In the latest Gallagher Re ‘Natural Catastrophe and Climate Report’, the reinsurance broking giant highlighted the “notably elevated” financial cost of natural catastrophes in Q1 2025 – with global economic losses hitting US$110 billion.
Discussing the report in a follow-up interview with ReInsurance Business, Steve Bowen (pictured), chief science officer for Gallagher Re, highlighted that a major driver was the unprecedented wildfire activity in Los Angeles in early January. The Palisades wildfire alone represented economic losses of almost US$40 billion – while the Palisades and Eaton fires resulted in a combined economic loss of at least $65 billion and insured losses of up to $40 billion – making the two events the costliest wildfires ever recorded in Q1 of a calendar year.
“This is a significant level of total loss, and for it to occur in the first quarter is unusual since Q1 is typically one of the quieter quarters for weather related losses,” Bowen said. It’s a troubling start for the year, particularly as the market has yet to face the peak months for natural catastrophes, which typically starts from now through to September or October, with peak thunderstorm season in the US, and the Atlantic hurricane season. “We know if we do get a major landfalling event, that could really drive market losses for the year even higher.
“The fact that we're entering the historical peak loss months of the year already at a much higher incurred industry loss level is something to watch.” Touching on some of the key implications of the LA wildfires, he highlighted that it’s going to be more of an earnings event than anything else. Reinsurers will be looking at the event and continuing to reassess their appetite on the basis of this evaluation,” he said.
Essentially, the event is another data point which will allow primary carriers and reinsurers to consider and to enable them to recognize that these high-risk areas are, in fact, becoming riskier. “What was previously considered to be a “tail” event – an event with a low probability of occurrence – is increasingly becoming more plausible in today’s environment.
“All of this reinforces the need for a recalibration in terms of how underwriters are assessing their own portfolios. They’re trying to better assess the risk profile of certain states or local communities with a finer lens, and more authoritatively understand how that risk may impact market behavior. The market is always trying to maintain its own health and solvency, but it also has to recognize that it's going to have to price to meet the risk.”
Unfortunately, more people are moving into these risk-affected areas which, in turn, means that the industry must react to this shift in population and premiums have to reflect the changing risk profile that comes with that. “The LA wildfires mean that many national US carriers with a nationwide exposure footprint are facing a more challenging situation since it eroded catastrophe budgets so early in the year.”
“As we get deeper into the peak months of thunderstorm season, hurricane season, and what would be deemed a more traditional peak of wildfire season in late summer and early fall, the fire activity in the first two weeks of January ultimately created a much more expensive starting baseline for the rest of 2025.”
The LA wildfires have reframed conversations across the re/insurance market in the early days of 2025 but the overall message Bowen believes needs to be delivered continues to be around capital. Reinsurers are still sitting on a significant volume of capital, he said, citing Gallagher Re’s 2024 Reinsurance Market Report which reported that global reinsurance dedicated capital reached $769 billion in 2024, a 5.4% increase from the 2023 level.
“Heading into 2025 there was about $769 billion of available capital. This suggests a healthy and flush market. It would likely require a singular event of probably $75 billion to $100 billion to really start to move the needle in terms of a re-hardening of the market,” he said. “The industry is certainly in a good position to be able to withstand higher levels of total loss.
“But what that doesn't necessarily capture is that a lot of the smaller events in aggregate are really putting additional pressure on primary carriers. We’ve seen this reflected in recent quarterly earnings reports. At the end of the day, companies are seeking to improve their underwriting performance, but these increasingly expensive events keep throwing curveballs to the market.”
