The Insurance Industry’s New “Normal” for CAT Season

Introduction

The insurance industry’s new “normal” for CAT season in 2025 is influenced by a combination of factors, primarily driven by climate change and evolving societal landscapes. The impact of these changes can be substantial for insurers who are not sufficiently prepared.

This article will discuss the factors contributing to the new “normal” for CAT season and examine its impact on insurers.

What is shaping the new “normal” for CAT season?

Increase Frequency and Severity of Events

The most significant driver is the continued impact of climate change. According to an article by the Environmental Defense Fund, warmer temperatures contribute to more intense and frequent extreme weather events such as hurricanes, wildfires, severe convective storms (including hail and tornadoes), and flooding.

Data from recent years already indicates a rise in insured losses from natural catastrophes. In September 2024, Verisk reported that the average annual loss (AAL) reached a new high of $150 billion, becoming the new expectation for the future.

Shift in Peril Types

Historically, Q4 was dominated by winter storm claims. However, 2024 saw a significant shift towards late-season hurricanes. Markel reports that severe convective storms are increasingly becoming primary perils, accounting for a large percentage of insured losses. This requires insurers to adapt their claims-handling processes and expertise to different types of events.

Warmer Atlantic temperatures and La Niña conditions are expected to cause an active Atlantic hurricane season in 2025. Riverine and coastal flooding events are expected to become more common and intense due to increased rainfall and rising sea levels.

Expanding Geographic Areas of Risk

Migration to Catastrophe-Prone Areas

As more people move to coastal and wildfire-prone areas, the number of insured properties in high-risk zones rises. This migration has significant implications for the insurance industry, as it must now adapt to an expanding geographic area of risk.

Insurers face the challenge of understanding and managing the increased exposure to severe events in these regions.

The Spread of CAT Exposures

Severe convective storms are impacting areas not traditionally considered high-risk for such events.

Wildfire risk is expected to remain high with hotter and longer dry seasons, potentially expanding beyond traditional hotspots. An unusually dry fall in 2024 led to a significant increase in wildfire activity across the Northeast. States like Connecticut, Massachusetts, Rhode Island, New Jersey, and New York experienced a record number of Red Flag Warnings for November, typically a low-risk period.

What effect does the new “Normal” have on insurers?

Increased Volume of Claims

According to a recent Verisk Analytics Report, the rising frequency and severity of natural catastrophes, as seen with the dramatic 113% year-over-year increase in CAT claims in Q4 2024, directly leads to a much larger volume of claims for insurers to process.

This surge is driven by events like late-season hurricanes, which saw a staggering 1100% increase in claims compared to the previous year.

Extended Claim Cycle Times

The complexity and scale of damage from more intense CAT events often lead to longer claim processing times. For instance, Hurricane Milton-related claims had an average cycle time of 112 days from receipt to return, which is longer than the average for the quarter.

This may result in customer dissatisfaction and greater operational challenges for insurers.

Increased Complexity and Need for Supplements

A significant portion of CAT claims now require supplements or adjustments to the initial estimates. For Hurricane Milton, 20% of claims needed supplements, indicating the complexity of assessing and settling damages in the aftermath of severe events.

As insurers adapt to these changes, the need for more robust and agile processes becomes evident. Advanced analytics and predictive modeling can help estimate potential damages more accurately, streamlining the claims process and minimizing the need for frequent supplements.

The Strain on Resources and Infrastructure

The sheer volume and complexity of claims from major CAT events can strain insurers’ resources, including claims adjusters, customer service personnel, and technology infrastructure.

Insurers are exploring more efficient processes and potentially adopting new technologies to manage the workload.

Enriching claims data with external sources like weather data, demographic information, or third-party vendor data can provide valuable context. However, challenges remain in accessing, integrating, and ensuring the quality of this external data.

Greater Reliance on Technology and Automation

The insurance industry is adopting digital claims processing, AI, and automation to manage the increasing number and complexity of claims. These technologies assist with data validation, risk assessment, fraud detection, and automating specific decision-making processes and payments, resulting in quicker and more efficient claims handling.

Focus on Customer Experience

Despite the challenges, there’s an increasing focus on providing a smooth and transparent claims experience for policyholders affected by CAT events. Digital portals, real-time updates, and efficient communication are becoming crucial for maintaining customer satisfaction during stressful times.

Key Takeaways

In conclusion, the new normal of more frequent and intense CAT seasons in 2025 fundamentally reshapes how insurance claims are handled. It demands greater efficiency, technological innovation, a focus on customer experience, and a constant adaptation to the evolving nature of catastrophic risks.

Key aspects of this new normal include a change in the dominant peril type (with late-season hurricanes and severe convective storms gaining prominence over winter storms) and an expansion of geographic risk areas due to population migration to vulnerable regions and the increasing impact of events in non-traditional hotspots like the Northeastern US.

These changes are significantly impacting insurers by causing a surge in the volume of claims, extending claim processing times, and increasing the complexity of claims requiring more supplements.

This puts a strain on insurer resources and infrastructure. The industry increasingly relies on technology and automation to streamline claims handling and focuses on improving the customer experience through digital tools and transparent communication.

To learn more about how Auriemma Roundtables for P&C Claims members discuss this and other topics of shared interest with their peers, visit our Insurance Groups website page.