Finding the Optimal Public-Private Balance in Catastrophe Insurance: The Katrina Experience

Abstract

In this paper, we consider the issue of natural catastrophe insurance taking Hurricane Katrina as a point of departure. In section II we review Katrina's effects, the estimated losses, what private insurance covered, and what aid the federal government provided. In section III we review the literature on natural catastrophe insurance. We assess the status quo arrangement - a de facto combination of private insurance, post-disaster aid, and government provided or government-sponsored insurance. We also evaluate alternatives. The first is the so-called "layered approach" to natural-catastrophe insurance - a framework in which individuals, private insurers and reinsurers, state-sponsored insurance funds, and the federal government would share responsibility for covering catastrophe-generated losses at different layers of damage. The second alternative proposed is a framework in which the federal government acts not as a reinsurer of last resort but rather as a lender of last resort. We comment on the pros and cons of both of these options. Section IV then concludes.

Keywords: Hurrican Katrina, Insurance, Natural Catastrophe