Come Hell and High Water: Can the Tax Code Solve the Post-Katrina Insurance Crisis?

Christine L. Agnew, University of Houston

Abstract

Abstract

As Americans struggle to appreciate the full extent of the damage and destruction caused by Hurricane Katrina, a terrifying question resonates with a shell-shocked nation: what is next? Forecasters have been quick to respond with a laundry list of the most unimaginable disasters with price tags ranging from $50-$400 billion dollars apiece. Imagine what would happen if these catastrophes occurred back-to-back like they did in 2004 and 2005.

Prior to Katrina, the thought of having to shoulder a triple digit loss was unfathomable. Today, it is considered inevitable and the only question that remains is who will bear the loss. This has become particularly worrisome for Congress since the private insurance industry began bailing out of markets with a history of, or potential for, natural disasters. If these markets are uninsured and disaster strikes, the triple digit losses could fall to the insurer of last resort – Uncle Sam.

In an attempt to deal with the insurance crisis, Congress proposed a four-part National Catastrophe Plan that, inter alia, involves amending the Tax Code to allow insurers and homeowners to deduct amounts set aside to pay for losses arising from a natural disaster. The purpose of the proposed legislation is to increase the availability and affordability of private insurance in peak risk areas and to reduce the risk of insurer insolvencies following disasters.

This Article is the first to provide an extensive legal and economic analysis of the post-Katrina insurance crisis and to consider what impact (if any) the Tax Code can have on the crisis. This Article describes recently proposed tax legislation that attempts to solve the crisis by amending the Tax Code and explains why this proposed legislation would provide insurers with a windfall. Importantly, this Article uses the proposed tax legislation as a poignant example of why subsidizing insurance costs through the Tax Code threatens to destabilize an otherwise stable insurance industry.