Hurricanes Katrina and Rita exposed such major shortcomings in the United States’ insurance system that regulators from several states are drawing up plans for a national catastrophe insurance program.

Its backers argue that without a major overhaul, the current system will once again perform miserably in a big California quake, a major terrorist attack or storms that echo this season’s in size and intensity.

While the details will be worked out at a summit in San Francisco next month, one strong possibility is that the program will be mandatory for all U.S. homeowners in the same way liability insurance is required for car owners.

That would eliminate the biggest problem with current forms of disaster insurance: It’s specialized and often expensive, so few buy it. That keeps the premiums high, which keeps it unpopular. When a disaster hits, only a small percentage of people are covered.

With a national program, premiums would vary according to risk areas, with Gulf Coast residents and Californians paying more than, say, Idahoans or Nevadans. The insurance companies would administer the program and, in all likelihood, the federal government would guarantee it.

The proposal, which would have to be approved by Congress, is drawing fire from consumer advocates, who fear it would be nothing more than a massive bailout of the insurance industry.

Supporters – including California Insurance Commissioner John Garamendi – contend that the entire country is already paying for disasters like Katrina, but after the fact.

“You have a catastrophe, the president flies in, and the money falls out of the back of Air Force One,” Garamendi said.

With Katrina and Rita, losses might total as much as $200 billion, at least half of which was uninsured.

Bill Birch scrapes mud out of his flood-damaged home in the Lakeview area of New Orleans. After more than five weeks, residents were allowed back into all but one of the city's neighborhoods last week to inspect damage from Hurricane Katrina.

“It’s a government bailout,” the commissioner said. “It’s inefficient, and extraordinarily expensive.”

No one – insurers, consumer advocates, regulators or local residents – wants a replay of Katrina and Rita. The storms ruined hundreds of thousands of homes, but insurance may cover only a fraction of the destruction.

Many policyholders in Louisiana, Texas and Mississippi are being told that their damage is the product of flooding rather than the wind that made the flooding possible. Wind is covered in standard policies, but rising water isn’t. Some people are hiring special adjusters to argue their case with insurance company adjusters.

Only a minority of homeowners had government flood insurance. Even those who did are limited to $250,000 in coverage, which won’t be nearly enough for some waterfront mansions.

Insurers have their own complaints. Industry officials say they can’t develop computer models for cataclysms. They say it won’t take many more storms like Katrina to drain their reserves.

The legal battles promise to be lengthy and messy. The Mississippi attorney general is suing insurers to force them to cover all storm damage, including flooding. A flurry of private lawsuits seek the same thing. A Mississippi legislator is touting a proposal to allow people to buy flood insurance retroactively, a concept that overturns every tenet of the insurance business.

The Insurance Information Institute, an industry group, warns that if these cases prevail, the companies will leave the market.

“Is there a lot of anger? Absolutely,” said Louisiana Insurance Commissioner J. Robert Wooley. “The insurance companies are being vilified.”

The fury isn’t always justified, he added. Sometimes people have themselves to blame.

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“Sixty percent of the people in America are underinsured. Maybe it’s a little lower nationwide, maybe higher here,” said Wooley, an advocate of a national plan.

The situation is likely to repeat itself soon, maybe in the gulf, maybe elsewhere, experts say. As large-scale catastrophes increase in frequency and severity, fewer of those affected are equipped to survive them financially.

Several converging trends are responsible.

More Americans are living in risky areas, whether along earthquake faults in California or in the hurricane zone that stretches from Texas to North Carolina. And terrorism is an unquantifiable but real threat in every large urban area.

Five of the seven most expensive hurricanes in U.S. history, as measured in 2005 dollars, struck in the last 14 months. To protect themselves, insurers will continue a decade-long process of cutting back.

“The model we currently operate under is very effective with high-frequency, low-severity events – automobile accidents, house fires, theft of property,” said Michael Trevino, a spokesman for Allstate Corp., which insures 17 million households. “We can predict the likelihood of future losses pretty well. We can’t do that with mega-catastrophes.”

As a result, coverage that was once standard – including protection from earthquakes, flood, mold and landslide – now must either be purchased separately or is unavailable.

The federal government has offered flood insurance since 1968. It sets rates for the policies and can borrow from the U.S. Treasury in years when payouts exceed premiums, which they will do in 2005.

Flood insurance is supposedly mandatory for mortgages in flood-prone areas. Nevertheless, participation rates were as low as 15 percent in some hard-hit areas of the Gulf Coast, officials there say.

Several state insurance regulators, including California’s Garamendi as well as his counterparts in New York, Florida and Illinois, believe the low sign-up rates for earthquake and flood insurance are the best reason to revamp the system. National catastrophe insurance has been touted before – the idea is so old no one is sure who first came up with it – but if it’s ever going to have a shot, it’s now.

Consumer advocates are wary of a national insurance program, as are some development experts.

“Talk about an incentive to build in the wrong places,” said Joel Kotkin, a senior fellow at the New America Foundation who advocates environmental or insurance restrictions that would encourage populations to move inland.

“Why should people in Idaho pay for a house that’s been destroyed and rebuilt 10 times by hurricanes?” he added.

The insurance commissioner for Idaho, Gary Smith, declined to be interviewed. But the commissioner for another lightly populated landlocked state said she was interested in the proposal.

“It’s certainly something to look into,” said Nevada Commissioner of Insurance Alice Molasky-Arman.

Robert Hunter, a former Texas insurance commissioner who now works with the Consumer Federation of America, said the insurance companies “would love to socialize all the risk and keep all the profits. It’s very dangerous to open this Pandora’s box of federal backup.”

California commissioner Garamendi said such concerns were “appropriate” but “premature,” since no plan has been formally chosen. One possibility is that the private sector keep control but be given certain incentives, such as the ability to accumulate reserves tax-free. At the opposite extreme, there’s complete federalization.

One way the program could be adapted to discourage risky building is to have builders include the price of insurance in the cost of the house, consumer advocate Hunter said.

“If you’re going to solve the problem, do it right. Everyone’s got to give something up,” he said.

Among them: insurance companies will have to sell the insurance, and not run away from disaster coverage as they’ve tended to in the past. Developers will have to reduce risk so “they’re not building houses underwater,” Hunter said. And the public is going to have to be willing to live with a higher deductible so the insurance is only used for catastrophes.