Following major disasters such as Hurricane Katrina of 2005 and the Northridge Earthquake of 1994, many impacted households wished they had purchased insurance as they were not covered. Moreover, insurance companies were struggling to pay out on claims and were reluctant to continue offering insurance policies in these risky locations.

• What does this tell us about uncertainty and risk with respect to extreme events (i.e. both rare and costly events such as natural disasters, terrorist attacks, and major technological accidents)? What role can the government play? Please discuss this with respect to an actual government program or agency. Is there a danger of a moral hazard occurring if the government does intervene? Does this matter?