A "federal property reinsurer" proposed as a way to help ease the mounting pressure the U.S. homeowners insurance market faces from severe climate risk also would likely benefit state and local governments in disaster-prone areas.
That's according to Benjamin Collier, an associate professor at the University of Wisconsin-Madison, who was one of three authors of a March 18 commentary entitled "A proposal for a US federal property reinsurer," posted on The Brookings Institution's website.
"The high-level vision is that this reinsurer would provide reinsurance – insurance for insurance companies – to primary insurance companies," Collier said in an interview Friday, adding that when it comes to natural catastrophe risks, "the most severe risks are really expensive to reinsure in the private sector."
"So we think that this could help lower costs for homeowners insurance by the federal government holding the really severe catastrophe risk," he said, adding that having a federal property reinsurer would also likely benefit state and local governments.
"It would benefit state and local governments in areas of higher disaster risk because it would make homeowners insurance more affordable and making home ownership more affordable helps state and local governments," Collier said.
The homeowners insurance market in the U.S. "faces mounting strain from severe climate risk," Collier and the other authors said in their commentary, adding that inflation-adjusted premiums rose nationally by an average of 28 percent between 2017 and 2024, with even bigger increases seen in high-risk areas.
"Insurers are also canceling policies, exiting markets, and in some cases going insolvent," their commentary said. "These trends threaten household financial stability, housing markets, and disaster recovery."
The proposed federal reinsurance entity, which the authors have dubbed "US Re," would sell reinsurance contracts to providers of U.S. homeowners insurance and reinsurance to cover the most severe weather events.
The federal government's ability to borrow substantially and at attractive rates would enable US Re to "reliably pay claims without being subject to the same high and volatile costs as the private reinsurance market," the commentary said.
"As a result, US Re could help households maintain more consistent and affordable coverage, contribute to resilience and disaster recovery, and help stabilize mortgage and housing markets," the authors said in their commentary
In addition to Collier, the other authors were Benjamin Keys, a professor at the University of Pennsylvania's Wharton School and Philip Mulder, an assistant professor at the University of Wisconsin-Madison.
