The last week of 2025 is defined by a tightening feedback loop between models, capital, and real-economy exposure. New government and regulatory reports (Japan, California and Bermuda) underscore how modeled tail risk, particularly from wildfire and earthquake scenarios, is increasingly shaping policy, pricing, and capital adequacy decisions.
- Japan’s Cabinet Office released a report last week estimating that a Tokyo region inland earthquake could result in approximately ¥83 trillion in economic damage. The report concludes that the absolute scale of potential losses (rather than uncertainty about whether an earthquake will occur) has become the dominant policy concern. Under the maximum-damage modeled scenario, the government estimates around 18,000 direct fatalities, roughly 400,000 buildings destroyed or burned, and widespread business interruption, with cascading effects on domestic production, exports, financial markets, and global supply chains.
- U.S. lawmakers are scrutinizing how financial stability models and methodologies are being used to assess insurer solvency, following a series of congressional letters and investigations focused on Demotech. Demotech positions its Financial Stability Ratings (FSRs) as forward-looking assessments grounded in insurers’ business plans and reinsurance programs. The firm emphasizes that it reviews “State Specialists,” which account for 23.6% of insurers reporting to the NAIC, and highlights the role of catastrophe reinsurance in providing claims-paying capacity for natural disasters. Lawmakers, however, argue that Demotech’s modeling framework relies too heavily on forward-looking assurances (such as expected reinsurance placement or capital infusions) rather than demonstrated financial resilience under stress. In a December 23, 2025 letter to Fannie Mae and Freddie Mac, Senators warn that Demotech’s ratings are “based on forward-looking business models and reinsurance plans, rather than on demonstrated financial resilience,” raising questions about whether those assumptions hold as climate-driven losses intensify. The Senate committees’ investigation goes further, explicitly questioning whether Demotech incorporates catastrophe modeling or climate analytics into its ratings at all. In a letter to Demotech’s CEO, the Senators ask whether the firm “considers the results of catastrophe modeling in its ratings,” whether it weighs insurers’ geographic concentration in high climate-risk areas, and whether it conducts forward-looking stress tests under scenarios such as “catastrophic weather events or reinsurance shortfalls,” They also seek evidence of historical back-testing to evaluate how well Demotech’s ratings model has predicted insolvency risk over time.
- The Bermuda Monetary Authority (BMA) says that wildfire and other “secondary” catastrophe risks are increasingly challenge traditional modeling assumptions. According to a report released last week and based on 2024 data, 88.21% of catastrophe exposure was considered modelable using vendor models, while 99.18% of catastrophe risk was modeled overall, often supplemented by in-house approaches where vendor tools were insufficient . The BMA notes that non-modelable risks, common in emerging or rapidly evolving perils, are typically addressed through internal models or expert judgment. A key theme for catastrophe—and increasingly wildfire—modeling is the growing use of loading factors to compensate for model uncertainty and loss amplification. Model usage remains highly concentrated. AIR Worldwide and RMS/Moody’s dominate catastrophe modeling across both legal entities and groups, with AIR the most frequently used stand-alone model in 2024. At the same time, 41.3% of legal entities and 35.3% of groups reported using internally developed stochastic models, particularly where exposures fall outside traditional vendor coverage.
- Arizona regulators are converging on wildfire risk modeling as a central lever in addressing insurance availability and affordability, according to the Resiliency and Mitigation Council’s 2025 Final Report released by the Arizona Department of Insurance and Financial Institutions (DIFI). The report documents diverging modeling philosophies. Milliman cautioned that the core risk is often urban conflagration, for which empirical loss data remain sparse, while Verisk’s FortressFire presented a physics-based approach that assumes a wildfire has already reached a property and models ignition pathways—convective heat, radiant heat, embers, and structure-to-structure transfer—to identify mitigation actions capable of reducing ignition risk “to near-zero.” ZestyAI, meanwhile, described dual scoring that separates neighborhood-level wildfire probability from property-level damage vulnerability, revealing that while most Arizona homes face low event probability, many remain structurally under-mitigated .
- The California Department of Insurance last week published updated guidance detailing how catastrophe models, particularly wildfire models, will be reviewed before they can be used in rate filings. The process is described as a voluntary mechanism intended to ensure that models used for insurance rates “calculate risks accurately, reliably, and fairly,” and to support public participation without compromising intellectual property. Model vendors are also required to run specified test cases and provide outputs during the review, reinforcing that the process extends beyond documentation to operational model behavior.
- Total insured catastrophe losses in 2025 are estimated at $121 billion, roughly 18% below the five-year inflation-adjusted average, with reinsurers bearing only 11–12% of those losses, down from about 20% prior to the 2023 market reset, according to Guy Carpenter’s January 1, 2026 Reinsurance Renewal Report. California wildfire losses of approximately $40 billion were the single largest contributor to insured catastrophe losses in 2025, accounting for roughly 33% of the annual total, making them “the largest insured wildfire losses on record” . Despite that severity, most wildfire losses remained within primary retentions. Across property catastrophe renewals, buyers sought 5–10% additional catastrophe limit, with roughly half placed in aggregates, quota shares, or alternative structures such as catastrophe bonds and parametric products. The report notes that excess capacity exceeded 25% at January 1, 2026, giving cedents leverage to translate modeled risk improvements into pricing and coverage gains. “Despite global trade tensions and increased regulatory scrutiny, reinsurers have grown capital due largely to strong retained earnings,” Dean Klisura, President and CEO, Guy Carpenter, said in a statement.
- Growing physical risk damage increases the lifetime probability of default for US commercial real estate credit by nearly 18% and expected losses by more than 22%, according to a new Moody’s analysis. In aggregate, that translates into approximately $270 million in additional CRE balance lost, even across portfolios that appear healthy under traditional credit metrics. Insurance losses and rising physical damage costs act as the primary transmission mechanism. Portfolios concentrated in high-risk geographies—such as the Gulf Coast and parts of California—experience the sharpest deterioration.
- Physical climate risk is hitting corporate balance sheets through insurance markets , according to a new KPMG report. The firms warns that extreme weather events (floods, hurricanes, wildfires, and heat) are increasingly translating into immediate asset damage, higher retained losses, and shrinking insurance recoveries. KPMG says that insurers are “at the forefront of pricing climate risk into their business models,” though rising premiums, coverage restrictions, and non-renewals.
Market & Index Updates
- Fairfax Financial Holdings Limited (TSX: FFH.PRI) removed from the S&P/TSX Preferred Share Index
Upcoming Cash Dividends
- The Progressive Corporation — $0.10 per share | Payable Jan 2, 2026
- Erie Indemnity Company — $1.4625 per share | Payable Jan 6, 2026
- Xcel Energy Inc. — $0.57 per share | Payable Dec 29, 2025
- PG&E Corporation — $0.05 per share | Payable Dec 31, 2025
- AXIS Capital Holdings Limited — $0.44 per share | Payable Dec 31, 2025
