Why a Federal Reinsurer Remains a Bad Idea
Many states have seen the cost of homeowners insurance rise sharply in recent years, leading to the development of proposals to make insurance more affordable through federal intervention in the reinsurance marketplace. The latest, “A proposal for a US federal property reinsurer,” comes from the Brookings Institution. Like several prior attempts to reduce insurance cost through the formation of a federal reinsurance entity, the Brookings proposal misses the mark.
The Brookings report does get some things right. For example, it declares that “[p]rivate insurance markets have several advantages relating to publicly provided reinsurance.” It also correctly states that risk-based pricing is critical for reinsurance and that risk-based pricing is necessary to incentivize resilience. Brookings also cautions that the proposed entity must have political independence in setting rates. However, several areas in the 36-page proposal are misleading. This analysis focuses on three: the health of the primary insurance industry, the condition of reinsurance markets, and the potential backfire from underpriced reinsurance crowding out the private market.
How Is the Insurance Market Really Doing?
The Brookings report presents a gloomy picture of the health of the primary insurance industry. It characterizes the market for homeowners insurance as in turmoil, facing unprecedented stress and mounting strain from severe climate risks. It also declares that insurers have exited markets or gone insolvent and their responses to these challenges are unsustainable. The reality is quite different. In 2025, the homeowners insurance market reported the strongest results in many years, with a net pure loss ratio of 55.6 percent, which translated into an exceptionally favorable financial result. The broader primary property and casualty insurance market also had exceptionally strong results in 2025. The overall property and casualty insurance industry reported a loss ratio of 65.2 percent—the best in the past decade. Results improved significantly in Florida, a state with a perennial personal lines problem. The 2025 loss ratio for State Farm, Florida Peninsula, and Patriot Select improved by 10, 8.4 and 11.3 percentage points, respectively. Insurance companies operating in Florida (e.g., Progressive) are even rebating some of their automobile underwriting gains to policyholders because the statutory profit margin cap was exceeded.
The Truth About Reinsurance Capital and Capacity
The Brookings report also misrepresents the condition of the reinsurance market. The report maintains there is a problem with availability of reinsurance capital and that the proposed entity, US Re, would “facilitate” reinsurance markets, though it is unclear what that means. In reality, the traditional reinsurance market is better capitalized than ever, with $805 billion of capital at traditional reinsurers and an additional $120 billion in alternative reinsurance products (e.g., catastrophe bonds, sidecars). This near-trillion-dollar fortress balance sheet is more than enough to withstand several catastrophe events without denting its capital.
The proposed federal reinsurance entity US Re would take risk in the highest risk tier, above what primary insurers assume and above working layer reinsurance. Among the most troubling features of US Re is underpriced reinsurance, given that its stated role is to “hold severe catastrophe risk at a lower cost than any other entity ever could.” Being the cheapest provider of a good is not necessarily a virtue. Government insurance and reinsurance programs like the National Flood Insurance Program and the Florida Hurricane Catastrophe Fund are either insolvent or courting insolvency.
What the Brookings proposal fails to mention is the functioning market for the highest tranches of reinsurance risk. Retrocessional reinsurance is reinsurance for reinsurance companies. The Lloyd’s market; Bermuda reinsurers; and reinsurers in continental Europe, the United States, and Asia provide the capital base for retrocessional reinsurance products. Retrocessional coverage is also provided by hedge funds such as D.E. Shaw and private equity funds such as OAK and Berkshire Hathaway. The retrocessional market smooths earnings for reinsurers, which in turn reduces volatility for primary insurers.
Haven’t We Seen This Movie Before?
The Brookings proposal is reminiscent of several prior attempts to create a federal reinsurance entity. Most recently, in July 2025, Sen. Adam Schiff (D-Calif.) reintroduced the “Incorporating National Support for Unprecedented Risks and Emergencies Act” (known as the “INSURE Act”) after first proposing it in 2024. Sen. Schiff’s bill advocated the creation of a federal entity that would “give insurance companies a fairly priced alternative to the private reinsurance market.” We wrote about why this was a bad idea when Sen. Schiff’s bill was first introduced.
The idea of creating a federal reinsurance company goes back to 2007, when the U.S. Senate Banking Committee conducted a hearing on the heels of the unprecedented seven landfalling hurricanes that struck in 2004 and 2005: Charley, Frances, Ivan, Jeanne, Katrina, Rita, and Wilma, which caused damages totaling approximately $300 billion.
The purpose of the Senate Banking Committee’s 2007 hearing was to explore potential federal reinsurance responses to the losses incurred between 2004 and2005 that would support the availability and affordability of insurance. The hearing, “Availability and Affordability of Property and Casualty Insurance in the Gulf Coast and Other Coastal Regions,” discussed potential benefits and shortcomings of a federal reinsurance facility. As revealed in the hearing’s transcript, highlights included written testimony of the perils of a federal solution presented by a Committee ranking member, former Sen. Richard Shelby (R-Ala.), as well as Council of Economic Advisors Chairman Edward Lazear. Whereas several witnesses proposed that the U.S. government create a fund from which to pay disaster losses, Shelby and Lezear warned that a federal reinsurance entity would create more problems than it would solve—chief among them the tendency to provide cheap, underpriced reinsurance. Other problems include undermining incentives to mitigate risk, subsidizing insurance in high-risk areas, and weakening the price signals that competition provides.
It is important to note that the response to the horrendous hurricanes of 2004 and 2005 was driven completely by the market—not by the government. A group of new reinsurance companies with approximately $32 billion of new capital was spawned by private sources to support the launch of the new reinsurers and to replenish the capital base of legacy reinsurers. The result of the infusion of private capital was restoration of the reinsurance market to health. Review of recurring support for a federal reinsurance program—from the 2007 hearing to the two iterations of Sen. Schiff’s bill to the Brookings proposal—shows that a federal solution was a bad idea then and remains a bad idea now. The market does it better.