Billion Dollar Blowout: Billion Dollar Blowout

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Whether rates will ultimately rise is a matter of debate. Premiums are set according to a state's loss-data history, not a single event. Insurance firms developed more sophisticated modeling techniques after Hurricane Andrew. Now they are able to predict with greater accuracy the frequency and potential damage of storms like Katrina and spread their risk across the country accordingly. While residents in hurricane-prone areas can expect rate hikes, "people in Alaska won't be paying for this," says Robert Hartwig, chief economist with the Insurance Information Institute.

Kevin McCarty, Florida's insurance commissioner, disagrees. He believes that homeowners across the board will pay more because of the storm. "The insurance companies are out there saying Katrina won't affect rates in their states, but that doesn't make sense," he says. "Demand for reinsurance is going to rise, supply is down, and that cost will be passed on to consumers." All this is academic, though, for the thousands of poor homeowners who did not have federal flood insurance and may have to rely on low-interest loans in order to rebuild.

Can the economy take the hit?

For the most part, yes. In the near term, economists say, Katrina may shave half a point off GDP growth over the next couple of quarters, largely because everyone from homeowners to truckers to airlines will be paying more for energy. But the U.S. economy can withstand some big blows. The nation was emerging from recession on 9/11, and that event did not ruin the recovery (thanks to billions in tax breaks). A slowdown may give the Fed reason to suspend its interest-rate hikes, a prospect that has already sparked a bond-market rally. While Katrina's impact on the Gulf economy is devastating in the near term, an infusion of federal disaster-relief dollars should stimulate industries from homebuilding to appliances and help lift the economy in 2006.

And never underestimate the indefatigable American profit motive. One Houston contractor, Bert Screen, hopes to make his fortune rebuilding New Orleans. He was packing up his Ford pickup last week, rounding up a crew and planning to head east. "In a twisted way, I'm looking forward to it," he says. "I've always felt New Orleans was my second home, so I will help rebuild it, and make a pile of money." The recovery has already begun. --With reporting by Lisa Takeuchi Cullen, Jyoti Thottam, Dody Tsiantar and Deirdre van Dyk/New York, Wendy Grossman/ Houston and Douglas Waller/Washington