The Hamilton Project, an economic policy initiative within the Brookings Institution that aims to advance America’s economic opportunity, prosperity, and growth, has proposed a federal reinsurance entity, US Re, that would sell reinsurance contracts to providers of U.S. homeowners insurance and reinsurance to cover the most extreme weather events.
The new policy proposal, authored by Benjamin L. Collier, Benjamin J. Keys, and Philip Mulder, comes at a time when the U.S. homeowners insurance market faces “mounting strain” from severe climate risk, which is increasing claims and adding to volatile reinsurance costs.
According to the Hamilton Project’s document, inflation-adjusted premiums increased nationally by an average of 28% between 2017 and 2024, and even more in high-risk areas.
The proposal document continued, “Insurers are also cancelling policies, exiting markets, and in some cases going insolvent. These trends threaten household financial stability, housing markets, and disaster recovery.
“Growing catastrophic risk related to extreme weather events is a central contributor to this problem. Catastrophes such as wildfires and hurricanes impose large, concentrated losses on insurers’ portfolios.
“Insurers manage this risk by purchasing reinsurance from global markets. However, the cost of reinsurance for U.S. catastrophes is high and volatile.”
With this in mind, the document noted that the potential federal reinsurance entity, US Re, would sell reinsurance contracts to providers of U.S. homeowners insurance and reinsurance to cover the most extreme weather events.
“Because the federal government can borrow substantially and at attractive rates, US Re could credibly and reliably pay claims without being subject to the same high and volatile costs as the private reinsurance market,” the proposal document observed.
As a result, US Re could reportedly help households maintain more consistent and affordable coverage, contribute to resilience and disaster recovery, and help stabilise mortgage and housing markets.
As part of their research, the authors examined several public insurance and reinsurance programs for catastrophe risks, using them as case studies to illustrate the trade-offs associated with insurance market intervention and to draw lessons for the design of a federal catastrophe reinsurer.
“In each case, a catastrophe or set of catastrophes precipitated an insurance supply crunch, which led to a policy response intended to stabilise the market,” The proposal document explained.
The first program they identified is the NFIP, through which the U.S. federal government became the primary insurer of flood risk.
The next two were created in response to terrorist events: the U.K.’s Pool Re, a government-organised reinsurer, and the U.S.’s TRIA, which provides a federal backstop. The final program is the FHCF, a state-level public reinsurer for hurricane risk.
Drawing on the experiences of these existing public insurance and reinsurance programs, the Hamilton Project’s new document has recommended that US Re should be designed to follow three main principles: 1) price risk, 2) target market failures, and 3) maintain credibility.
According to the proposal, rather than subsidising risk, US Re would set prices according to expected loss and other expenses while lowering costs through its more favourable cost of capital.
US Re would also maintain a substantial role for private insurers and reinsurers, which provide valuable sources of innovation and market discipline.
“Finally, US Re should have clear authority to pay claims and political independence in setting prices,” the proposal document continued.
The Hamilton Project concluded, “With sound governance and proper coordination across public and private sectors, a well-designed federal reinsurer could serve as a critical step toward restoring stability and resilience in the U.S. homeowners insurance market.”
Benjamin L. Collier is an Associate Professor at the University of Wisconsin–Madison. Benjamin J. Keys is Rowan Family Foundation Professor of Real Estate and Finance at the Wharton School of the University of Pennsylvania. Philip Mulder is an Assistant Professor at the University of Wisconsin–Madison.
