2025 Insurance Shake-Up: Wildfire Losses, AI Push & Rising Regulatory Pressure

The year 2025 has been a transformational pivot for the insurance industry, shaped by three interconnected forces: climate-driven catastrophes (notably wildfires), litigation and regulatory responses, and technology-led evolution, especially in AI and dealmaking.

1. Wildfires & Profit Pressure
California’s wildfires—especially the Palisades and Eaton fires in January—have inflicted unprecedented insured losses. One estimate puts total economic losses from those fires as high as $65 billion, of which $40 billion is insured. Munich Re estimates its own exposure from the Los Angeles wildfires at approx. €1.2 billion (~US$1.3 billion), while California’s FAIR Plan has received more than 4,700 claims, nearly half involving total property loss. These losses significantly elevated homeowners’ insurance loss ratios, particularly in Q1, where it was reported as the worst Q1 in over 15 years. These pressures threaten the combined ratios of property & casualty insurers, pushing many toward re-pricing risk, reducing exposure in high-risk geographies, and/or seeking state/regulatory relief.

2. Litigation & Regulation Surge
Legal challenges have been abundant and multifaceted. Multiple lawsuits implicate power utilities (e.g. Southern California Edison) for negligence in causes or management of wildfires including the Eaton Fire. In California, the FAIR Plan seeks $1 billion from private insurers to cover wildfire claims; regulators approved cost recovery mechanisms (one-time surcharges) that are currently being litigated by consumer groups alleging overreach. State legislative and regulatory calls are amplifying demands for insurers to serve high-risk regions, with proposals for expanded access to catastrophe bonds, state backing, and tighter market obligations.

3. M&A & Technology/AI Transformation
Despite climate and litigation storms, M&A in the insurance sector remained strong. Major transactions include Brown & Brown’s $9.8B purchase of Risk Strategies/One80, Sompo’s acquisition of Aspen Insurance for $3.5B, and the AIG-Onex joint buy of Convex Group for $7B. These deals reflect demand for specialty lines, platform expansion, and scale in underwriting and distribution. Meanwhile, AI is being treated both as tool and target. 51 % of firms surveyed had completed AI-business acquisitions by late 2025, with 46 % planning to do so soon. Applications include underwriting, claims handling, risk analytics, and document processing. The market for AI in insurance is projected to grow at CAGR well above 20 %, anticipating value expansion from roughly US$6.1B in 2023 toward US$141B by 2034.

Strategic Implications & Open Questions

• Insurer capital adequacy is under stress in wildfire-prone geographies; risk selection and pricing models must evolve rapidly. Can insurers maintain affordable coverage while capturing true risk? Who absorbs systemic tail risk—insurers, reinsurers, or governments?
• Regulatory frameworks are being tested. Surcharges and forced assessments (e.g., via FAIR Plan) are contentious. States like Nevada moving toward allowing wildfire exclusions in standard policies reflect a realignment of public-private risk sharing.
• AI holds promise for efficiency and competitive differentiation but introduces governance, bias, interpretability, and liability risks. Models like interpretable deep neural additive models and proposals for insurance-based governance of frontier AI are increasingly relevant.
• M&A momentum may continue as carriers seek diversification, tech capability, and scale. But deal valuations could be under pressure from interest rates, regulatory uncertainty, and loss volatility.