It has been five years since Hurricane Katrina took on New Orleans. There were 1,836 deaths (confirmed) and total damage estimate between $80 billion to $150 billion dollars, making it the costliest hurricane in the U.S. history. There has been plenty of finger-pointing to the Bush Administration, FEMA, local authorities, and even law enforcements on the ill-preparedness beforehand and lack of progress afterward. As of now, some of the damaged neighborhoods still inhibit less than half of the pre-Katrina population. And if bad luck strikes again, it can happen in just the next hurricane season. We ought to use the New Orleans experience as an example when we enact policies. Specifically, we need to draw lines on the roles and responsibilities of government, residents, and insurance companies in the event of such widespread natural disasters, so each will react instead of expecting others to act.

Lesson 1: Role of Government
The government cannot turn the Hurricane back, but it has sufficient resource to warn the residents beforehand. Hurricanes, unlike earthquakes (arguably), have warning signs before they hit. A quick notice over the television and air waves 24 to 48 hours ahead will warn all residents in the city. If need be, they can even use trucks armed with loud speakers going through neighborhoods to make sure people know what they are up against. Our government sustains itself via taxes from the residents, so there should be no hold back on information from the general public, especially if the withholding can cause tremendous damage. The taxes collected should sufficiently cover all monitoring services and ensure all roads are clear for people that need to leave the city for a safe area.

What if people don’t have the means to leave the area even after knowing the pending disaster? I think it is safe to say that Ronald Coase would recommend Greyhound buses going through neighborhoods picking people up, with 2 pieces of luggage allowed per person. Of course, if people decide to take a chance (What if the hurricane misses your house by a mile, right?) and stick around, then they assume responsibility of themselves.

Lesson 2: Role of Residents
Residents have very limited options: stay behind or pack up and leave. Neither option is as good as if no disaster takes place, but that’s why we call them disasters. Now, if you zoom out to the year(s) prior to Katrina, you can see the residents have a choice of living in warm New Orleans with a chance of hurricane or elsewhere in the U.S. (or within state borders, such as Shreveport) with lower or no chance of hurricane. If you choose an attractive area that is prone to natural disasters, it is your choice. Yes, if you live in a house over a California cliff and a major earthquake hits, there shouldn’t be any misunderstanding. In other words, you simply can’t have the best of both worlds. After all, natural disasters of this magnitude are considered “Acts of God.”

However, you do have the access to natural disaster insurances. If you own a home in a tornado prone area, you might want to consider tornado insurance. If it hits and you don’t have it, you can only have the same response as if the dealer hits blackjack with an ace showing. Insure beforehand, post disaster actions will only be valid for future incidents.

And of course, being prepared with an emergency “pack” containing important documents and valuables that can be readied within a short period of time is smart; struggling to find your wallet when the house is falling apart isn’t.

Lesson 3: Role of Insurance Companies
This issue isn’t considered by many but shall never be overlooked. Many people do purchase insurance for their homes and property to hedge against the event of natural disasters. Insurance companies charge a premium equal to a tiny fraction of the pay-out amount and can usually afford to pay the claims, as the chance of a large number of simultaneous claims is essentially zero. Of course, this doesn’t apply to the case of natural disasters – if a hurricane takes out your house, then, chance are, your neighbors’ houses are not doing any better. In geeky terms: the insured events are not necessarily independent. So, if you see an insurance company that insures (core of its business) all New Orleans homes against hurricanes, you can bet that it cannot pay its claims! Any insurance company that concentrates its policy holdings does not deserve to be in the business.

One way to avoid this is to better oversee the insurance industry. This can be done by creating an analogous version of what the FDIC does for banks. Require insurance companies to meet strict requirements ensuring their ability to pay claims, or impose heavy fines if they ever fail. Being told your insurance company can’t pay your claim after losing your home is worse than simply losing your home without insurance.

As of now, tremendous efforts have been put in place to restore the greatness in New Orleans. I hope they are from local government, residents, and private investors – since they are the ones that reap the benefit of future taxes, pleasant atmosphere, and profits. Additional government funding only makes living in New Orleans more attractive than market value, result in an overflow of residents that will again suffer during the next hit. The only way to minimize damage for future disasters (they will come) is to clearly define roles of government, residents, and insurance companies. They will react to what is in the best of their interests.