During global insurer AIG’s full-year 2024 earnings call, CEO Peter Zaffino provided a sobering outlook for the insurance and reinsurance industry, forecasting that after the extremely costly Los Angeles wildfires, 2025 could see insured catastrophe losses surpass $200 billion.
This outlook follows the release of the company’s strong results and Zaffino highlighted the impact of higher reinsurance retentions and escalating natural disaster costs, notably from wildfires and other secondary perils, which are becoming one of the industry’s most pressing concerns.
The devastating wildfires in California are a prime example of how catastrophic losses have soared in recent years. Zaffino noted that insured loss estimates for these wildfires are settling around $40 billion, with some as high as $50 billion, while some estimates put the total economic loss above $250 billion, creating a massive protection gap of up to 80%.
“The California wildfires demonstrate the increased loss from secondary perils and the magnitude of tail events that are not captured well in modelling,” he said, pointing out how catastrophic losses from wildfires are outpacing traditional risk models.
Zaffino went on to stress that 2025 could be one of the costliest years on record for natural catastrophes.
“If you assume the upper end of the range for the California wildfires, taking a $50 billion loss pick, adding the average annual insured loss for the past eight years, and assuming we have an active but not abnormal wind season, which is realistic, given the 2024 hurricane season experience and ocean temperatures are the warmest on record, 2025 could be a year of more than $200 billion of insured catastrophe losses. This could recalibrate the entire industry,” he warned.
During the call, the CEO explained that with the ongoing shift in reinsurance retentions, primary insurers are now absorbing a larger share of catastrophe losses.
“In 2023 and 2024, primary insurance carriers are estimated to retain approximately 90% of the insured loss from natural catastrophes, with the reinsurance industry absorbing 10%,” he noted. This marks a sharp contrast to earlier years when reinsurers traditionally took on a larger portion of losses, helping to spread the risk across the industry.
A key driver of the growing losses is the increasingly severe and frequent impact of natural catastrophes, including from wildfires, floods, and severe convective storms.
Wildfires, in particular, have seen a dramatic rise in insured losses over the last decade, doubling from an average annual insured loss of $4 billion to around $8 billion globally, with the US experiencing the largest share of this increase.
“The average annual insured loss from 2000 to 2024 was approximately $4 billion globally, of which the US is the majority at $3.5 billion,” Zaffino explained.
This forecast is a clear indication of how much the industry has changed over the years. “Fifteen years ago, adjusting for inflation, $100 billion was considered the benchmark for an outsized cat year. But with the last eight years averaging more than $140 billion, this thinking is clearly outdated,” Zaffino added.
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