The Hamilton Project, an economic policy initiative within the Brookings Institution that promotes economic opportunity, prosperity and growth in the United States, proposes the establishment of a federal reinsurance entity, US Re, that would sell reinsurance contracts to U.S. homeowners insurance and reinsurance providers to protect against the most extreme weather events.
The new policy proposal, authored by Benjamin L. Collier, Benjamin J. Keys and Philip Mulder, comes as the U.S. homeowners insurance market faces “increasing pressure” from severe climate risks that are leading to higher claims and increased volatility in reinsurance costs.
According to documents from The Hamilton Project, inflation-adjusted premiums increased by an average of 28% nationwide between 2017 and 2024, and even higher in high-risk areas.
The proposal document continues: “Insurers are also canceling policies, exiting the market, and in some cases going bankrupt. These trends threaten household financial stability, the housing market, and disaster recovery.
“Rising catastrophic risks associated with extreme weather events are a major contributor to this problem. Catastrophes such as wildfires and hurricanes bring large and concentrated losses to insurers’ portfolios.
“Insurers manage this risk by purchasing reinsurance from global markets. However, reinsurance costs for U.S. catastrophes are high and volatile.”
With that in mind, the document states that potential federal reinsurance entity American Re will sell reinsurance contracts to U.S. homeowners insurance and reinsurance providers to cover the most extreme weather events.
“Because the federal government can borrow heavily at attractive interest rates, American Re can cover claims credibly and reliably without the high and volatile costs associated with the private reinsurance market,” the proposal document states.
According to reports, American Re can help households maintain more consistent and affordable coverage, enhance resilience and disaster recovery, and help stabilize the mortgage and housing markets.
As part of the research, the authors examine several public insurance and reinsurance programs for catastrophe risk, using them as case studies to illustrate the trade-offs associated with insurance market intervention and to draw lessons for the design of federal catastrophe reinsurance companies.
“In each case, a disaster or series of disasters triggers a contraction in insurance supply, leading to policy responses aimed at stabilizing the market,” the proposal document explains.
The first program they identified was NFIP, through which the U.S. federal government became the primary underwriter of flood risk.
The next two were created in response to terrorist events: Pool Re in the UK (a government-organized reinsurer) and TRIA in the US (which provides federal support). The final plan was FHCF, a state-level public reinsurer for hurricane risk.
Drawing on the experience of these existing public insurance and reinsurance programs, the Hamilton Project’s new paper recommends that U.S. reinsurance should be designed to follow three main principles: 1) price risk, 2) target market failures, and 3) maintaining credibility.
Under the proposal, U.S. Re would not subsidize risk but price it based on expected losses and other charges, while reducing costs through more favorable capital costs.
American Re will also continue to play an important role for private insurers and reinsurers, providing valuable resources for innovation and market discipline.
The proposal document continues: “Finally, U.S. reinsurers should have clear authority to pay claims and political independence in setting prices.”
The Hamilton Project concluded: “With sound governance and appropriate coordination across the public and private sectors, well-designed federal reinsurance can be a critical step in restoring stability and resilience to the U.S. homeowners insurance market.”
Benjamin L. Collier is an associate professor at the University of Wisconsin-Madison. Benjamin J. Keys is the 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.
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