A Federal Reinsurer Could Help—If It Serves the Public Interest

For years, the property insurance market has been breaking down: Premiums are rising, insurers are withdrawing, and FAIR plan enrollment is climbing. As losses mount, insurance companies protect themselves by buying their own insurance—called "reinsurance"—but reinsurance can become very expensive, and its availability is unpredictable, with those costs getting passed on to homeowners.  

The Hamilton Project’s proposal for a federal property reinsurer is one of the first technically rigorous efforts to address catastrophic tail risk at the national level. It deserves attention, and strengthening it will require addressing questions the proposal does not yet answer. 

The proposal suggests creating a government-backed entity called "US Re" that would act as a reinsurer of last resort for the worst-case disaster scenarios. Because the federal government can borrow money more cheaply and reliably than private companies, US Re could offer more stable and less expensive reinsurance coverage without the volatile pricing seen in private markets. Importantly, the proposal is designed to preserve accurate price signals rather than provide open-ended subsidies while passing on the federal government’s lower cost of capital. 

As part of its analysis, the proposal looks at the challenges for the market in insuring (and reinsuring) catastrophe risk and the additional challenges posed by climate change. It examines some of the precedents for public primary insurance and reinsurance in detail, including the National Flood Insurance Program (NFIP), United Kingdom public terrorism reinsurance, U.S. public terrorism insurance, and Florida public hurricane catastrophe insurance. It recommends the creation of a federal property insurer (US Re) and discusses some of the principal design challenges: setting prices that accurately reflect risk, crowding in (and being careful not to crowd out) private insurance and reinsurance, and ensuring political independence. It considers such issues as whether purchasing reinsurance from US Re should be mandatory (considering adverse selection as a potential problem if it is not), what types of events and property should US Re cover, and how US Re would relate to other insurance market issues.

What the proposal gets right 

This proposal identifies how part of today’s crisis is not merely about expensive insurance premiums for policyholders but also about a changing global risk profile, resulting in increasingly unpredictable and large tail risks that are very expensive to insure. Reinsurance capital constraints from climate-driven losses, not just rising expected losses, are driving a significant part of the premium spiral. The federal government’s low borrowing costs provide a unique comparative advantage in absorbing correlated catastrophic losses, and the proposal wisely avoids recommending a subsidy for expected losses that would be borne by taxpayers and could undermine accurate price signals. 
 
The proposal is timely and additive to current insurance discussions, and we believe a federal reinsurer has the potential to both stabilize pricing and incentivize long-term risk reduction. To do so, there are ways to help establish a more holistic proposal that can encompass price stabilization and risk reduction while preventing US Re from becoming a taxpayer-funded subsidy to private insurers. 

Can this proposal address the need for investments in resilience that reduce potential damage? 

The core challenge is not just pricing but insurability. The proposal sidesteps the issue of risk reduction and states that it is beyond the scope of US Re. Yet without significant adaptation and risk reduction, US Re will inevitably expand in size, cost, and political importance as catastrophic tail risks continue to grow. As losses due to climate change continue to climb, a reinsurer that only reduces pricing volatility, not the underlying hazards, could evolve into a costly permanent public backstop unless paired with clear requirements that advance long-term risk reduction. Ultimately, any federal involvement in catastrophic risk must further long‑term risk reduction—not just risk transfer.  

Price stabilization is necessary, but unless it is paired with parallel investments in reducing underlying physical risk, affordability and insurability will continue to deteriorate in high-risk communities. 

The question is how to best channel the economic gains created by US Re into lower premiums and the use of the resulting savings to fund, incentivize, and reward effective hazard mitigation investments. Also, if the program generates annual surpluses at the US Re level above revenue‑neutral pricing, using them to further hazard mitigation would directly support long‑term market stability. 

How do we avoid privatized profits and socialized losses? 

As the proposal discusses, the NFIP’s history offers important lessons for how a federal reinsurer should be structured to avoid unintended market distortions. A federal reinsurer that stabilizes private insurer balance sheets without requiring commitments to serve distressed markets risks repeating this pattern. 
 
Insurers made record profits in recent years while raising premiums and restricting coverage. Access to a federal backstop should be paired with clear public interest commitments that ensure shared benefits. California’s Sustainable Insurance Strategy offers one model: Insurers receive regulatory flexibility only if they commit to writing coverage in high‑risk areas. US Re must include similar obligations.  

Key questions: 

• What ensures that lower reinsurance costs translate into lower premiums for policyholders, especially in markets that are not meaningfully competitive?
• What binding commitments should insurers make to receive federally backed reinsurance?
• Does the program prevent insurers from withdrawing from low‑income or climate‑vulnerable communities while benefiting from a federal safety net?
• How does US Re interact with chronically underfunded FAIR plans, which serve the most vulnerable homeowners? Stabilizing private markets without reinforcing FAIR plans could deepen inequities. 

US Re is not designed to be a subsidy, but it could become a very large subsidy to private insurers without public interest safeguards. The lower cost of reinsurance provided by US Re could provide real economic value to insurers, allowing them to invest funds saved through cheaper reinsurance into capital markets—where they make the majority of their money. It should not be assumed that these savings would be passed on to policyholders in the form of reduced premiums. In fact, without explicit requirements and oversight in place, it should be assumed that they would not.

What governance and accountability would protect the public? 

Data transparency must be a condition of participation, not an optional feature. Insurers using US Re for reinsurance should be required to submit standardized, disaggregated data on availability, pricing, and coverage across income and demographic groups, enabling regulators and the public to identify where insurance markets are failing and assessing whether the US Re program is advancing a system where coverage is non-discriminatorily available, reasonably priced, and equitably distributed.  
 
Accountability for US Re must extend beyond an advisory committee. Communities that are not seeing improved access to insurance must have enforceable pathways to challenge program failures. 
 
Finally, insurers utilizing the federal reinsurance program must operate with heightened public accountability—through transparent rate-setting, engagement in mitigation incentives, and binding obligations to continue serving vulnerable or high-risk markets. 

Ultimately, any federal reinsurance proposal needs to include clear public interest guardrails to avoid becoming a subsidy for private insurers, linking access to federal support with risk-reducing building standards and mitigation investments, protections for underserved and high-risk communities, credible climate transition commitments from participating insurers, and governance structures that ensure transparency, independence, and accountability. Together, these elements help ensure that federal reinsurance stabilizes markets and reduces long-term risk rather than entrenching today’s vulnerabilities.  

An alternative proposal

A federal reinsurance program specifically serving state FAIR Plans could target federally backed reinsurance to the riskiest properties, where it is most needed, while minimizing concerns about privatized gains and socialized losses. It would cost taxpayers significantly less and avoid potentially becoming subsidies for private insurers, which could distort the market. By targeting FAIR Plans, the program would help stabilize private insurance markets by reducing the likelihood of reserve shortfalls and subsequent assessments on private insurers. Additionally, it would preserve the climate change price signals sent by private insurance pricing.  

The program can also incentivize states to adopt risk reduction measures, which might not be as effectively encouraged under a broader federal reinsurance program. Savings to FAIR plans and other state-created residual markets can be reinvested into cost-saving risk reduction investments, following the success of the North Carolina Insurance Underwriting Association’s Strengthen Your Roof grant programs. 

Any credible long‑term strategy to stabilize the insurance system must ultimately include reducing climate pollution and slowing the rate at which physical risks worsen. A federal reinsurer may have a role—provided it is designed as part of a broader movement toward resilience, not as a subsidy for today’s fragile status quo. A narrower, targeted program could be a more viable alternative to a broad-based approach.