Insuring Against Catastrophes The Lessons from Katrina

Luckily, not many storms are as destructive as Katrina. Since 1990, only Hurricane Andrew approaches it in the value of property damage, which was less than half that of Katrina in 2005 dollars. The attacks of September 11, 2001, did a comparable amount of property damage, but cost far more lives. That such catastrophes are extremely rare does not necessarily mean another will not occur in the not-too-distant future. In the 1920s, a category 5 hurricane hit downtown Miami. If such a storm were to occur today, the property damage would far exceed that of Katrina. And one cannot rule out severe earthquakes or another terrorist attack. Katrina spectacularly exposed widespread weaknesses in the public policy response to catastrophes, weaknesses that afflicted everything from the humanitarian response to the operation of the flood insurance program. This article focuses on the conceptual issues involved in insuring against major catastrophes and the practical problems involved in developing a coherent strategy.