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Hurricanes and Disaster Risk Financing Through Insurance: Challenges and Policy Options

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Publication Date: January 2008

Publisher(s): Library of Congress. Congressional Research Service

Topic: Business (Insurance)


The U.S. Atlantic and Gulf of Mexico coastal states, Hawaii, Puerto Rico, and the U.S. Virgin Island are exposed to relatively high levels of risk from hurricanes and tropical storms. The rapid expansion of the U.S. population into areas that are susceptible to hurricanes has placed millions of people and new areas of economic activity in harm's way. To address the financial and economic effects of such risks, households and businesses have relied on private insurance, state-sponsored insurance pools, and/or federal emergency disaster assistance to manage their natural hazard risk.

In the aftermath of four major hurricanes in 2004 -- Charley, Ivan, Frances, and Jeanne -- that resulted in tens of billions of dollars in insured and uninsured property losses, the 109th Congress might focus attention on the long-term budgetary implications of disaster recovery expenses incurred by the federal government, and finding ways to expand private-sector capacity for insuring disaster losses. Previous Congresses responded to insurers' concerns by considering legislation to create a federal catastrophe reinsurance program for residential property.

Given that actual and threatened catastrophe losses to property in hurricaneprone states have caused insurers to be unwilling or unable to provide property insurance coverage to the extent sought and needed, the federal government has created a federal flood insurance program and the states have created short-term risk financing solutions for the small-to-moderate sized hurricane. Most economists would agree that it is in the interest of both the federal and state governments to assure that property is insured so as to facilitate the remediation, reconstruction, and replacement of damaged or destroyed property in order to reduce or avoid the negative effects to the national and state economies, and to the revenues of the state and local governments needed to provide for the public welfare.

Insurers, legislators and policymakers learned a great deal from Hurricane Andrew in 1992 and took specific actions that had the effect of minimizing the impact of last season's devastating hurricanes that made landfall. One outcome of these changes was that states have shifted the burden of hurricane losses to households through hurricane deductibles, policyholder assessments to repay revenue bond debt, and other insurance underwriting requirements.

This report examines the role of insurance in financing disaster risk and the changes implemented by insurers and legislators that helped to minimize market disruptions following the 2004 hurricane season. After reviewing the congressional interest in financing catastrophe risk and summarizing the results of the 2004 hurricane season, the report describes lessons learned, the insurance market's response to hurricanes, and existing mechanisms for insuring hurricane losses. The concluding two sections analyze issue and policy options as well as future challenges that policymakers in the 109th Congress face.

This report will be updated as events warrant.


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