States Should Not Become Reinsurers of Last Resort

By Matt Posner, Contributing Author for The Epicenter and Head of Public Finance for The Resiliency Company

Property insurance markets across the U.S. are under strain. Premiums are rising, insurers are pulling back from high-risk regions, and lawmakers—under pressure from homeowners and real estate interests alike—are scrambling for solutions. 

In response, a growing number of states are leaning on public and quasi-public reinsurance backstops, shifting catastrophic risk onto taxpayers through state-backed funds, residual markets, and post-event assessments.

This approach may provide short-term political relief, but it is a long-term fiscal mistake. Public reinsurance does not reduce risk. It transfers it from private balance sheets to the public purse while reinforcing the very behaviors that made insurance unaffordable in the first place.

Florida offers a clear warning

Florida’s insurance challenges are often described as inevitable; the product of hurricanes and geography. But the state’s current predicament is also the result of policy choices, decades of suppressing risk-based pricing, encouraging coastal development, and relying on public mechanisms to keep insurance available without confronting underlying exposure.

As private insurers and reinsurers retreated, Florida expanded state-backed entities such as Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund. These structures are frequently described as market stabilizers, which are essentially reserve funds that institutions can draw upon when disaster strikes. In reality, they function as taxpayer-supported reinsurance mechanisms–meaning, when losses exceed reserves, the state can levy mandatory assessments (effectively taxes) on policyholders statewide to cover claims, whether or not they were affected by severe weather.

The result is not risk reduction but risk redistribution. Floridians far from the coast are asked to subsidize rebuilding in high-risk areas. Developers and insurers are shielded from the full consequences of their decisions. And the state quietly accumulates exposure that will surface only after the next major storm.

This is not a temporary bridge. It is a structural commitment to absorbing private risk with public capital.

Public reinsurance fails on basic economic and fiscal grounds

First, public reinsurance transfers losses created by poor policy–moving the risk onto public balance sheets from private ones. When states suppress insurance prices or permit development in vulnerable areas, they increase future insurance claims. Public reinsurance then forces taxpayers, many of whom benefited little from those decisions, to absorb the cost.

Second, public reinsurance distorts market signals. Rising reinsurance prices are not arbitrary. They reflect increased loss frequency and severity. When states step in to override those signals with public funds, they mute the warning system that should drive changes in land use, construction standards, and investment.

Third, public reinsurance undermines sound building practices and smooths over poor policies. Once the state has demonstrated a willingness to backstop insurers or residual markets, private actors adapt their behavior accordingly. Insurers rely on public support in bad years. Developers continue building in risky locations. Homeowners delay making updates that would reduce future damage. The expectation of rescue becomes embedded in the system.

Fourth, public reinsurance establishes a bailout precedent. Public reinsurance is rarely rolled back. Each storm, fire, or flood becomes justification for further expansion. What begins as an emergency measure becomes permanent exposure on the state’s balance sheet.

Finally, public reinsurance misallocates scarce public dollars. Every dollar used to absorb insurance losses after a disaster is a dollar not spent reducing the damage beforehand.

States should regulate risk, not absorb it

Private reinsurers exist to price and pool catastrophic risk. When they pull back, they are delivering information, not abandoning their responsibilities. States should treat that information as a policy input, not a market failure to be corrected with taxpayer capital.

The proper role of state government is not to replace the reinsurance market. It is to reduce the underlying risk so private capital can return on sustainable terms.

That means shifting public resources away from risk transfer and toward risk reduction.

States have more effective and fiscally responsible options

One such option is the creation of state-level authorities (akin to the California Earthquake Authority or the Rhode Island Infrastructure Bank) that coordinate and fund strategic resilience initiatives. With data suggesting resilience investments yield massive long-term returns (for every $1 dollar, resilience saves anywhere from $11 to $33 in future losses), a case for an appropriation can't be too difficult. Taxing active property insurance carriers in a state to fund such an effort has precedent (see the Strengthen Alabama Homes program), but a reallocation of premium tax dollars collected is likely a more realistic and equitable approach. 

Another idea with precedent is that of resilient revolving funds, such as the Resilient Virginia Revolving Loan Fund. Rather than using state credit to absorb insurance losses, states might also use it to finance mitigation, stronger roofs, floodproofing, defensible space, elevation, and infrastructure hardening. These investments reduce losses directly and recycle capital as loans are repaid.

States would also benefit from requiring and supporting local risk analysis. Many local governments lack the tools or incentives to assess physical risk before approving development or issuing debt. States can require risk disclosure and analysis as a condition of grants, infrastructure funding, or credit support, aligning public finance with physical reality.

States can also leverage private co-beneficiaries of risk reduction: insurers, reinsurers, lenders, utilities, small businesses, and large employers, all of whom benefit from safer communities. Public policy should bring these actors into mitigation financing, not relieve them of responsibility through public backstops.

Finally, states can better use existing financing structures. Housing finance agencies, tax-exempt bonds, and Community Reinvestment Act incentives can all be aligned to support resilient construction and retrofits, especially in lower-income communities where insurance affordability is most urgent.

These approaches don’t require states to underwrite private insurance losses. All of them improve insurability over time.

Risk reduction offers sustainable solutions

Supporters of public reinsurance argue that homeowners need immediate relief and that markets will not return quickly enough. But public reinsurance does not solve affordability in the long run. It delays market adjustment to the realities of the present risk, increases community exposure, and guarantees larger taxpayer liabilities later.

Insurance is expensive in high-risk areas because losses are high. Masking that reality does not make communities safer. It makes future bailouts more likely.

The choice facing states is not between public reinsurance and doing nothing. It is between spending public dollars to repeatedly pay for damage or spending them once to reduce it.

States should leave reinsurance to the private market. Their role is not to absorb risk, but to govern it through land use policy, building standards, infrastructure investment, and targeted financing that lowers losses over time.

Public reinsurance programs are expensive endeavors that exacerbate the problem. Resilience is an investment strategy.

Only one protects taxpayers in the long run.

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