With the recent California wildfires seen as likely to drive the second most costly first-quarter on record for the global insurance and reinsurance industry, AIG CEO Peter Zaffino has warned that a $200 billion annual catastrophe loss year in 2025 could “recalibrate the entire industry.”
Zaffino highlighted that, “Much more of the risk is now being retained by insurance companies. 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%.
“Contrast this with the period prior to 2023, reinsurers would often share a significantly higher proportion of the insured loss with the distribution of losses between insurers and reinsurers at approximately 50/50, on average.”
He said this is why his company has been focused on reducing its excess-of-loss reinsurance attachment points and expanding its aggregate reinsurance protection, which as we reported earlier AIG has been successful in doing again at the 2025 reinsurance renewals.
Speaking about the recent California wildfires, Zaffino highlighted the way this event has demonstrated the significant protection gap for the peril, while also starting 2025 with a particularly heavy catastrophe loss burden for the industry.
“The California wildfires demonstrate the increased loss from secondary perils and the magnitude of tail-events that are not captured well in modelling,” Zaffino said.
“In a month with one of the lowest model probabilities of loss, the California wildfires alone would make the first-quarter of 2025 the second most costly first-quarter for natural catastrophes on record.”
He went on to say that, “15 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 But with the last eight years averaging more than $140 billion, this thinking is clearly outdated.”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 continued to explain what this might mean for the insurance and reinsurance industry, suggesting that this year could see a historic level of insured catastrophe losses.
“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,” Zaffino said.
The question is exactly how that recalibration might occur, if 2025 were to see a historic level of catastrophe losses for the industry.
Capital erosion would certainly be a feature, but with industry capital building all the time it’s not clear how significant an impact that would have at this time.
A particularly heavy loss year in 2025 may drive more demand for reinsurance protection, as well as for capital infusions for industry players.
For the ILS market, there would certainly be opportunities to deploy more capital as a result. But, as ever, it would depend on what type and size of events occur through the rest of the year, as well as what layers in the tower losses impact.
One recalibration that could happen, might be a further shift towards capital partnerships, as insurers and reinsurers look to recapitalise and reinsure on the most efficient and frictionless terms.
It might also drive a further shift towards the balance-sheet light, to no balance-sheet (MGA) type models, which again would suggest those with efficient capital to deploy in supporting the industry after a particularly catastrophe loss heavy year might find an expanding opportunity set.
