Paying for Katrina: The Insurance Question By one estimate, close to half a million insurance claims have already been filed in the wake of Hurrican Katrina -- and a host of questions have been raised. Who will pay for what stands to be the costliest disaster to hit the U.S. insurance industry?
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Paying for Katrina: The Insurance Question

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Paying for Katrina: The Insurance Question

Paying for Katrina: The Insurance Question

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This is TALK OF THE NATION. I'm Brian Naylor in Washington, sitting in for Neal Conan.

As the storm surge from Hurricane Katrina hit the Gulf Coast, it smashed homes, blew out windows, launched boats onto dry land and even flooded an entire city. Roughly half a million insurance claims have been filed in the wake of Katrina, and the property damage is expected to rise above $35 billion, making this Category 5 hurricane the most expensive natural disaster in US history.

But Katrina and last week's damage from Hurricane Rita were just the latest hits to America's coastal areas. Last summer four major hurricanes tore up large portions of Florida's Panhandle, costing insurers over $22 billion. In this hour, we'll find out who pays when catastrophe strikes, whether insurance premiums will skyrocket in high-risk areas and why the federal government is being asked to step in and provide a financial backstop to private insurers.

Join the conversation. Was your home damaged by the recent hurricanes? Are you concerned about rising insurance rates? Our number here in Washington is (800) 989-8255; that's (800) 989-TALK. Our e-mail address is

The looming question for millions of Gulf Coast residents is what will their insurance policies cover, particularly for those whose homes were flooded? We're joined now by David Maurstad, director of FEMA's National Flood Insurance Program and Mitigation Division. He comes to us by phone from Jackson, Mississippi.

Mr. Maurstad, thank you.

Mr. DAVID MAURSTAD (FEMA's National Flood Insurance Program and Mitigation Division): You're welcome, Brian. Good afternoon.

NAYLOR: Good afternoon. Let me ask: Why is the national government the only entity that covers flood insurance?

Mr. MAURSTAD: Well, back in the late '50s and throughout the '60s, there was a recognition that, because there was not an ability for insurance companies to spread the risk for flood, like they're able to do in most other lines of insurance, that flood insurance was generally not available or, when it was available, was unaffordable. And so the National Flood Insurance Program began in the late 1960s to address that problem, in addition to also working with local communities to make sure that floodplain management techniques were put in place to reduce the vulnerability from flooding in the future. And then the third leg of this three-legged stool called the National Flood Insurance Program is the flood mapping, mapping the hazard for flood for the country.

NAYLOR: Mm-hmm. Can you give us a brief synopsis of how the program works? How does one go about getting flood insurance? Is it directly through FEMA, or is it through individual insurance carriers?

Mr. MAURSTAD: Well, Brian, it's really a program that depends upon cooperation from a number of sectors. And first, a community, a local community, has to decide and has to pass the necessary local ordinances to become a part of the National Flood Insurance Program. They are called participating communities. They agree to enforce floodplain management practices in return for flood insurance being made available to the homeowners, renters and business owners in that community. We now have 20,072 communities across the country participating in the program.

Then it starts with, of course, the individual homeowner, business owner or renter that has to sit down and look at their risk and how they can protect their personal property. And that's where the flood mapping comes in and assists them in determining what their risk to flood is. And once they determine that that risk does, in fact, exist, then, generally speaking, they contact their local insurance agent or the representative of the company that they have their homeowners insurance with, their auto insurance with or their business insurance with, to check on and secure a flood insurance policy. That those companies--96 of them across the country--that have an arrangement with the National Flood Insurance Program--the major property insurance companies--then write that policy on behalf of the National Flood Insurance Program.

About 95 percent of the 4.7 million policies that are a part of the National Flood Insurance Program are written through that arrangement with the private insurance industry. The other 5 percent are written through agents that don't have an affiliation with any of those write-your-own companies, and they then work with a servicing contractor that the National Flood Insurance Program has to provide their customers, their policyholders, with a flood insurance policy.


Mr. MAURSTAD: So it's written in cooperation with all of those. The insurance companies service the policies, just like they would their home or their auto policy. They adjust the claims. They collect the premium. They then return that premium, minus the fee that we pay them for their involvement in the program, to the National Flood Insurance Fund, which then uses the balance to pay the expenses of the program and the claims that come in over the course of a year.

NAYLOR: Now last year you got hit pretty hard by the hurricanes...


NAYLOR: Florida. This year, you've got Katrina and Rita. I'm wondering, first of all, how much into the red you expect to go as a result of these two most recent storms, and how you recover from that.

Mr. MAURSTAD: Well, you're right on the mark in that 2004 was the most severe year that the National Flood Insurance Program had experienced in the 37-year history. We had over 74,000 claims nationwide. About 52,000 of those came from the four named--four of the named hurricanes last year, primarily in Florida but also through--up the Eastern seaboard into Pennsylvania and other areas of the country, where, you know, those 74,000 claims resulted in about $2.1 billion in claim payments being made to policyholders.

The early telephone polling that we conduct with the major write-your-own companies in the Louisiana and Gulf Coast area are indicating that we now have over 150,000 and counting claims that are going to be as a result of Katrina and Rita. It's early yet to tell that--you know, what the total dollar figure is going to be on those claims, but the director for the Office of Management and Budget has indicated, I believe, that the claims could result in $10 billion to $30 billion. And so it is certainly going to be an unprecedented year for the National Flood Insurance Program, and this is in line with, of course, the unprecedented catastrophe that has resulted from Katrina followed up by Rita.

NAYLOR: We're speaking with David Maurstad, director of FEMA's National Flood Insurance Program and Mitigation Division. I'd like to take a call now. Daniel is on the line with us from Novi (pronounced NOvie)--Is that how you say it?--Michigan.

DANIEL (Caller): Yes. Yes.

NAYLOR: Daniel, thanks for calling.

DANIEL: Yeah, just a few comments. I guess at the beginning of your show I heard somebody, some politician from the South, talking about the government coming in and forcing insurers to cover these losses, even when they aren't bound to contractually. And I guess after having lived in Louisiana myself for about three and a half years and seeing firsthand how developers play games about reclassifying land as to whether it's in the floodplain or not, I just find it a little disingenuous and silly that some of these red-state government leaders come in now and want big government to come into the insurance industry and ask them to pay claims that they're not even responsible for.

NAYLOR: David Maurstad, let me ask you--you talked a little bit about communities having to sign up for a floodplain management plan, and I'm wondering, to what extent should communities and states be accepting responsibility for building on these areas?

Mr. MAURSTAD: Well, I spoke of cooperation earlier, and we work very closely with those communities that participate in the National Flood Insurance Program. We do community visits. We look at and, in fact, oversee the results of their decisions at the local level and whether or not they are, in fact, complying with the necessary regulations that they agreed to when they signed up for the National Flood Insurance Program. The--you know, clearly, the National Flood Insurance Program and the federal government will make good on the claims that will result from these disasters, as we did last year from that robust hurricane season. And it's very clear what a national flood insurance policy, what the standard flood insurance policy, provides coverage for, and flooding, the storm surge, that damage that occurs by our policyholders, we will certainly make good on those claims.

NAYLOR: We have about a minute left. I just wondered if--is the Flood Insurance Program, though, giving a false sense of security to coastal landowners?

Mr. MAURSTAD: Well, we certainly hope not. We work very hard on communicating our message, that we feel that everyone is at risk from a flood and, certainly, in those areas of our country that are susceptible to hurricanes, we've developed a public-relations mechanism, FloodSmart, which has a Web site, We have a lot of tools that we provide to communities, companies and agents to help make sure that people understand what their risk is and how they can go about addressing that risk from flooding.

NAYLOR: David Maurstad is director of FEMA's National Flood Insurance Program. He came to us from Jackson, Mississippi.

We're talking about insurance coverage in the wake of a catastrophe. You can take your--send us your e-mail or give us a call at (800) 989-TALK.

I'm Brian Naylor. It's TALK OF THE NATION from NPR News.

(Soundbite of music)

NAYLOR: This is TALK OF THE NATION. I'm Brian Naylor in Washington, sitting in for Neal Conan.

We're talking insurance and hurricane damage. The Mississippi attorney general, Jim Hood, has sued several insurance companies in his state to force them to pay claims stemming from Hurricane Katrina. Our guest this hour is Howard Kunreuther, co-director of the Risk Management and Decision Processes Center at the University of Pennsylvania's Wharton School.

We also want to hear from you. Did your house suffer damage in Hurricane Katrina or, most recently, Hurricane Rita? Do you have questions about whether your policy covers hurricane flood damage? Give us a call at (800) 989-TALK. Our e-mail address is

Professor Kunreuther, I'm wondering: What's the psychology of property insurance? Do people have an adequate or inadequate level of coverage?

Professor HOWARD KUNREUTHER (Co-Director, Risk Management and Decision Processes Center, Wharton School): Well, that's an interesting question. Often before a disaster, people do not purchase flood insurance or other insurance, because they believe that the event will not happen to them. And so that's a real challenge in terms of how you can get people to protect themselves voluntarily.

NAYLOR: And to what extent are people willing to take on policies, which I guess are kind of expensive, for flood insurance if they go, you know, years without being affected?

Prof. KUNREUTHER: Well, often, what happens--in fact, people often buy a policy after a disaster occurs, rather than before. A few years later, if they haven't suffered damage, they are going to cancel their policy and hope--and feel that it isn't really all that good an investment. So I think that the real challenge in this area is to try to convince people that, in many cases, the best return on an insurance policy is no return at all.

But your question in terms of people wanting to actually purchase insurance when the price is high, of course, raises some challenges, because some people feel that they may not be able to afford it.

NAYLOR: What is the cost of flood insurance? Can you give us a ballpark figure?

Prof. KUNREUTHER: Well, I think it varies from area to area. When the flood program was set up initially in 1968, it was a subsidized program where the federal government subsidized those who were living in flood-prone areas by 90 percent of the premium. And, in fact, we actually did a study at that time, or shortly after that, because of the fact that so few people were buying it and it really was a very good deal. When you talk about homes that are developed since the program was formulated, those properties will pay the full rate, and it could be quite high in very high hazard-prone areas.

NAYLOR: What about--well, speaking of hazard-prone areas, I mean, let's take New Orleans, for instance--low-lying; everyone knows most of the city is under sea level. What would it cost to get flood insurance?

Prof. KUNREUTHER: Well, I don't have a good answer on that. You had the gentleman before, who probably could have told you with a specific figure. But I do believe that the actual premiums could be quite high, unless the homes were insured in the early part of the program where they would have been highly subsidized. But actual figures, I wouldn't be able to tell you.

NAYLOR: Hundreds or thousands, do you know?

Prof. KUNREUTHER: It could be hundreds and, in some cases, it could be thousands of dollars.

NAYLOR: Mm-hmm.

Prof. KUNREUTHER: If there was an expensive home in a flood-prone area of New Orleans, they certainly could be paying thousands of dollars.

NAYLOR: Mm-hmm. I'd like to take an e-mail question here we got from John Speck in Napa, California. He asks if developers `lobby local governments to allow construction in floodplains, and if so, should developers help pay for flood losses?' Is that something that occurs? How much pressure do developers put on local officials to allow building in these flood-prone areas?

Prof. KUNREUTHER: Well, one of the special features, Brian, of the flood program, the National Flood Insurance Program, is that they have land use regulations and building codes that are associated with this. That was the carrot-and-stick part of the program when it was started. If you were going to subsidize rates, try to make sure there is not development in these high-hazard areas. So in some sense, it's really trying to enforce these regulations that have been a challenge. After Hurricane Andrew, for example, it was found that 30 percent of the buildings did not meet the building codes, for whatever reason. And so I think the question for developers, I think, today is: How do you build safer homes, and how can you convince everyone that taking an ounce of prevention before the disaster will be worth it in terms of avoiding the kinds of problems that we're having today?

Now in New Orleans, of course, you had a real challenge because of the fact that you had flooding that really wiped away houses, and it's not clear...

(Soundbite of phone ringing; crash in background)

Prof. KUNREUTHER: ...what could have been done to spare those homes. But the fact that we could have building codes and regulations is a very important part of what we should be thinking about in the future.

NAYLOR: Is everything all right there?

Prof. KUNREUTHER: I don't know.

NAYLOR: The--OK. I heard...


NAYLOR: There was a kind of crash in the background. I just wanted to make sure that...

Prof. KUNREUTHER: I--right. I think we're OK.


Prof. KUNREUTHER: The phone was ringing and it actually dropped by mistake.

NAYLOR: OK. All right. Let me--I'd like to bring in another voice into the conversation. Robert Hunter is director of insurance for the Consumer Federation of America. He is the former insurance commissioner for the state of Texas and also headed the National Flood Insurance Program in the 1970s. He joins us now from Rangeley, Maine, of all places.

So, Mr. Hunter, what's your take? Have you been satisfied with the insurance companies' response at this point?

Mr. ROBERT HUNTER (Director of Insurance, Consumer Federation of America): No. Normally at this stage of a hurricane, the normal cycle, we would see almost no complaints and no lawsuit discussion. Things usually go very well for the first month or two. It's six months out you start to hear complaints. And this time we're hearing complaints very early and discussion of lawsuits very early. It's not working well for the insurance companies on this particular hurricane.

NAYLOR: Mississippi's attorney general has filed lawsuit against five of the biggest insurance companies operating there to cover flood damage. He says the homeowners bought their policies for the primary purpose of insuring against any damage that could possibly result from hurricanes. Is this a valid argument, in your estimation?

Mr. HUNTER: Not the way you put it, 'cause, you know, I think flood and wind are particularly fairly clear. However, I think there's at least a fairly strong argument in law in the state of Mississippi, given some precedents having to do with proximate cause. If the wind is considered a crucial factor in some damage, even including some damage involving water, there are some cases where courts have held that the proximate cause was the wind, and the claims had to be paid. So I think he at least has a good argument when it comes to the proximate cause part of his complaint.

NAYLOR: I'd like to take a call here. You can call us at TALK OF THE NATION at (800) 989-TALK. Nick from Triumph, Idaho, thanks for calling.

NICK (Caller): Hi. How are you?


NICK: I've got a question for you. If underwriters are paid to take the risk and the idea is to make a profit, but there are too many claims and that means a loss, like any business they suffer a loss. No one's going to bail them out. So if there's a loss, why do we--and why is it being discussed that we, as taxpayers, are going to have to bail these underwriters out? And the second part of that is: Does the government underwrite the underwriters? Thanks.

NAYLOR: OK. Thank you.

Robert Hunter?

Mr. HUNTER: Well, the federal Flood Insurance Program is a federal policy, so the insurance companies are not involved in the underwriting of that risk; they just sell it as salespeople and do some of the servicing. But--so they have nothing to do with the ultimate claims payment that comes out of taxpayers if there's a loss. On the other hand, they will, if they suffer a loss, spread it through reinsurance. They happen to be in a very profitable cycle right now, and it looks to me like they might lose one-quarter of this year's profitability from Hurricane Katrina. That's how strong their profits are right now. So I don't think there needs to be any kind of a bailout of the insurance industry at all.

NAYLOR: And maybe I can toss this question your way, Mr. Hunter. What is it? What does flood insurance cost a typical homeowner, if there is such a case?

Mr. HUNTER: Well, Howard is right. I mean, it varies by your risk and the value of your home. I once, when I was federal insurance administrator, charged a $150,000 house $50,000 a year because it was built outside of a sand dune in Florida--on the ocean side of a sand dune. And so you can charge--the rates vary all over the place. But in a place like New Orleans, the rates are probably only a few hundred dollars, because the program would assume that the levee would work to control the hundred-year storm, and therefore the rates would be relatively low. And I think the problem is less the rates in Louisiana and in the rest of the region; the reason people aren't buying it is what Howard said: They don't think it'll happen, A, and B, they think that the federal government will come and hand them some kind of disaster money for free. That's--both of those things lead to people being underinsured.

And I think the program has failed to make market penetration. Banks are supposed to require insurance in the high-hazard areas, and I don't think the banks have done a very good job at keeping insurance on those properties.

Prof. KUNREUTHER: Mr. Naylor, if I could also chime in on the notion of the bailout, and amplifying what Bob Hunter was saying, that--one of the real challenges I think we face today is, with all the liberal relief that may be forthcoming after Katrina, people may feel that they will be bailed out in the future. And I think the challenge for our society and our nation today is to figure out a way to get people to think about protecting themselves in advance through insurance and through mitigation measures. And it's one, I hope, that will be covered by Congress as they begin to rethink and think through the problem of what it means to provide very liberal relief for just the reasons that Bob Hunter was mentioning.

NAYLOR: Mm-hmm.

Mr. HUNTER: For a long time--I just want to add one other factor. For a long time, I've proposed, but haven't gotten very far with--but maybe we can now--that new houses ought to be insured for the first 30 years for disasters--in other words, floods and winds, etc. That policy ought to be bought by the developer and sold with the house. And that would mean that developers would have to be very careful about where they built houses or they would be stuck with houses they couldn't sell because of the high cost of insuring them for the 30-year period of a mortgage.

NAYLOR: Mm-hmm. What about, though, for renters, who--I mean, there are so many low-income people in New Orleans and all along the Gulf Coast--presumably don't have the wherewithal to afford this expensive insurance? Is there any easy solution?

Mr. HUNTER: Go ahead, Howard.

Prof. KUNREUTHER: All right. I think one of the questions that always comes up when one is raising the question of who should pay for disasters is whether or not special relief should be given to the low-income people. And I think the equity issues are very important here. And so the idea of possibly having to subsidize the low-income people in some way would be a part of this future policy. On the other hand, renters themselves, of course, have a very different problem. They don't own the house. They would be insuring, really, their contents, not the actual property itself, so they may not have to pay all that much for the contents.

NAYLOR: Very good. Bob, you want to ask...

Mr. HUNTER: Well, I was just going to say that contents is a relatively low-cost insurance, but even so, you're probably going to always need to have some special treatment of very low-income people who are not insurance buyers, typically, anyway.

NAYLOR: Robert Hunter is director of insurance for the Consumer Federation of America and the former insurance commissioner for Texas. He joined us from his vacation home in Rangley, Maine. Mr. Hunter, thanks very much.

Mr. HUNTER: Thank you.

NAYLOR: You're listening to TALK OF THE NATION from NPR News.

Let's take a call now. And Dave in Port Mayaca, Florida. I'm sure I messed that up a little bit. Is that right?

DAVE (Caller): Sure. That's pronounce--that's correct pronunciation.

NAYLOR: Well, thanks for calling.

DAVE: Yes, sir. Thank you. I just wanted to make a comment. Knowing the market in Florida here, since Hurricane Andrew homeowners insurance has not been available when there's a storm threatening, and when you're purchasing a house the closing are postponed until after the storm threat is passed in order to get your homeowners insurance and close on the purchase of the house. And I believe that applies to the flood insurance also. I just wanted to make that comment.

NAYLOR: OK. Thanks very much.

DAVE: All right.

NAYLOR: I'd like to turn to Bill Bailey now. He's the managing director of the Hurricane Insurance Information Center established by the US insurance industry in the aftermath of Hurricane Katrina. He joins us on the phone now also from Jackson, Mississippi.

Mr. Bailey, thank you.

Mr. BILL BAILEY (Hurricane Insurance Information Center): It's good to be on with you. Just a minor correction. We were first set up and operating in 1992 immediately after Andrew.

NAYLOR: All right.

Mr. BAILEY: So we've been around a little while.

NAYLOR: Gotcha. Thanks.

Mr. BAILEY: Thanks. You bet.

NAYLOR: Let me ask, in Florida, Allstate Insurance Company recently announced it won't renew about 95,000 policies. Another company, Nationwide, has plans to discontinue about 40,000 policies. Safeco Insurance told the state it won't write any new policies, and will stop renewing with Florida customers next year. Is it likely that big insurance companies will start to pull out of other Gulf Coast states?

Mr. BAILEY: Well, I--the only initial reaction I have is to the phrase `pull out,' and I don't think they're pulling out. I think they're reducing their level of risk, which I think the numbers probably very clearly demonstrate would be a major burden on their capital allocation if they don't. And the answer to your question is yes. In fact, I was listening to Bob Hunter, who's a friend; we're on the opposite sides most frequently. But I have great respect for Bob, and I was listening to him describe the general situation there, and he's absolutely right. But I think the issue to be looked at in the Mississippi attorney general's lawsuit is even a much larger one than Bob raised about the specifics in the case, and it has to do with the future of the market.

I can tell you right now that the insurance commissioner for the state of Mississippi, George Dale, and many companies are very, very concerned about the potential impact of the attorney general's lawsuit on the market in Mississippi. Mississippi is going to have to have huge amounts of insurance as part of its overall recovery plan, and if the insurance industry is left hanging as to what its potential liabilities are, especially something as enormous as flood, I think you'll see companies say that either we're going to jack the rates sufficient to cover our potential losses, or we will either reduce our exposure or pull out. It's a drastic step, but these are drastic times as a result of some of the moves that have been made since Katrina.

NAYLOR: Is there a property insurance crisis looming? The companies not writing policies in Florida anymore? The...

Mr. BAILEY: Well, you know, just--I'm being very picky. I apologize for that.

NAYLOR: That's all right.

Mr. BAILEY: But we are writing policies. We just aren't writing them--the bigger companies are not writing so many of them. But I am aware of the fact that--I can't give you the names--but there are some small companies that were set up specifically to take advantage of this market swing, and obviously the capital is there for the small company to get into the game, and that's how small companies go from small- to medium-size companies. They get in at the right moment. Is this the right moment? You know, I've befriended Dr. Bill Gray, probably world's foremost hurricane expert, over the years because we've attended so many conferences together. And Bill Gray says, `I've been telling people for years this is not an aberration. This has been in the climatology for a long time. We are a--there's a huge cycle that takes place with wind and hurricane activity, and we are in the cycle right now that's going to see us having an increased number of storms and increasingly intense storms over the next few decades.

NAYLOR: And so...

Mr. BAILEY: Yeah, I'm sorry. Go ahead.

NAYLOR: Yeah, I just wondered so where does that leave the insurance companies?

Mr. BAILEY: Worried! Very worried that we could be hit by not a Katrina, but a series of Katrinas. You know, we're not out of the wash yet. The official end of the season is November 30th, so June through November and...

NAYLOR: OK. You're listening to TALK OF THE NATION from NPR News.


NAYLOR: This is TALK OF THE NATION. I'm Brian Naylor in Washington, sitting in for Neal Conan.

Here are some of the stories NPR is following today. In New Orleans, 249 police officers, roughly 15 percent of the force, are AWOL, It's unclear why those officers left their posts without permission during Hurricane Katrina and the storm's chaotic aftermath, and there's now word from the Associated Press that the New Orleans police superintendent, Eddie Compass, is resigning. No word yet on his reasons. And a new report from the Pew Hispanic Center argues that immigration mirrors the US business cycle, rising and falling along with US demand for workers. The report adds fuel to an already burning debate about whether immigration helps or hurts the US economy. All the details coming up on "All Things Considered" from NPR News.

Tomorrow the future of hunting here on TALK OF THE NATION. This once popular sport is in decline, but efforts are being made to bring new fans to the sport as well as clean up hunting's image. We'll hear how this is being done tomorrow on TALK OF THE NATION.

Today we're talking about insurance coverage in the wake of a natural disaster, such as a hurricane. Our guests are Howard Kunreuther of The Wharton School at the University of Pennsylvania and Bill Bailey, managing director of the Hurricane Insurance Information Center. We invite you to join the conversation. Call us at (800) 989-TALK. Our e-mail address is Let's take a call here now from Jim in Buffalo, New York. Thanks for calling TALK OF THE NATION.

JIM (Caller): Hi. I'm curious about what is exactly covered in flood insurance in terms of--oh, I heard you say something about content vs. building, but does a building have to be destroyed if it's still habitable afterwards? Or does it just have to get wet?

NAYLOR: All right. Good question. Bill Bailey, I'll toss that one your way.

Mr. BAILEY: Thank you. The flood insurance policy addresses causation rather than resulting loss, so to that extent anything that is damaged by virtue of a flood occurring would be covered under the flood policy.

I think this gentleman's trigger legitimately raises an issue that I would like to, if I could, address not only for the benefit of this caller but one that called just a little while earlier while I was listening. May I just read the precise language in the two different policies to show you how they dovetail with each other? Is that all right?

NAYLOR: Yeah, sure, if it doesn't take too terribly long.

Mr. BAILEY: Good. ...(Unintelligible) promise you. It just simply says the following causes of loss are excluded: water damage. Water damage means flood, surface water, waves, tidal water, overflow of a body of water or spray from any of these whether or not driven by wind. So there's that wind component issue about causation. The flood policy, on the other hand, says that a flood is a general and temporary condition of partial or complete inundation of at least two or more acres of normally dry land area or of two or more properties; is also an overflow of inland or tidal waters or an unusual and rapid accumulation or runoff of surface waters from any source.

Now I think back in 1968 when Congress passed the flood program, it was intended to specifically pick up each of the types of source of loss that the policy written for years and years by the private capital industry had excluded. So the government acknowledged that this is the kind of loss that occurs with very little warning, causes enormous damage and is extremely difficult if not entirely impossible to underwrite. So the program itself has been in place for 35--37 years, and for all those years, just to give you an indication of how the people who run the programs have interpreted that language, over the last decade the flood insurance program has paid over $880 million a year in claims. Last year because of Ivan it was $1.4 billion.

NAYLOR: And any...

Mr. BAILEY: The program collects $2 billion a year in premiums.

NAYLOR: Any back-of-the-envelope calculation on how much it's likely to be paying out as a result of Katrina and now Rita?

Mr. BAILEY: That, my friend, is the biggest problem of all, because so many people did not buy flood. The estimates I heard most recently were, on a statewide basis in the region, maybe 40 percent had flood insurance that in retrospect should have had it. For some reason--I keep hearing a number about New Orleans property insurance that says the flood insurance was only bought by about 18 or 20 percent of New Orleans residents.

Mr. KUNREUTHER: Market shot--may I make a comment?

NAYLOR: Please go ahead.

Mr. KUNREUTHER: May I make a comment here?

NAYLOR: Howard Kunreuther.

Mr. KUNREUTHER: I think one of the issues that the flood insurance program has raised and what has happened after Katrina is that trying to separate out the damage between wind and water--and that has raised a lot of controversy. It's always been a problem in terms of whether or not one has insurance protection against these events. And I think that we really have to begin to reflect on whether or not it might be feasible to put a vari--the flood program together with some of these oth--with the regular homeowners policy and not have to deal with the separation problem...

Mr. BAILEY: ...(Unintelligible). Sorry.

Mr. KUNREUTHER: ...because right now today, a person may be claiming that they have the damaged caused by the wind. The insurance industry itself may be liable for 40 to $60 billion worth of damage--that's the latest estimate with respect to what they may have to cover from these two hurricanes, and there is this whole issue of trying to separate this out. There's also an equity issue here that if a home is very well built, and as a result the water comes up and destroys the home, they will not collect on a homeowners policy, where on the other hand, if the wind has blown off the roof, you may then find that your covered by wind damage. So we do have a real challenge here in terms of how to separate these two causes of the damage out, and that is obviously in the fore right now with a lot of discussion in the media.

NAYLOR: Bill Bailey, one last final comment.

Mr. BAILEY: Thank you. I just wanted to say hello to Howard Kunreuther because I admire him and we've been on programs together. It's nice to hear you, Howard.

Mr. KUNREUTHER: It's nice to meet you--it's nice to hear you, Bill.

Mr. BAILEY: Thank you.

NAYLOR: And then...

Mr. BAILEY: Let me just respond by saying this very quickly. FEMA does not have a claim department. The National Flood Insurance Program does not have a claim department. The total organization to cover everything in addition to flood is 2,500 people. The flood insurance program not only relies upon the insurance industry to sell its product for a commission, but it also hires our adjusters, called the single adjuster program, to go out and make the very distinctions that Howard just mentioned, and that is how do we know it was wind and how do we know it was flood that caused this loss. We've been doing it since the program was initiated, and we've been doing it obviously to the successful acceptance of not only the people who administer the program but the people who have the insurance. ...(Unintelligible) not easy...

NAYLOR: With that thank you very much, Bill.

Mr. BAILEY: ...but it has to be done and it is done every day.

NAYLOR: Thanks very much. Bill Bailey, the managing director of the Hurricane Insurance Information Center established by the US insurance industry. And he came to us by phone from Jackson, Mississippi. We also heard from Howard Kunreuther, the co-director of the Risk Management and Decision Processes Center at the University of Pennsylvania's Wharton School. He joined us from there. Thanks very much.

Mr. KUNREUTHER: Thank you.

NAYLOR: Coming up, we're going to hear from Michael Brown, the former director of the Federal Emergency Management Agency. That, when TALK OF THE NATION continues.

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