- Terrorism Risk Models Still Fall Short as Reinsurers “Struggle” With Loss Estimates
Nearly a quarter century following the 9/11 attacks, a new report says critical gaps in current risk modeling capabilities continue to constrain private sector participation in terrorism risk coverage. - California Legislature Passes Bill Updating Geo Hazard Assessment Tied to Climate Risks
Lawmakers passes legislation expanding the definition of geological hazards to include climate-related risks. - Brookfield’s Shah Wants a “Investment-Lead” Insurance Business
The Wealth Solutions business targets dramatic expansion with a focus on investments fueled by a new deal into the UK pension risk transfer market.
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Catastrophe Risk Coming to a Congressional Head
Two critical US government programs tied to physical and catastrophe risk markets are coming up for renewal, and the timing couldn't be worse.
This week lawmakers will dive into the continued funding of the terrorism reinsurance backstop and its ever-increasing scope, while the National Flood Insurance Program's (NFIP) authorization is set to expire on September 30.
The timing comes just as a divided US Congress faces a potential government funding shutdown that is becoming increasingly likely.
On Wednesday the House Subcommittee on Housing and Insurance will hold a hearing on the reauthorization of the Terrorism Risk Insurance Act of 2002. Industry executives expected to testify include Marsh president Michelle Sartain and Connecticut Insurance Commissioner Andrew N. Mais.
Congress enacted the Terrorism Risk Insurance Act (TRIA) following the September 11, 2001 terrorist attacks, which caused nearly $60 billion in insurance losses and led to the collapse of the terrorism risk insurance market. The legislation established a temporary three-year federal backstop requiring insurers to offer terrorism risk coverage in certain commercial property and casualty lines. Since its original enactment, TRIA has been repeatedly extended—most recently in 2019 through its current expiration date of December 31, 2027.
NFIP Faces Financial Crisis and Reform Pressure
The NFIP currently owes $22.5 billion to the U.S. Treasury, a debt that has accumulated primarily following catastrophic flood events like Hurricane Katrina in 2005, Hurricane Sandy in 2012, and more recently, Hurricanes Harvey, Irma, and Maria in 2017.
In February 2025, FEMA exercised its borrowing authority to borrow an additional $2 billion from the U.S. Treasury to pay claims from Hurricanes Helene and Milton, which together generated more than 78,500 flood insurance claims totaling over $5.2 billion in losses.
Hurricane Helene alone received more than 57,400 flood insurance claims totaling more than $4.5 billion, while Hurricane Milton added another 21,100 claims worth $740 million.
The program's financial strain reflects a fundamental structural problem: the NFIP runs an annual deficit of approximately $1.4 billion, with costs of $5.8 billion exceeding the $4.3 billion collected in premiums. In 2022 alone, the program paid over $280 million in interest on its debt—money that comes from policyholder premiums rather than being available for claims.
The NFIP was last comprehensively reauthorized in 2012 when President Obama signed the Biggert-Waters Flood Insurance Reform Act, which attempted to make the program financially sound by moving toward risk-based pricing. However, steep premium increases led to the 2014 Homeowner Flood Insurance Affordability Act, which rolled back many of those reforms.
Market Impact and Industry Concerns
The National Association of Realtors estimates that a lapse in NFIP authorization might impact approximately 1,300 property sales each day, roughly 40,000 closings per month.
During any authorization gap, FEMA would stop selling and renewing policies for millions of properties, though existing policies would remain in effect until their expiration dates.
The program's challenges extend beyond immediate reauthorization concerns. FEMA's new Risk Rating 2.0 methodology, implemented in 2021, is intended to better align premiums with underlying flood risk at the individual property level. However, it would take until 2037 for 95 percent of current policies to reach full-risk premiums, resulting in a $27 billion premium shortfall.
The NFIP serves approximately 5 million policyholders nationwide and provides nearly $1.3 trillion in coverage against flood damage.
Equity Growth Helped US Insurers Withstand Catastrophe Pressures
A new study by researchers at HEC Montréal shows that the US property-liability insurance industry's capacity to absorb catastrophic losses has reached unprecedented levels in 2024, despite mounting climate-related challenges that drove home premiums up 22% between 2020 and 2023.
The research, funded by the SCOR Foundation for Science, updates previous capacity assessments and finds that insurers could cover 98.2% of a $200 billion catastrophic event in 2023, compared to 81% in 1997.
For a $300 billion loss scenario, industry capacity improved from 77% in 1997 to 96% in 2023.
Strengthened Capital Position
The industry's ability to withstand losses stems primarily from substantial capital growth.
Total equity capital expanded from $373 billion in 1997 to $1.23 trillion in 2023, while the ratio of net losses to capital improved from 66% to 51%.
This capitalization growth has outpaced the increase in loss exposures, creating a stronger foundation for catastrophe absorption, the report says.
The study analyzed three different samples of insurers using 10 to 15 years of historical data to estimate response functions under various loss scenarios. Researchers employed correlation coefficients between individual insurer losses and aggregate industry losses to account for geographic concentration, reinsurance arrangements, and market imperfections that prevent perfect risk spreading.
Climate Impact on Capacity
While capacity has strengthened, climate risks pose ongoing challenges. The research notes that insured catastrophe losses reached $140 billion in the US during 2024, well within industry capacity. However, total economic losses of $320 billion highlight significant protection gaps, as high premiums limit insurance demand despite adequate industry capital.
The study reveals increasing volatility in recent years. The coefficient of variation for equity capital has risen markedly since 2015, suggesting greater dispersion in capital management across insurers. Meanwhile, loss variability has become more stable, indicating improved underwriting practices.
Analysis shows that insurance groups and unaffiliated companies consistently demonstrate higher capacity than the broader market, likely reflecting increased concentration among the largest insurers through consolidation. This concentration appears to enhance overall market stability and loss-absorption capability.
However, the research highlights a critical policy challenge: while industry capacity exists to cover insured losses, high premiums necessary to maintain this capacity create barriers to insurance adoption.
The study concludes that the insurance industry successfully maintained adequate capacity through the turbulent 2020-2023 period, but society faces a trade-off between maintaining industry solvency and ensuring affordable coverage.
