* In 2005 dollars. Source: United States Senate Budget Committee as of 9/19/05; Insurance Information Institute. (Click image to enlarge)

Despite the president’s promises, Washington viewed initial requests from Louisiana’s congressional delegation for $250 billion in aid as far too high, questioning how the money would be used and who would oversee the spending. In response, Louisiana Gov. Kathleen Blanco created the Louisiana Recovery Authority to organize the reconstruction efforts. Walter Isaacson, the former CEO and chairman of CNN who grew up in New Orleans, is vice chairman of the authority and has become an integral player in bringing focus to the effort, coordinating recommendations made by a commission set up by New Orleans Mayor Ray Nagin. The group plans to rally federal aid in three areas: rebuilding the city’s levees, securing small business administration loan help and funding education.

"We lost some of our credibility," Isaacson says of the original $250 billion request. "That said, we’ve now decided to set our priorities and say we in Louisiana will do most of this ourselves, and that’s the way it should be. We’ll rip out our own wallboard and rebuild our own houses, build up our own businesses–but we have a few things that we need federal partnership on."

TOP VIEW: Some estimate that rebuilding the Gulf Coast damage from Hurricane Katrina will cost as much as $250 billion. Ultimately, U.S. taxpayers will cover much of this, a point that leads some to question the government’s rapidly expanding role as the de facto insurer of last resort against natural disasters. If the government maintains its willingness to make open-ended commitments for disaster relief, will it amount to a large scale transfer of wealth, similar to the New Deal policies of the 1930s? If so, it may have unfortunate consequences for the economy–and for wealthy taxpayers.

While Congress may question various relief bills in the coming months, the requests for federal partnerships similar to Isaacson’s will not go away–in fact, they will only grow in the coming years, on the Gulf Coast and elsewhere. Already, the more than $40 billion that Newark, Calif.-based Risk Management Solutions estimates the industry has paid out to cover property losses in 2005 will make it the most expensive year ever. This does not include the estimated $12 billion price tag for Hurricane Wilma. Climatologists predict that rising global temperatures will increase the frequency of category 4 and 5 hurricanes. In earthquake-prone California, development continues unabated. Cities throughout the West have morphed into sprawling suburbs, pushing into areas where brush and forest fires that once might have just burned out now threaten homes and businesses. Private insurers, restricted by increasingly tough regulations capping what they can charge for insuring in areas likely to face a disaster, are becoming reluctant to extend coverage to these imperiled zones.

"The typical way [the government] approaches disasters and financing them is to provide aid. I call it de facto insurance," Brookings’ Litan says. "There is something of a backlash. A lot of people are standing up and saying we don’t want to write a blank check."

Litan and others are floating an idea to replace the current system with a national insurance plan to cover disaster-prone regions. Premiums would not only provide greater security to insurers, giving them confidence to continue writing policies in areas at risk, but also offer individuals a financial incentive to live in less-risky areas–or if not, to bear some of the cost. Litan suggests "pre-funding" for disasters in a formal federal reinsurance program administered by the Treasury Department, loosely modeled after the federal terrorism reinsurance program established in 2002. Under such a scheme, participants in high-risk areas would pay premiums that would reflect actuarial risk. This plan would include incentives for states and municipalities to encourage better building codes and land use rules. This way, too, individuals and businesses would bear some limited amount of first-dollar losses through insurance policy deductibles.

Legislation along those lines is in the works. Rep. Ginny Brown-Waite (R-Fla.) introduced a bill in November that would authorize the Treasury to sell reinsurance contracts at auction to provide homeowners with disaster coverage. Some insurers, too, have begun to weigh in on this discussion. In November, Allstate became a charter member of an advocacy website, ProtectingAmerica.org, ostensibly to help citizens better prepare for disasters (and thus potentially lower the company’s exposure to damage), but also to push to establish catastrophe funds.