Articles - Governments evolving role in catastrophe insurance systems

By Simon Sølvsten, Stuart Calam, Brooks Kaiser, Yanjun Liao and Zachary Whitlock, WTW

A new working paper on synthesising arrangements across 13 countries and the US states shows that when private markets strain, governments consistently re-enter catastrophe insurance systems. Rather than replacing the insurers, they expand risk pooling and enable forms of cross-subsidization that sustain coverage. 

The message is clear: keeping up will require upgraded public–private “rules of the road” for pooling, pricing signals, data/model governance, and incentives to reduce risk, not just more capital.

That assumption is starting to break. In many markets, the practical question is no longer only “can we model this?” but “can we keep offering cover at terms that are both viable and politically acceptable?” Increasingly, the answer depends on shared arrangements between private markets and public institutions. Sometimes that’s deliberate. Often it happens by default.

Two forces are driving this shift. First, catastrophe losses are becoming more severe and more correlated. Second, the underlying risk landscape is changing, as climate trends and exposure growth weaken the link between historical experience and future losses.

This is visible through higher premiums and deductibles, tighter limits, more exclusions, more non-renewals – alongside a wider gap between economic losses and insured losses.

As this uncertainty increases, it affects the entire risk-transfer chain. Reinsurance and insurance-linked securities are priced off the same loss distributions as primary insurance. If model risk and correlation rise, capital demands a higher return and becomes more selective.

As a result, reinsurance hardens; terms tighten; and those costs feed straight back into primary pricing and availability. In some high-risk regions, cover becomes economically unworkable even before you get to consumer willingness-to-pay.

Across jurisdictions, governments repeatedly assume roles as insurer, reinsurer, pool designer, or backstop, especially when catastrophe risk is highly correlated, politically sensitive, and economically destabilizing. The labels vary (“temporary”, “exceptional”, “market stabilization”), but in practice many of these arrangements behave like standing institutions.A helpful way to think about this is as four recurring public–private “regimes”:

Four ways the public sector shows up

None of this is free. Residual pools can become concentrations of bad risk. Blunt subsidies can weaken incentives for mitigation or for moving out of harm’s way. Public backstops can build liabilities that are politically invisible, until the event arrives.

The question is not “should governments be involved”? Experience suggests they will be. The real question is how the rules are set, and how often they are revisited as hazard and exposure keep shifting.

The goal isn’t to eliminate disagreement about risk. It’s to stop disagreement from becoming a source of fragility. Useful interventions include:

But voluntary resilience investment is constrained; by liquidity, myopia, and coordination failures. In practice, sustained risk reduction usually needs a mix of:

Crucially, these measures only help insurability if they are measurable, enforceable, and connected to underwriting and pricing decisions.

For insurers and reinsurers, balance sheet strength and technical modelling still matter. However, strategic advantage increasingly comes from operating well inside these hybrid systems: engaging credibly with regulators and policymakers, helping shape workable pooling and subsidy rules, and turning “resilience” into something that can be verified, priced and rewarded.

For research and innovation-led partnerships such as the Willis Research Network, the opportunity is to make this debate less reactive. Catastrophe insurability under climate change isn’t just a technical problem, but equally a governance challenge at the intersection of science, markets and public policy. Better frameworks, clearer trade-offs, and shared approaches to handling uncertainty can shape decisions before the next shock forces them.

Ultimately, the central question is not whether governments will be involved in catastrophe insurance, they already are. The question is how effectively these hybrid systems can be designed and governed as climate risk continues to evolve.

*Source: adapted from RFF Working Paper, “Co-Managing Natural Catastrophic Risks by the Insurance Industry and Government”. A paper supported by the Willis Research Network.

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