As always, hurricane season officially begins June 1. The National Oceanic and Atmospheric Administration predicts an “average” hurricane season this year—meaning “a likely range of 9 to 15 named storms (winds of 39 mph or higher), of which 4 to 8 could become hurricanes (winds of 74 mph or higher), including 2 to 4 major hurricanes (category 3, 4 or 5; with winds of 111 mph or higher).” By comparison, NOAA predicted that 2018, which produced Hurricane Michael, the first Category 5 hurricane to come ashore in the continental U.S. since 1992, would be “near or above-normal.” And 2017 produced Harvey, Irma, Maria and Nate.

One might reasonably suppose that these storms and the amounts spent on disaster relief (irrespective of political issues) and flood insurance claims would prompt a push toward structural changes to insurance for catastrophes of this kind. Unfortunately, one would be wrong.

As this is written, the Federal Emergency Management Agency flood insurance program is set to lapse once again effective June 14. The current extension is the tenth time Congress has “kicked the FEMA can down the road” since September 2017. While efforts are underway to give the can another kick through the end of September, the bill containing the extension and $19.1 billion in disaster relief funds may not get through the House until after it records a vote. Unless all Representatives give unanimous consent, the National Flood Insurance Program may lapse or go on hiatus again.

The NFIP program faces multiple issues, most of which are familiar to anyone who has followed this program since the introduction of the Biggert-Waters Flood Insurance Reform Act of 2012 (“BW-12”). BW-12 sought to stimulate development of a private flood insurance market as an alternative to the NFIP program by allowing financial institutions to accept non-NFIP coverage for loans in Special Flood Hazard Areas. BW-12 also included provisions that would have brought premiums for NFIP flood insurance into line with actuarial projections necessary to keep the program self-sustaining prospectively, and that added a surcharge to present policyholders to help pay of prior program debts.

The BW-12 premium increase was met with hostility, to say the least. Many individual homeowners faced huge increases in premiums under BW-12 as their “grandfathered” premiums (refers to a practice under NFIP that enabled homeowners to keep their old premiums when a new map reclassified them into a higher-risk zone) phased out, and lawmakers quickly backed away from support for the phasing out of premiums. The Homeowner Flood Insurance Affordability Act of 2014 rolled back most of the premium increases enacted under BW-12 and continued the push to stimulate a private flood insurance market.

In 2017, Congress forgave approximately $16 billion of debt owed by the NFIP program from prior claim payments. Even with this forgiveness, NFIP had a deficit to the Treasury from claim payments of over $24.6 billion.

In April 2017, about four months before Harvey made landfall, the Government Accountability Office (GAO) issued a report to Congress titled “Flood Insurance: Comprehensive Reform Could Improve Solvency and Increase Resilience.” GAO found six elements necessary for comprehensive flood insurance reform: (1) eliminating existing debt in the program; (2) adjusting premium rates to account for the existing risk of loss; (3) affordability; (4) barriers to private insurer market participation; (5) consumer misperception of risks; and (6) resilience problems, including issues relating to mapping and construction standards.

The need to adjust NFIP premium rates and truly stimulate private participation in the flood insurance market is directly relevant to HB 668, introduced in the current legislative session but which died in committee. The bill's text is deceptively simple. For policies delivered after Jan. 1, 2020, “If the governor designates a disaster area under Section 418.014, Government Code, an insurer may not consider loss and expense experience caused by the disaster in the designated area to set rates for risks outside of the designated area.” That's all. Under this statute, homeowners in Amarillo would not be called upon to pay for flooding in Addickes and Barker Reservoir areas flooded during Harvey, and people in West Houston would not have to pay for tornado damage in the Panhandle. That seems fair enough.

The 2017 GAO report explains why it might not be so fair. Distributing risks of loss as reflected by premium costs over a small population increases the amount that each member of the population must bear. This makes insurance against that risk more expensive and is likely to reduce consumer participation in the program. It is a significant problem because many existing properties are subject to loans that require insurance and that may move the burden of purchasing such insurance to the financial institution through a force-place program. Such a cycle occurred in areas affected by Sandy after passage of BW-12 and remains a substantial problem after the storms of 2017. Telling a victim of Hurricane Harvey that they will face substantial increases in insurance—if they can obtain it at all—because of state-mandated premium requirements is not likely to be received favorably.

The need to create actuarially sound premium structures also affects private entry into the marketplace. The federal flood insurance program dates to 1927 because of the great Mississippi River Flood that is best described in Randy Newman's song, “Louisiana 1927.” As many commentators and official studies have noted, federal flood insurance was enacted on the theory that insurance was better than ad hoc disaster relief, a purely political judgment. Private insurers are not allowed to make such judgments and must meet solvency and capitalization requirements. Statutes that limit premiums in amount or area so as to distribute risks adequately are unlikely to stimulate growth of a private market for flood-related insurance.

Additionally, to the extent that bills like HB 668 are intended to deter development in hurricane or tornado-prone areas, they are likely to be unsuccessful. Bills regulating premiums prospectively obviously cannot stop development that already has occurred and is unlikely to be a substantial deterrent to new development outside of existing or easily identified hazard areas. Where will the next emergency declaration be?

At a deeper level, bills like HB 668 paper over the more difficult problem: how to cope with climatological disasters in a world where storms—such as tornadoes and hurricanes—are likely to increase in number and severity. By their very nature, catastrophes defy the kind of actuarial modeling necessary to establish stable premium rates: how much damage can an average hurricane or tornado cause?

It likely is for the best that HB 668 did not make it out of committee. Insurance for catastrophe losses and disaster relief requires more than finagling of premiums.

Thomas B. Alleman is co-director of the insurance industry group at Dykema Gossett in Dallas. The opinions expressed in this article are not necessarily those of the firm or any of its clients.