The Brookings Institution’s Hamilton Project has released a proposal for a federal reinsurance backstop called US Re to leverage federal borrowing capacity and stabilize the country’s homeowners insurance market.

“Properly constructed, US Re could improve resilience while maintaining the benefits of market incentives,” authors of the plan from the think tank said.

While the idea of a federal reinsurance backstop is “well-intentioned,” Dave Snyder, vice president for policy, research, and international for the American Property Casualty Insurance Association, said it raises “serious questions.”

“The federal backstop being proposed does not address the real drivers of affordability challenges, including growing risk, inadequate land-use planning and building codes, underfunded infrastructure and emergency response, persistent inflation, and the rising costs of legal system abuse and abusive litigation,” Snyder said in a statement.

The focus should be on this list of factors rather than “shifting costs to taxpayers or masking the need for commonsense reforms,” he added.

The proposal was unveiled at a forum on March 18 hosted by The Hamilton Project and Hutchins Center on Fiscal Monetary Policy at Brookings.

“We propose a model for a public reinsurer to address the following home insurance market challenges: premium increases that exceed the increase in underlying risk, rising premium volatility, and lack of access to insurance coverage,” wrote the trio of economists who published, “A proposal for a US federal property reinsurer“.

“A U.S. government reinsurer would have advantages that allow it to manage severe tail risks at a lower and more consistent cost than is the case with private reinsurers, facilitating catastrophe insurance markets,” they said.

Related: Home Insurance Prices Set to Keep Rising With Severe Weather

The so-called “US Re” would provide contracts to homeowners insurers and reinsurers to cover extremely severe natural catastrophes. The government’s borrowing power would allow US Re to pay claims “without being subject to the same high and volatile costs as the private reinsurance market.”

“We argue that such a federal reinsurance entity would help households maintain more-consistent and more-affordable coverage, contribute to resilience and disaster recovery, and help stabilize the mortgage and housing markets.”

Snyder acknowledged cost-of-living challenges, but he said the homeowners insurance market is “showing signs of improvement.”

“We are seeing stabilizing pricing, increased availability, and faster claims settlement – progress that reflects disciplined risk management and state-based reforms already underway,” he said.

Photo: Waves from Hurricanes Humberto and Imelda destroy a home in Buxton, N.C. (Heather Jennette via AP)

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Reinsurance
Homeowners