Federal Catastrophe Insurance Programs


   In 1803, Congress passed a law granting the victims of a fire in Portsmouth, New Hampshire, extra time to repay certain debts owed to the Federal Government. Though the Federal Government has assisted Americans harmed by disasters throughout the Nation's history, prior to the midtwentieth century aid was generally provided on an ad hoc basis; a disaster would strike and Congress would then determine whether and to what extent Federal aid would be provided. Acts of Congress passed in 1947 and 1950 regularized the process by which the Federal Government extends assistance to disaster-affected communities and additional legislation enacted since then has clarified and expanded the Government's role in disaster relief.

   One problem with a variety of government relief efforts is that they can make it more difficult for private insurers to sell policies for some catastrophe hazards at prices commensurate with underlying risks. People have less incentive to pay sometimes high insurance premiums if they expect to receive aid from the government when a catastrophe strikes. Policymakers have sought to address this moral hazard problem in several different ways. The Federal Government provides insurance coverage for certain catastrophe hazards, often at prices lower than those that would be charged by private insurers. In addition, in some cases the Government requires that individuals purchase insurance policies or mandates that private insurers offer policies for sale.

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