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. [16] Munich Re estimates its own exposure from the Los Angeles wildfires at approx. €1.2 billion (~US$1.3 billion) [16], while California’s FAIR Plan has received more than 4,700 claims, nearly half involving total property loss. [17] These losses significantly elevated homeowners’ insurance loss ratios, particularly in Q1, where it was reported as the worst Q1 in over 15 years. [6] 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. [11]

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. [29] 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.[17] 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. [17]

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. [8] 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. [7]

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.