Bryan Norcross: Talking about the hurricane insurance crisis while we wait out a tropical lull

There is nothing to look at right now, but the various computer forecast models all show some form of a disturbance developing in the Caribbean around Halloween. The predictions range from a fairly benign, broad low-pressure system to a well-defined tropical storm or hurricane.

The triggering mechanism looks to be a strong upper-air disturbance that will move into the Pacific Northwest of the U.S. tonight and eventually turn into a sharp dip in the jet stream extending into the Caribbean. So the eventual low-pressure system, if it forms, will have non-tropical origins and, therefore, could take a while to develop, if it does. We’ll see.

For now, the tropics are taking a break.

Over the past few days, a number of readers have made the distinction between building better to defend against future hurricanes and paying the impossibly high cost of hurricane insurance in Florida. You build strong once, but the insurance bills never end.

Indeed, insurance has been on my mind ever since Florida Insurance Commissioner Bill Nelson appointed me to serve on a committee looking into the insurance market crisis created by Hurricane Andrew. The committee failed to find a permanent solution, and since then, the desperate-to-keep-things-stable state government has tweaked the system, including making it harder for hurricane victims to get paid, which they hope will encourage private insurance companies to continue doing business in Florida.

So the crisis is only deeper, insurance is stunningly expensive, and the 2024 hurricanes will likely make things worse.

In 2006, after the hurricane onslaught that included Katrina, Rita, and Wilma, I published a book called the “Hurricane Almanac.” Included was a section I modestly named “How I’d Do It Better,” where I addressed some systemic challenges of living in the hurricane zone. One of them, of course, was insurance.

Here were my thoughts then on what needed to be done. I think it still applies. The situation has only gotten worse in Florida, and the contagion has spread through the hurricane zone.  

If you think the idea has merit, I encourage you to contact your local congressperson and get them focused on solving the problem. Remember, this piece was written from a 2006 perspective.

The only solution to the insurance crisis: A national catastrophe fund

The hurricane insurance problem is a crisis that’s about to turn into a catastrophe in its own right. No “insurance system,” as we currently understand that term, can ever work for hurricanes because:

• Hurricanes don’t happen with enough regularity, so a reliable average yearly loss number can’t be calculated.
• No matter how big a pile of money an insurance company has on hand to handle a major hurricane, it may not be enough if there’s a monster storm.
• There could always be another monster storm next week.

This is in contrast to fires and car accidents, for example, which happen with enough uniformity that calculations can be made to determine what an appropriate premium needs to be for the company to pay its claims and make a reasonable profit. These high-frequency events are “insurable” because they occur with predictable regularity.

Major hurricanes, devastating earthquakes, and serious terrorist attacks, that is, catastrophes, only rarely happen and therefore don’t fit the definition of an insurable event.

Every time there is a big hurricane or a series of hurricanes, rates go higher. They have to, because no amount of money is guaranteed to be enough.

Hurricane insurance is really a misnomer. When you pay money to the insurance company to cover you against a hurricane, you are really just throwing money into a pot and hoping it’s going to be enough. Even though it is guaranteed that this year, next year, or another year soon it will NOT be enough. The system will collapse, and the federal government will have to come bail us out to the tune of billions and billions of dollars.

How I’d do it better

There is only one solution to the problem: a National Catastrophe Fund. By taking the relatively rare extreme event out of the insurance equation, insurance companies can make a reasonable estimate of what their maximum yearly losses will be and what they have to charge.

There are a variety of ways to implement this program, but the key component of any properly constituted catastrophe fund system must be incentive. Communities and states should be allowed to participate in the fund—and therefore have their insurance rates dramatically lowered—only if some or all of the following conditions are met:

• The building code meets a high standard (appropriate to the local threat) and is properly enforced.
• A program is undertaken to retrofit existing buildings.
• A program is undertaken to strengthen the homes of people who, for economic reasons, are unable to participate in other programs (many of whom likely carry no hurricane insurance under the current system).
• New mortgages are not granted unless the building being sold is brought up to a realistic standard.
• A practical system is created to “rate” individual buildings for loss potential.
• The state creates an escalating insurance scale based on a building’s “rating.”
• The state has its own catastrophe fund.

The fund would cover all hurricane losses above a defined amount each year to protect insurers from multiple-storm seasons. Since total payouts for any one season would be capped, insurance would become more widely available, and competition would return to the marketplace.

Many people have a philosophical problem with the government being in the insurance business. The fact is, however, insurance companies are not currently in the insurance business when it comes to hurricanes. They are in the pile-up-money-and-hope business.

If the pile of money isn’t enough, they can declare bankruptcy and move on, having taken their profits in non-hurricane years. Then the state borrows money, adds a tax to future insurance policies to pay for past storms – further increasing the cost of insurance. The house of cards grows taller. It’s an unworkable system.

The other complaint against creating a catastrophe fund on a federal level goes something like, “People in North Dakota shouldn’t have to pay for losses caused by people living in the way of hurricanes.” I have four responses to that concern:

• People in North Dakota and every other state pay anyway. Look at the federal bill for Katrina, Rita, Wilma, Andrew, Hugo, and every other destructive hurricane—many many billions of dollars.
• Each state should be required to have a state catastrophe fund. The size of that fund would vary depending on the likelihood of a devastating event happening in that state. Homeowners in Florida and California, for example, would have a significantly bigger catastrophe fund surcharge on their policies than homeowners in Ohio. In case of a catastrophe, the state fund would be used up first.
• By creating the incentive system described above, the future losses for everybody are diminished, so there is the potential to save federal money down the road.
• The National Catastrophe Fund doesn’t cost much of anything if there is no mega event. But, all the while, it’s providing the incentives necessary to improve the national readiness for a major hurricane, earthquake, or other horrific disaster.

As I said earlier, hurricanes (and earthquakes) are not, by definition, insurable. Add to that the economic drag high insurance rates create, and there’s even more reason to take action. The money paid out after a disaster only solves problems caused by that one event – a terribly inefficient system.

Money spent on mitigation to minimize losses protects against all storms to come. Lives will be saved, cleanup costs for garden-variety disasters will be dramatically diminished, and we will make a better country.

There is, of course, a federal “insurance” system in place, the National Flood Insurance Program (NFIP). It was created decades ago because governments came to realize that floods were not “insurable,” for the same reasons hurricanes aren’t insurable stated above. A private insurance system can’t handle the threat. The NFIP program should be reworked and incorporated into the new plan.

Everybody in the system, from insurance companies to informed legislators, knows that there is no way to stop the escalating insurance crisis in the coastal areas by simply moving piles of money around. Concrete steps must be taken to lower the risk of an unfundable catastrophe in order to attract private money into the system. The sooner Congress moves on the program outlined above, or something similar, the better for the entire country.