AM Best Urges Stress Testing Amid Rising US Property Catastrophe Losses
A recent AM Best report highlights a significant challenge for the U.S. property and casualty insurance sector: almost half of all states have experienced their highest single-year property catastrophe loss ratios in the past decade. These losses are more than 20 percentage points above the 10-year median, driven in part by increasing frequency and impact of secondary perils such as severe convective storms, inland flooding, and wildfires. This shift is prompting insurers to revise pricing, underwriting, and risk management approaches to better address evolving threats.
The report emphasizes the surge in billion-dollar weather events, noting 27 in 2024 and 28 in 2023, well above the 2010–2022 average of 15 events annually, despite the absence of NOAA-named hurricanes during these years. This heightened event frequency and broader geographic impact place greater strain on insurers, especially those with concentrated state-level operations. Local insurers in states like Kentucky have faced disproportionate loss exposure relative to market share, underscoring the risks for regional carriers.
AM Best stresses the importance of robust stress testing to capture emerging risks beyond historical scenarios, integrating factors like risk appetite, net exposure, liquidity, and reinsurance structures. It highlights the limited availability of aggregate reinsurance amid rising losses, compelling insurers to assume higher direct risk through increased net retentions and co-participation, particularly in high-risk areas like California with escalating wildfire claims.
Insights reveal that smaller, single-state insurers have endured greater capital and surplus volatility during loss years compared to larger firms with diversified geographic exposure. While Enterprise Risk Management (ERM) frameworks are widespread across insurers, consistent stress testing practices are more prevalent among national carriers, enabling better risk management. The report documents more frequent credit rating downgrades among regional insurers relative to their market share, reflecting mounting financial pressure from catastrophe events.
Despite these challenges, AM Best notes overall favorable balance sheet strength, especially for insurers with broader geographic footprints and mature ERM systems. Their Capital Adequacy Ratio modeling incorporates extreme event losses, reinsurance recoverables, and reserve adjustments to assess solvency and risk resilience. The report concludes that stress testing and proactive risk governance are vital for carriers to navigate increasing unpredictability and cost of weather-related catastrophes, including in historically lower-risk areas.