Climate Risk and Catastrophe Modeling in 2026: How $107 Billion in Losses Is Reshaping Actuarial Practice

The 2025 Loss Landscape: A Year Defined by Non-Peak Perils

The 2025 insured loss total of $107–108 billion was 24–25% lower than 2024’s record $141 billion, but the composition tells a more consequential story for actuarial practice.

Los Angeles Wildfires: $40 Billion and a Paradigm Shift

The January 2025 Los Angeles wildfires produced the costliest wildfire event in global insurance history at $40 billion in insured losses. The Palisades Fire and Eaton Fire destroyed over 18,000 structures and forced evacuations of more than 200,000 people. The destruction was driven by a convergence of factors: prolonged Santa Ana winds reaching hurricane force, extremely low humidity, a dry start to the wet season following vegetation buildup, and dense concentration of high-value residential property in the wildland-urban interface (WUI).

What makes the LA fires actuarially significant goes beyond the dollar figure. Before 2015, wildfire-related losses constituted roughly 1% of all natural catastrophe insured claims. Eight of the ten costliest wildfire events on record have occurred in the past decade, and wildfires now account for approximately 7% of global insured nat-cat losses. In California specifically, exposure growth in high-risk WUI zones has outpaced non-WUI growth by a factor of 1.9 since 1990, according to Swiss Re.

One year on, insured losses from the LA fires remain in the $25–30 billion range according to Moody’s January 2026 analysis. Approximately 94% of the 42,121 policyholder claims filed have been fully or partially paid, with $22.4 billion distributed - the fastest claims payout pace on record for a California wildfire, driven partly by new regulatory requirements. The Eaton Fire’s cause remains under investigation, with Southern California Edison’s $1 billion compensation program backed by a ratepayer-funded insurance pool and the state’s expanded $18 billion Wildfire Fund.

Severe Convective Storms: The $50 Billion Persistent Peril

Severe convective storms (SCS) - encompassing tornadoes, hail, and straight-line winds - generated $50 billion in global insured losses in 2025 according to Swiss Re, making it the third costliest SCS year on record after 2023 and 2024. Munich Re’s estimate for U.S. SCS losses alone was $42 billion, significantly above the 10-year average of $29 billion.

The year saw severe tornado outbreaks in March and May, with a multi-day southern U.S. event in March causing $7–10 billion in insured losses across 26 states. While second-half SCS activity was muted, the first-half accumulation was enough to make SCS the dominant loss driver outside of the LA wildfires.

From tracking these loss patterns over recent years, what stands out is the structural nature of the SCS loss trend. This is not cyclical variability - it is a sustained upward trajectory driven by urbanization in hazard-prone areas, rising asset values, higher construction costs, aging building stock (particularly roofs), and the expansion of Tornado Alley’s effective reach into new regions. Only a decade ago, SCS insured losses were trending at around $20 billion annually. The doubling-plus increase reflects exposure growth as much as hazard change.

For primary insurers, SCS presents a distinct challenge from hurricane or earthquake risk. Individual SCS events rarely produce catastrophic insured losses, but their frequency combined with rising property values and repair costs creates substantial aggregate exposure. This makes SCS losses largely a retained risk for primary carriers, falling below typical catastrophe reinsurance attachment points. As Swiss Re’s Balz Grollimund noted, understanding the cumulative effect of frequent, lower-severity events is critical for proper underwriting and risk management.

The Benign Hurricane Season and False Comfort

The 2025 North Atlantic hurricane season produced 13 named storms, 5 hurricanes, 4 major hurricanes, and three Category-5 hurricanes (Erin, Humberto, and Melissa). Hurricane Melissa, which struck Jamaica in October, was the costliest event at an estimated $2.5–3 billion in insured losses. Yet for the first time in a decade, none of these hurricanes made U.S. landfall.

This is relevant context for actuaries, but it should not induce complacency. The hurricane loss potential on the U.S. East and Gulf Coasts remains enormous - Swiss Re estimates a major equivalent event could produce $130–200 billion in insured losses. The absence of U.S. hurricane landfalls in 2025 is a stochastic outcome, not a trend. The 20th anniversary of Hurricane Katrina serves as a reminder of the tail risk that persists regardless of any individual year’s experience.

The U.S. Concentration Problem

The United States accounted for 83% of global insured catastrophe losses in 2025 ($89 billion of the $107 billion total). This concentration reflects both the scale of U.S. insurance penetration and the expansion of insured assets into hazard-prone zones. For global reinsurers and ILS investors, the U.S. remains the dominant source of natural catastrophe financial exposure, and any actuarial assessment of cat risk is fundamentally an assessment of U.S. exposure dynamics.

Catastrophe Model Evolution: The Vendor Landscape in 2026

The catastrophe modeling industry is undergoing its most significant transformation since the post-Hurricane Andrew era when firms like RMS and AIR Worldwide first demonstrated that probabilistic models could outperform industry estimates. Today, the two dominant vendors - Moody’s (which acquired RMS) and Verisk (which owns AIR Worldwide) - are racing to incorporate climate change, AI, and higher-resolution data into their platforms, while newer entrants challenge the duopoly.

Moody’s RMS: High-Definition Models and Climate Views

Moody’s RMS has been systematically upgrading its model suite to the “High Definition” (HD) framework, which uses a simulation-based approach for modeling event frequency and severity at higher spatial granularity. Recent HD model releases include North America Severe Convective Storm, Europe Windstorm, North America Winterstorm, and Terrorism models.

The North America SCS HD Model is particularly notable for its resolution: hail and straight-line wind modeled at 1-km resolution and tornado at 100-meter resolution. For an industry where SCS is now a $40–50 billion annual peril, this granularity matters enormously for portfolio management and underwriting.

Moody’s also offers forward-looking climate change models calibrated to future risk under various Representative Concentration Pathway (RCP) scenarios, with projections through 2100. The Moody’s RMS U.S. Wildfire HD Version 2.0 model completed California’s PRID review in August 2025, incorporating urban fire spread scenarios and mitigation measures into risk assessments.

Verisk: Climate Data Through 2023 and the California Breakthrough

Verisk’s 2025 model releases enhanced thunderstorm modeling using near-present climate data through 2023, advanced hail vulnerability assessment, and new solar panel vulnerability analysis. The company is also developing Synergy Studio, described as a next-generation catastrophe modeling and risk management platform, with a 2026 launch planned.

Verisk achieved a significant regulatory milestone by becoming the first vendor to complete California’s PRID review for wildfire catastrophe modeling in July 2025. The Verisk Wildfire Model for the United States uses a stochastic catalog of up to 100,000 simulated years, calibrated to historical wildfire activity from 1979–2015 while preserving climate variability patterns like ENSO. The model converts hazard information into monetary loss estimates, bridging the gap between fire science and insurance pricing.

Emerging Challengers and Open Models

The traditional Moody’s-Verisk duopoly faces growing competition. Karen Clark and Company (KCC), which completed California’s wildfire model review alongside the two majors, offers an alternative vendor perspective. KatRisk provides high-resolution flood, storm surge, SCS, and wildfire models with a cloud-native API supporting real-time integration. Bellwether, created in Alphabet’s innovation division and partnered with Swiss Re, applies AI and earth observation data to wildfire risk assessment. Fathom specializes in flood modeling at 30-meter global resolution.

There is also growing demand for open-source and transparent catastrophe models. The Oasis Loss Modelling Framework provides an open platform for running catastrophe models, and California’s new Public Wildfire Catastrophe Model Act (SB 429, signed into law October 2025) is establishing the nation’s first publicly available wildfire loss model through a university-led consortium. The California Department of Insurance released a Request for Expressions of Interest in January 2026, with a Request for Proposals expected in Q2 2026.

The Model Trust Gap

A critical observation for actuaries: the maturity and reliability of catastrophe models varies enormously by peril. As Amwins SVP Chris Platania has noted, there is an important distinction between long-tested hurricane and earthquake models - refined over decades of validation - and emerging models for higher-frequency perils like SCS, flood, and wildfire.

For SCS and wildfire in particular, models are updated every few years while the underlying exposure landscape changes continuously. Population growth in hazard-prone areas, the expansion of Tornado Alley’s effective reach, and aging building stock all create gaps between model assumptions and current reality. Actuaries should view cat model output as one input to the pricing process, supplemented by actuarial judgment, historical loss experience, and exposure trend analysis.

California’s Catastrophe Model Revolution

California’s adoption of forward-looking catastrophe models for insurance ratemaking represents the most significant regulatory shift in the state’s property insurance market in over three decades. Understanding this transformation is essential for actuaries working in any state that interfaces with national carriers.

The Regulatory Framework

California’s new regulation (Section 2644.4.5, effective January 2, 2025) expanded the use of catastrophe models to cover wildfire, in addition to the earthquake and fire-following-earthquake perils previously allowed. This brought California in line with every other U.S. state, where catastrophe models have been used in ratemaking for decades.

Under Commissioner Ricardo Lara’s Sustainable Insurance Strategy, the framework operates on a quid pro quo: insurers that use Department-reviewed wildfire catastrophe models must commit to writing and maintaining more policies in wildfire-distressed areas, affecting more than 1.5 million homeowners. This “coverage-for-modeling” exchange is unique nationally.

Model Review Status

The CDI completed reviews of three wildfire catastrophe models through its PRID process:

Mercury Insurance, Allstate, and CSAA were among the first insurers to announce plans for rate filings using the approved models, with more expected.

The Public Model Initiative

California’s Wildfire Public Model Act (SB 429) is creating the nation’s first publicly available wildfire catastrophe model, funded through state grants to a university-based consortium. The model will provide an independent, transparent benchmark for assessing wildfire risk, educating communities, and evaluating proprietary vendor models. Cal Poly Humboldt led the strategy group that made initial recommendations.

The timeline: Department of Insurance released a Request for Expressions of Interest in January 2026, with a Request for Proposals to selected consortiums expected in Q2 2026. The initiative draws inspiration from Florida’s public hurricane model, which has proven useful for regulators, insurers, and consumers.

Consumer Impact and Controversy

The shift to cat model-based pricing is not without critics. Consumer advocacy groups, including Consumer Watchdog, argue that forward-looking models could inflate premiums. A Center for Climate Integrity analysis estimates the average California homeowner could pay over $1,000 more annually by 2026 compared to 2023. The counterargument from regulators and industry is that actuarially sound pricing that reflects true wildfire risk is preferable to the alternative: insurers withdrawing from the market entirely, leaving consumers dependent on the FAIR Plan residual market.

What This Means for Actuarial Practice

The convergence of record losses, evolving models, and regulatory change creates specific demands for actuaries working across the P&C value chain.

Pricing and Reserving

The persistent upward trend in SCS and wildfire losses - growing at 5–7% annually in real terms according to Swiss Re - must be incorporated into trend factors. Actuaries relying solely on historical loss experience will systematically underprice risk in regions where exposure growth and climate shifts are accelerating. Cat model output should be blended with actuarial judgment, recognizing model limitations for emerging perils while leveraging the probabilistic framework for tail risk assessment.

For reserving, the LA wildfire experience highlights the challenge of mega-events that distort calendar-year results. The $40 billion insured loss from a single wildfire event would have been considered implausible even five years ago. Reserve adequacy testing should incorporate realistic wildfire and SCS scenarios at or beyond current model output ranges.

Underwriting and Portfolio Management

Granular, property-level risk assessment is becoming the minimum standard. Moody’s and Verisk both offer detailed enrichment datasets covering more than 100 million commercial locations. Actuaries supporting underwriting should ensure that cat model output is integrated at the individual risk level, not just the portfolio level.

The SCS aggregate exposure problem demands attention. Because individual SCS events fall below traditional cat reinsurance attachment points, primary carriers absorb the cumulative impact. Actuaries should model aggregate SCS exposure across the portfolio, evaluate the adequacy of aggregate excess-of-loss protections, and consider whether traditional reinsurance structures are optimal for this peril profile.

Capital Modeling and Reinsurance

The $107 billion loss year, despite being lighter than 2024, reinforces the capital requirements for writing U.S. property risk. Actuaries working in capital modeling should ensure that their internal models capture the correlation between SCS activity across states (the March 2025 event hit 26 states simultaneously), the potential for wildfire losses to cluster in high-value WUI zones, and the interaction between primary and secondary perils within a single event.

On the reinsurance side, the shift in loss composition has implications for treaty structure. Traditional per-occurrence excess-of-loss treaties are well-suited for hurricane and earthquake but may not adequately address the aggregate nature of SCS losses. Actuaries advising on reinsurance program design should evaluate aggregate covers, loss corridor protections, and parametric triggers alongside traditional structures.

Climate Analytics Integration

Forward-looking climate analytics are transitioning from a nice-to-have to a regulatory and competitive necessity. California now mandates cat model usage for wildfire ratemaking. NAIC climate risk disclosure requirements are expanding. Rating agencies evaluate climate risk management in their insurer assessments. Actuaries should be conversant with climate scenario analysis frameworks (RCPs, SSPs), understand the assumptions embedded in vendor climate models, and be able to translate climate projections into actuarial assumptions.