Governments Redesign Residual Markets to Replace Withdrawing Private Insurers in High‑risk Jurisdictions

By [Staff Reporter]
Feb. 6, 2026

Who: State and federal insurance regulators, industry groups and governments in the United States, the United Kingdom, Australia and other developed economies.
What: A wave of policy changes and new state‑backed reinsurance and insurer‑of‑last‑resort programs that are reshaping residual insurance markets as private carriers retreat from high‑risk areas.
When: Actions and proposals accelerated in 2024–2026 amid costly catastrophes and shifting reinsurance terms; several regulatory interventions were announced or implemented in 2024–2025 and remain active policy debates in 2026.
Where: Most visible in U.S. hot spots such as California and Florida, in Britain’s flood‑exposed regions, and in northern Australia; regulators elsewhere are watching.
Why: Insurers’ underwriting retrenchment — driven by rising climate losses, changes in reinsurance structures and demanding underwriting models — has left millions of households dependent on state‑run or state‑backed mechanisms, prompting governments to expand or redesign residual markets to maintain coverage availability and social stability.

As private carriers increasingly decline to renew or quote in high‑hazard geographies, governments and regulators in several advanced economies have moved to redesign the residual markets meant to be temporary safety nets. The responses range from expanded powers for existing insurers‑of‑last‑resort to new, state‑backed reinsurance pools and regulatory conditions placed on the use of catastrophe models and rate filings. Proponents frame the changes as necessary to protect homeowners and keep markets functioning; critics warn they risk creating hidden subsidies, moral hazard and long‑term fiscal exposure. (insurance.ca.gov)

How private withdrawal created public pressure

Insurer withdrawals and steep premium increases have concentrated risk inside public or industry‑mandated “residual” pools that were designed as a backstop, not a primary carriage for mass homes and small businesses. In California, the Fair Access to Insurance Requirements plan — the FAIR Plan — has ballooned in recent years as traditional carriers retreated from wildfire exposures. The FAIR Plan’s total exposure and policy counts climbed sharply through 2024–2025, prompting the state insurance regulator to seek substantial reforms and temporary expansions of FAIR Plan coverage. Commissioner Ricardo Lara said his changes aim “to restore the FAIR Plan to its original purpose — as a temporary solution, not a permanent one.” (insurance.ca.gov)

In Florida, Citizens Property Insurance Corp., the state‑owned insurer of last resort, swelled to hundreds of thousands of policies after waves of private exits; authorities have attempted to “depopulate” Citizens by authorizing private carriers to take blocks of policies, even as debates continue over arbitration, assessments and solvency risks. State officials and regulators have described depopulation as a tool to shrink Citizens’ exposure while preserving homeowner access to coverage. (insurancebusinessmag.com)

In Australia, the federal Cyclone Reinsurance Pool — a state‑backed mechanism created in 2022 and operated by the Australian Reinsurance Pool Corporation (ARPC) — has been embraced as a targeted reinsurance backstop for northern communities exposed to cyclone risk, even as reviews note the pool alone cannot make insurance broadly affordable without complementary mitigation. (aph.gov.au)

These developments mirror a broader reinsurance‑market recalibration. Brokers and reinsurers reported that the January 2025 and 2026 renewal cycles produced ample capacity at the top layers but that attachment points, terms and underwriting discipline in many programs remain higher than pre‑hard‑market norms — outcomes that effectively shift more frequent, mid‑severity losses onto primary insurers and, where those insurers exit, onto public backstops. Industry commentators say the market has become more selective: carriers and reinsurers reward cedents with strong risk data, resilient portfolios and mitigation programs, while risks deemed poor or unprofitable face exclusion or higher costs. (carriermanagement.com)

Policy choices: expand, reform, compel or subsidize

Faced with rising numbers of households with limited options, governments have taken three broad approaches: expand the capacity or mandate of existing residual markets; create state‑backed reinsurance or pools for specific perils; and use regulatory levers to compel private participation or reshape rate and model approval processes.

California: regulatory redesign and FAIR Plan pressure
California’s Department of Insurance has advanced one of the most aggressive regulatory programs. Since 2024 the department has pressed the FAIR Plan to expand certain coverages and increased oversight of the FAIR Plan’s claims handling and pricing. Commissioner Lara issued orders and regulatory changes to require insurers using forward‑looking catastrophe models or relying on reinsurance to participate in writing a share of policies in wildfire‑distressed areas, part of a broader “Sustainable Insurance Strategy.” Lara and the department have also used rate review and enforcement tools to push carriers toward more equitable access, while the state legislature has entertained bills to enlarge FAIR Plan scope — proposals that remain contested in court and politics. Consumer advocates applauded moves to preserve access; the FAIR Plan and some insurers warned of financial strain if the plan’s mission is materially altered. (insurance.ca.gov)

Florida: depopulation and market reshaping
Florida regulators have prioritized depopulation — legally transferring cohorts of policies from Citizens to approved private carriers — and adjustments to licensing and take‑out rules to entice entrants. The process has reduced Citizens’ policy count from historic peaks but has produced friction: some transfers raise premium costs for consumers and spotlight arbitration and claims‑handling practices at the state insurer. Industry filings and regulatory orders show sizable blocks of Citizens policies moved to new entrants in 2024–2025, part of a strategy to limit taxpayer and policyholder exposure to hurricane losses. (insurancebusinessmag.com)

United Kingdom: preparing for a successor to Flood Re
Flood Re, the U.K. government‑backed reinsurance scheme established in 2016 to make flood insurance affordable, is formally scheduled to end in 2039. Parliamentary committees and the government have begun reviewing options for a successor or transition, exploring how insurance can better incentivize resilience and support low‑income households while moving toward a more risk‑reflective market. The Environmental Audit Committee and government responses in 2024–2025 flagged the need to consider “Flood Re 2.0” concepts and to integrate resilience metrics into any successor scheme. (publications.parliament.uk)

Australia: the Cyclone Reinsurance Pool and the resilience caveat
Australia’s Cyclone Pool — backed by a government guarantee and managed through the ARPC — has shown early signs of reducing premiums in some high‑risk bands but has not solved availability or affordability on its own. The Insurance Council of Australia and competition monitors have urged coupling pooled reinsurance with stronger mitigation funding, building standards and local resilience strategies so the long‑run cost of coverage can fall. The parliamentary inquiry that reviewed the pool recommended continued government support but emphasized the pool is not a substitute for risk reduction. (aph.gov.au)

Why governments are intervening now

The policy shifts reflect a hard reality: where private markets retreat, governments face political, social and economic pressure to act. Analysts point to three drivers.

1. Climate‑driven loss trends. Repeated large wildfire and flood events in 2017–2025 have raised both the frequency and severity of insured losses, straining primary insurers’ balance sheets and prompting underwriting retrenchment in exposed geographies. Reinsurance costs and structures adjusted in parallel, creating tighter retentions on many programs that make mid‑severity events more expensive for primary carriers to retain. Brokers reported that some reinsurer discipline remains in place even when capacity has rebounded at the highest layers. (insurancebusinessmag.com)

2. Regulatory and rate constraints. In many jurisdictions, rate‑setting processes and consumer protections limit how quickly private carriers can pass rising costs to homeowners — pushing carriers either to accept thinner margins or to exit entirely. State regulators that must balance affordability, solvency and market availability are increasingly willing to reframe the residual market’s role or to condition market privileges on participation in higher‑risk segments. California’s requirement tying modeling and reinsurance use to underwriting obligations is a notable example. (insurance.ca.gov)

3. Political costs of uninsured losses. The fallout from large events is highly visible: uninsured homeowners, slow claims payments, contentious litigation and local economic disruption produce immediate political pressure. Governments therefore face strong incentives to create mechanisms that preserve broad access to at least basic property insurance. That pressure helps explain rapid policymaking in a handful of exposed states and nations. (sfchronicle.com)

Consequences: tradeoffs, hidden subsidies and potential moral hazard

The immediate effect of expanded residual markets is to shore up access: households in previously uninsurable ZIP codes may again obtain policy contracts, and lenders often can be satisfied. But the longer‑term consequences are complex.

• Financial exposure. Residual programs are not costless. FAIR Plan assessments and potential government guarantees mean the cost of catastrophic losses can be borne indirectly by policyholders across a state or, ultimately, taxpayers. California’s assessments on insurers after large wildfire losses prompted debate about whether costs were being socialized without sufficient legislative oversight. (apnews.com)

• Distorted price signals. Where governments or pools shield homeowners from full risk‑reflective pricing, the incentives for relocation, home hardening and resilient reconstruction may weaken. Regulators argue many homeowners cannot practically relocate and require transitional supports; critics fear permanent subsidies may slow necessary risk reduction. (businessinsuranceconsulting.com.au)

• Market structure shifts. Some private carriers and reinsurers say the new interventions can blunt reinsurance discipline or disincentivize risk mitigation unless coupled with performance‑based pricing and mitigation credits. Brokers and reinsurers, however, continue to favor differentiated access for well‑prepared cedents, suggesting any blanket socialization of risk would face industry resistance. (carriermanagement.com)

Voices from the field

“Decades of neglect have created a crisis of availability,” California Insurance Commissioner Ricardo Lara said as he described reforms to the FAIR Plan and his broader sustainable insurance agenda, adding that “we want homeowners and business owners to have choices — not just a last resort.” Critics including the FAIR Plan itself have pushed back, warning that expanding the plan’s exposure could threaten its long‑term solvency and lead to higher costs if not paired with funding reforms. (insurance.ca.gov)

Kylie Macfarlane of the Insurance Council of Australia urged continued government support for the Cyclone Pool while stressing the need for “greater national investment in disaster resilience and risk reduction” to make the arrangement sustainable. ARPC data indicate the pool has improved acceptance rates in some high‑risk areas but the Australian Competition and Consumer Commission has cautioned that the pool alone has not delivered broad affordability. (reinsurancene.ws)

“Capacity at the very top of the reinsurance market has recovered,” said a summary of broker commentary from the January 2025 renewals, “but higher attachment points and selective appetite mean primary insurers still shoulder more frequent losses — and that has consequences for market availability.” Brokers including Aon and Gallagher have urged insurers to strengthen portfolio resilience to secure better renewal outcomes. (carriermanagement.com)

Paths forward: policy options and emerging consensus

Several policy options are now being debated among regulators, insurers and consumer groups:

• Targeted, time‑bound reinsurance pools that reduce premiums for specific perils or regions (as in Australia’s Cyclone Pool) while pairing support with mitigation programs and sunset clauses. (aph.gov.au)

• Conditional market access and depopulation frameworks that require carriers benefiting from lower reinsurance costs or model‑based rate approvals to write a fair share of higher‑risk policies in the state. California has moved toward some elements of this approach. (insurance.ca.gov)

• Thorough reform of residual plans — clarifying coverage scope, adding transparency, tightening solvency safeguards, and enforcing time limits on how long policies can remain in residual pools. U.K. parliamentary reviews and U.S. state regulators have recommended stronger oversight and clearer demarcation of temporary backstops. (publications.parliament.uk)

• Investment in resilience and hardening measures tied to premium credits and flood‑performance or wildfire‑resilience certifications, so that lower premiums reflect genuine risk reduction rather than permanent subsidies. Regulators and industry bodies in the U.K., Australia and the U.S. have urged such linkages. (publications.parliament.uk)

Where the debate goes next

The redesign of residual markets is likely to remain an active policy front through 2026 and beyond. Governments will be judged both on near‑term success in preserving access to insurance and on their capacity to steer stronger incentives for risk reduction and responsible land‑use. The immediate tests will be political durability — whether taxpayers accept contingent liabilities — and technical design: ensuring pools and backstops are transparent, actuarially informed and paired with credible mitigation programs.

“Insurers and regulators are finally recognizing that availability and affordability are interlinked with resilience,” said one industry analyst summarizing the evolving consensus. “The hard part is doing that without creating a permanent state subsidy for exposure that would otherwise be economically uninsurable.” (insurancebusinessmag.com)

As advanced economies confront hotter, wetter and more fire‑prone futures, the tug‑of‑war between private capital, public backstops and societal expectations will continue to define whether insurance remains a tool for shared resilience or becomes a political instrument for reallocating unavoidable losses. Governments’ redesigns of residual markets are a pragmatic response to private withdrawal — but whether those redesigns produce sustainable, equitable outcomes will depend on how well they combine funding discipline, regulatory clarity and investments that make homes and communities safer before the next disaster strikes. (insurance.ca.gov)

Sources: California Department of Insurance press releases and orders; California FAIR Plan filings; Insurance Business and industry reporting on FAIR Plan exposure; Florida regulatory orders and Citizens depopulation filings; Insurance Council of Australia, ARPC and parliamentary inquiry reports on the Cyclone Reinsurance Pool; global reinsurance renewal commentary from Aon, Gallagher Re and industry analysts. Specific sources cited inline.