Residential Insurance on the U.S. Gulf Coast in the Aftermath of Hurricane Katrina

The hurricane seasons of 2004 and 2005 brought devastating losses of life and property; they also threw the residential insurance market in the Gulf States into turmoil. Insurance premiums skyrocketed, a number of private insurers retreated from coastal regions, government insurance programs stepped into the breach, and premiums in high-risk areas were subsidized by taxpayers and by policyholders in low-risk areas. To make matters worse, thousands of residents who suffered hurricane damage resorted to the courts to resolve coverage disputes with their insurers. All in all, the residential insurance system did not function well. Policymakers, deeply divided about how to reform the system to deal with these issues, have so far been unable to build consensus on how to proceed. This paper informs the current policy debate by diagnosing the problems confronting the residential insurance market and proposing objectives for a well-functioning market. The authors examine impediments limiting the private and public sectors' ability to achieve these objectives and identify a range of policy reforms that merit attention.