Gulf Region Property Markets Still Troubled 5 Years After Katrina

Five years after Hurricane Katrina devastated the Gulf Coast, neither the federal government nor the private sector is any closer to developing effective solutions to the problems facing flood and windstorm insurance, according to a report from the RAND Corp.

“The current constellation of institutions and regulations is not adequate for achieving the basic goals for a well-functioning residential insurance market along the Gulf Coast,” said Lloyd Dixon, one of the authors of the study and senior economist with RAND, a nonprofit research organization.

“Until an improved system for mitigating and insuring hurricane risk is developed, these storms will continue to cause record-setting losses to life and property, ever-increasing federal disaster relief and major economic disruption in the Gulf Coast states,” Dixon said.

The RAND study, “Residential Insurance on the U.S. Gulf Coast in the Aftermath of Hurricane Katrina: A Framework for Evaluating Potential Reforms,” suggests that a national commission be created to assess reforms.

The study identifies numerous obstacles to public and private efforts. For example, it has always been difficult for the private sector to insure low-probability, high-consequence events like major hurricanes and earthquakes that affect a large number of insureds simultaneously. The large variation in annual losses can mean that insurers must hold a large amount of capital in reserve to protect against insolvency, which forces rates up.

“We found that the last round of catastrophic hurricanes has shaken the confidence of some insurers in their ability to predict wind damage risk,” said James Macdonald, a study co-author. “Several insurers we interviewed raised doubts about whether catastrophic windstorm peril can be accurately modeled.”

While public sector programs have some advantages, they often subsidize premiums in high-risk areas and, by doing so, may be creating disincentives for homeowners to take the risk of hurricanes into account when they choose where to live, or discouraging them from taking mitigation measures.

Some of the policy approaches that the researchers say warrant consideration include:

• Changes in regulations that reduce the cost of capital that private insurers hold to protect against large losses
• Government provision of reinsurance for wind risk
• Government provision of wind insurance
• Expanding mandatory flood insurance purchase requirements
• New policy language on loss allocation when there is both wind and flood damage
• Federal — as opposed to state — regulation of wind and privately provided flood insurance to encourage competition and innovation.