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Summary

On August 29, 2005, Hurricane Katrina made landfall on the Gulf Coast with high velocity winds and a 30-foot storm surge accompanied by heavy rainfall. Katrina has proven to be the most devastating disaster in recent U.S. history, exceeding Hurricane Andrew (1992) and the terrorist attacks on the World Trade Center (2001). Coastal towns and cities were flooded, with parts of Mississippi completely devastated and no buildings left standing in some towns. New Orleans was deluged by flood water from Lake Pontchartrain and also from the Mississippi River after levees broke. Catastrophe-insured losses in 2005 totaled $66.1 billion from 24 disasters. Estimated insured losses from Katrina alone were $43.6 billion stemming from 1.75 million claims. Despite the severity of storm damages, Hurricane Katrina and other catastrophes in 2005 did not threaten the solvency and claims-paying ability of the property/casualty (p/c) insurance industry. Insurers benefitted from favorable market conditions during the last three years and experienced significant growth in policyholder surplus. Insurers, in fact, earned record profits in each of the last three years -- 2004-2006. In the aftermath of Katrina, policymakers, disaster experts, and insurance company representatives have expressed concerns about the potential vulnerability of the insurance industry to a future mega-catastrophic event and raised questions about what role, if any, the federal government should play in financing catastrophe risks. Most insurance market analysts note that there is no state in the union that is not subject to catastrophe exposure, and the current state of affairs suggests that the exposures are far greater than the insurance industry is now prepared to handle. Although the insurance industry has emerged largely intact from Hurricane Katrina and is better capitalized now than ever, it simply does not have sufficient capital to pay for a mega-catastrophe. This fact is not new. Insurers and financial market experts knew after Hurricane Andrew in 1992 that outside capital was needed to supplement industry capacity. As Members of Congress explore ways to respond to the increasing risk and uninsured losses from tropical storms, earthquakes, and disruptive and costly inland flooding, they may be called upon to consider federal policy alternatives to build national capabilities for disaster risk management. Among measures that might be explored are various legislative proposals to pre-fund the cost of disasters with insurance or capital market instruments (risk securitization). This report will be updated as events warrant.

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