When Hurricane Katrina slammed into the Gulf Coast in 2005, it caused death and catastrophic damage in Louisiana and surrounding states despite weakening to Category 3 just before landfall.

The storm also was a turning point for how the insurance industry assessed the potential for hurricanes to cause extensive damage, not just from wind but from storm surge combined with catastrophic flooding due to the failure of the levee and floodwall systems in New Orleans.

Twenty years later, Katrina remains one of the deadliest hurricanes to have hit the U.S. Initial estimates put its death toll at more than 1,800 people, but the National Hurricane Center later revised that to just under 1,400.

After Katrina, the U.S. government invested tens of billions of dollars to strengthen flood defenses in New Orleans, which sits mostly below sea level, and stricter building codes were adopted in Louisiana and Mississippi to improve storm resilience.

Catastrophe modeling, which the industry widely adopted after Hurricane Andrew in 1992, evolved to incorporate improved data and new techniques (see related story below). The underwriting and pricing of catastrophe risk fundamentally shifted, leading to stricter terms and conditions for policyholders. The property catastrophe reinsurance market in Bermuda expanded, and demand for alternative capital increased (see story below).

Katrina made landfall near Buras, Louisiana, on Aug. 29, 2005. It later struck again — still as a Cat 3 — near the Louisiana-Mississippi border. Previously, it had made landfall just north of Miami before strengthening into a Category 5 hurricane in the Gulf of Mexico. The massive storm surge caused by Katrina was attributed to the hurricane’s large size, affecting nearly 93,000 square miles of the U.S.

Katrina dealt a severe blow to the economy and the environment by disrupting key population and tourism hubs, oil and gas operations, and transportation. Workplaces in New Orleans and beyond were damaged, resulting in thousands of job losses and millions of dollars in lost tax revenue. Over 800,000 housing units were damaged or destroyed, and many residents who left New Orleans did not return.

Katrina still ranks as the world’s costliest insured loss since 1900, causing $65 billion in covered losses at the time (see chart above).

Catastrophic losses

Katrina was a “watershed moment” for the industry, said Mohit Pande, New York-based chief underwriting officer, property, at Swiss Re, who in 2005 was a senior research engineer at catastrophe modeler Applied Insurance Research, which became AIR Worldwide.

“It truly reshaped how we understand and manage cat risk,” he said.

Mr. Pande, who led a team of engineers conducting post-disaster damage surveys in Biloxi and Gulfport, Mississippi, remembers seeing large floating casinos washed up inland. “I have not witnessed that kind of devastation in my life before,” he said.

The failure of the levees in New Orleans highlighted the potential for so-called “super cat” effects, Mr. Pande said. “These are compounding factors that drive losses and extreme catastrophes. Some people may also call them black swan events, but these are now routinely incorporated into catastrophe models,” he said.

Public entities with massive property schedules and billions of dollars in values often were covered by just one insurer in the admitted market before Katrina, said Nancy Sylvester, Baton Rouge, Louisiana-based executive area vice president in Arthur J. Gallagher & Co.’s public sector and K-12 education practice.

After the storm, there was a shift toward multi-insurer policies, with more international market involvement, she said.

Katrina was unique in that the flooding led to a long period of inaccessibility in New Orleans and the surrounding region, said Robert O’Brien, a Washington-based managing director in Marsh’s national property claims group.

The severity of damage across a widespread area, the exodus of people from New Orleans and infrastructure issues delayed recovery efforts, he said.

In addition to physical damage, businesses suffered contingent business interruption losses because of supply chain disruptions and the economic effects of a reduced customer base resulting from people leaving the area, Mr. O’Brien said.

“Katrina had a very long tail, not only because it was and remains the largest natural disaster in the U.S. in current dollars, but also in terms of claims,” said Robert P. Hartwig, a professor of finance and director of the Center for Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina.

The hurricane resulted in 1.7 million claims, he said.

Legal battles

Katrina triggered widespread litigation over wind versus flood damage. Most standard property policies exclude flood damage, but separate coverage is available through the National Flood Insurance Program or from private insurers.

The most litigated coverage issue was flood versus wind, said Cliff Simpson, Atlanta-based executive managing director at Brown & Brown. “The insurance industry actually won most of those cases,” he said.

In response to the litigation, insurers tightened definitions of flood and named windstorm in property policies to clarify that storm surge is considered part of flood, Mr. Simpson said.

Insurers also reduced their supplemental flood coverage limits. “Where a carrier might have consistently given $25 million of high-hazard flood on their policy to a single client, they lowered those to $5 million or $10 million to control their exposure,” he said.

As a result, it took more insurers and many more policies to build up the limits that either policyholders felt they needed or that their lenders required, he said.

Policy language was changed and awareness of flood risk increased, said Lauren Savage, Miami-based president of the private flood division at Tokio Marine Highland. Agents now explicitly advise their customers about flood coverage exclusions, she said.

Market changes

Property rates surged after Katrina because of the scale of the losses, as insurers and reinsurers pulled back limits and reevaluated how they modeled, underwrote and priced catastrophe risks.

The price of U.S. property catastrophe reinsurance jumped 76% at January 2006 renewals, according to the rate on line index from Guy Carpenter & Co.

There was an adjustment in pricing across the industry, Mr. Pande said. “Pricing reacted to the adjustment in the underlying exposures,” he said.

Property rates before Katrina were “irresponsibly inexpensive” and there was abundant choice, said Shaun Norris, New Orleans-based president of the Gulf South region at Hub.

“In hindsight, when you look at it, it was far below what we call the expected probable maximum loss, which then caused an unreasonable over-correction in pricing after Katrina,” he said.

The market shifted from standard market coverage to mostly excess and surplus lines quotes after Katrina, he said. “All the bells and whistles an agent could ask for pre-Katrina” became non-negotiable, for instance off-premises power coverage, Mr. Norris said.

Percentage deductibles became standard, especially for catastrophe coverage.

“I had clients during Katrina with a $100,000 property deductible, which feels free right now. Following Katrina, percentage deductibles became the norm and still are,” said Gallagher’s Ms. Sylvester.

Determining how percentage deductibles applied became essential. Many policies defined deductibles on a location basis, meaning all owned buildings within one city block could be treated as a single location, and the deductible applied to the total insured value of all buildings in that location, she said.

“Public entities don’t have the money to pay that kind of deductible, so we try really hard to make sure the deductible is written on a per-building basis,” Ms. Sylvester said.

Technology improves

Advances in technology since Katrina give claims professionals “early eyes” on hurricane losses and allow them to prioritize where their resources will be used, Mr. O’Brien said.

“Today, we can fly drones over a disaster area. We can use satellite photos, any number of tools that we have now that we really didn’t have efficient use of back then,” he said.

Technology enables the industry to assess the overall magnitude of the loss much more quickly, he said.

Advances in technology, such as video surveillance and remote sensors, can improve causation analysis in insurance claims, said Joshua Gold, a shareholder in law firm Anderson Kill’s New York office.

“Back in 2005, that evidence understandably was lacking on a lot of occasions, especially with residential policyholders. In 2025, we’re probably better situated to have more video evidence, more sophisticated data points that we could rely upon if we’re going to have this dichotomy of analysis as to what is actually causing the damage,” he said.

Flood mitigation and property-level resilience became crucial after Katrina, said Jeremy Kiefer, Tampa, Florida-based founder, CEO and executive risk consultant at loss adjusting company Deft Group.

New Orleans and Louisiana invested $14.5 billion after Katrina to rebuild and upgrade the city’s levee system. The Hurricane and Storm Damage Risk Reduction System, built by the U.S. Army Corps of Engineers and completed in 2018, is designed to protect the region from a 100-year storm surge event.

“With rising sea temperatures, which I don’t think anybody can deny, storms are more severe,” and sea levels are rising, Mr. Kiefer said.

Exposure growth in coastal areas due to demographic shifts is also a growing concern, he said.

“The entire Gulf Coast and Eastern Seaboard is more susceptible to flooding than it’s ever been. Flood mitigation, whether it’s on a federal level, like in New Orleans, or whether it’s on a property level, is pretty much mission-critical at this point,” he said.

Swiss Re estimates that a repeat of Katrina today would result in nearly $100 billion in insured losses in 2024 dollars, which is slightly lower than the inflation-adjusted loss of 2005, Mr. Pande said.

“The reduced physical devastation from a repeat of Katrina is largely due to the improved flood defenses and stricter building codes that have been implemented in and around New Orleans,” he said.

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Models failed to anticipate levee systems collapse

Hurricane Katrina spurred significant changes in insurance and risk management, including more robust hurricane models and a greater focus on data quality.

The failure of the levees in New Orleans highlighted the need to anticipate so-called super cat effects — loss-driving factors that contribute to large catastrophes, according to experts.

Hurricane Katrina’s damage was primarily due to flooding, not wind, and the levee system’s failure was a significant issue, said Karen Clark, president and CEO of Boston-based Karen Clark & Co.

The levee system was not as effective as the models assumed, and after Katrina, modelers had to take a closer look at how the system worked, Ms. Clark said. Models were adjusted to better reflect the effectiveness of the levee system, she said.

Katrina also prompted an increased focus on the quality of exposure data, Ms. Clark said.

“There were a lot of hotel casinos that had major damage. At first, there was criticism of the models, but it turns out these were floating casinos and they had been geo-coded as if they were on land,” she said.

Catastrophe models did an “adequate job” of modeling wind damage and coastal storm surge during Katrina but failed to anticipate the levee failure, said Hemant Shah, co-founder and executive chairman of San Francisco-based Archipelago Analytics.

“We were focused on modeling water as a storm surge dynamic on the coast, and potentially that the levees would be overtopped, but not that they would fail,” he said.

“It was a classic case of a failure of imagination to capture the complexity of these super cat events,” Mr. Shah said.

Hurricane models have become more robust and have held up well in recent events, but a severe earthquake in a major urban area in the U.S. today would trigger all kinds of outcomes that may not have been anticipated, he said.

“The consequences of a large earthquake could be so severe in terms of not just damage to buildings, but infrastructure, fire following earthquake, dam failures, levee failures, cascading consequences of impact across a whole metropolitan area which could be akin to the surprise that we saw on the peril of hurricane in the city of New Orleans in 2005,” Mr. Shah said.

Since Katrina, catastrophe modeling companies have continually improved their technology and their ability to provide probable maximum losses and address aggregation issues, said Cliff Simpson, Atlanta-based executive managing director at Brown & Brown.

“Those PMLs and aggregates are only good if the values are good, so certainly there’s been a heightened focus on valuation in the industry, especially in the most recent hard market with inflation,” Mr. Simpson said.

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Property cat reinsurance, alternative risk markets grew following Katrina

Demand for reinsurance increased sharply after Hurricane Katrina, as cedents scrambled to find property catastrophe coverage in a disrupted market.

Insurers and reinsurers responded to the perceived increase in the frequency and severity of storms after the destructive back-to-back Atlantic hurricane seasons in 2004 and 2005, according to experts.

Just weeks after Katrina, Hurricane Rita struck Louisiana as a Category 3 storm on Sept. 24, 2005. Hurricane Wilma made landfall on Florida’s southwest coast on Oct. 24, also as a Category 3.

The 2005 season resulted in $89 billion in insured losses at the time and more than $181 billion in direct economic loss, according to a Gallagher Re report issued in July.

Combined with nearly $30 billion in insured losses from the 2004 Atlantic hurricane season, total insured losses exceeded $100 billion — the first time back-to-back Atlantic seasons had crossed that threshold, Gallagher said.

This led to the so-called Class of 2005, a wave of insurers and reinsurers that formed in Bermuda, initially focused on property catastrophe risk. Startups included Amlin, Ariel Re, Flagstone Re, Lancashire Holdings and Validus Re.

2005 was by far the costliest year for natural catastrophes the market had seen, said Richard Brindle, group CEO and chairman of The Fidelis Partnership, who founded Lancashire in Bermuda in October 2005.

The loss was so huge that the industry was “gun-shy about deploying capacity, and the models were broken,” he said.

“Companies became very risk-averse. It created both an economic and a psychological compression in capacity, which meant that space was created for new entrants,” Mr. Brindle said.

“We made ourselves available to brokers 24/7 and there was a huge demand for all of our products,” he said.

Katrina also led to increased demand for alternative risk transfer options, prompting a significant influx of capital and growth in the insurance-linked securities market, particularly catastrophe bonds.

Katrina marked a “seminal moment” in the ILS market because it was the first time since 1997 that there was a catastrophe bond recovery, said Richard Pennay, New York-based CEO of Aon unit Aon Securities.

The bond, known as Kamp Re 2005, was triggered when Zurich Insurance’s Katrina losses exceeded $1 billion.

“Hurricane Katrina showed that there was meaningful risk transfer and that the market would digest losses and would continue to trade forward,” Mr. Pennay said. It helped validate the market’s viability, he said.

“The outstanding cat bond market at the time was $4 billion and today that same market is now $55 billion,” he said.

A larger share of capital entering the reinsurance sector today is coming through alternative markets, said Robert P. Hartwig, a professor of finance and director of the Center for Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina.

After Hurricane Andrew in the late 1990s, reinsurers tended to view alternative capital “as a competitor to traditional reinsurance, and with some hostility,” Mr. Hartwig said. “Now it is viewed by insurers and reinsurers as an essential capital provider.”