September 25, 2023 • 44 mins
This year has seen a spate of insurance companies announcing that they're leaving markets like Florida and California, citing the increased risk of natural disasters, such as floods and wildfires. Elsewhere, premiums for certain types of insurance are skyrocketing — yet many insurance companies can't seem to turn a profit in certain areas. Melanie Gall is the co-director of the Center for Emergency Management and Homeland Security at Arizona State University, and she also manages the Spatial Hazard Events and Losses Database for the United States, known as SHELDUS. In this episode, we talk to her about what's driving insurers away from certain markets, and what can still be done to protect businesses and homeowners from catastrophe.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:10):
Hello, and welcome to another episode of the Odd Loots Podcast.
I'm Tracy Alloway.
Speaker 2 (00:15):
And I'm Joe Whysenthal.
Speaker 1 (00:16):
Joe, do you do you like watching the weather? I
can hear the pain in your voice as soon as
I asked them.
Speaker 2 (00:26):
It's so funny. I didn't. I was wondering how you're
gonna start this one. I hate rain. I hate rain
so much. Other than that, I don't know. It's not
a big thing for me. What about you up in Connecticut?
Is it a bigger deal up there?
Speaker 1 (00:38):
I love weather. I am sort of an armchair meteorologist,
by which I mean I have several weather apps. I
get very excited about thunderstorms and other types of storms.
My husband, however, does not. He gets extremely anxious whenever
there's a forecast of a severe thunderstorm because inevitably it
ends up dumping like two inches of where we are,
(01:00):
and our basement starts to flood.
Speaker 2 (01:02):
I've lived in a house that had flood damage. It
is extremely stressful experience too. I mean there's just like
the direct issue of like cleaning up all of the
lost damage and then like compensation and damage to the
house is probably one of the more like sort of
like stressful things a homeowner can deal with.
Speaker 1 (01:21):
Well, you know one of the stressful things happening right now,
and we're recording this on let's see September eighth. There's
a major hurricane brewing in the Atlantic right now, Hurricane Lee.
It exploded from a tropical storm I think just two
days ago into a category four hurricane. Now it's category
five and there's a lot of deliberation about whether or
(01:43):
not it's going to sort of run up the Atlantic coast,
might even get into New England. So an interesting one to.
Speaker 2 (01:50):
Watch, yes, and I guess I guess by the time
people listen to this will be resolved. But I'm glad
you mentioned that. But it's also coming in the context
of a time when there is a lot of anxiety
about the property market and insurance. And this came up
on our recent episode that we did with Howard Hughes
Holding CEO. We talked about this huge surge in the
(02:12):
cost that the company is paying for insurance. And there
have been so many stories about natural disaster prone areas
and homeowners are either just getting staggering sticker shock when
it comes to the cost of homeowners insurance and other
property insurance or there's no one at all, or you know,
companies abandoning markets like Florida, like California, et cetera.
Speaker 1 (02:32):
Absolutely, and it's not just hurricanes and floods. Of course,
we've seen wildfire risk becoming a more major thing, particularly
in Hawaii and Maui. Recently, there have been a number
of headlines, as you just mentioned, of certain insurance companies
pulling out of markets all together because they're no longer profitable,
or in some cases, like Florida, they haven't actually been
(02:54):
profitable for a very very long time. And insurance premiums
are going up all over the United States. But it's
really interesting if you look at them on a regional basis.
I think in Miami the average cost of insurance is
something like five thousand dollars versus less than two thousand
dollars for the rest of the US. So that gives
you some idea of how this risk is starting to
(03:17):
get repriced. But it opens up all these interesting questions
about what is going to happen to cities, to houses,
to other buildings that are in these natural disaster prone areas.
Speaker 2 (03:31):
You know, the thinking of things like flood insurance, which
is already sort of socialized or there's publicly funded. There
doesn't seem to be a lot of appetite politically to
let property owners sort of completely be without insurance in
other words, right, So it's like if the private market
leaves an area, you don't really see politicians like, Okay, well,
(03:51):
I guess we can't build here anymore. There's usually the
government steps in in some way, maybe there's like a
state insure, a national insurre in the case of flood.
And of course this creates its own issues, and that
it's sort of another one of these financial services that's
like sort of post market, kind of like banking in
some respects. And so there is a lot going on
with this market. And you know, obviously comes in the
(04:13):
time of other financial tightening financial conditions, comes at so
much attention played to climate risk, and I think we
need to understand more of this area.
Speaker 1 (04:20):
Absolutely, it's a complex market. It seems to be getting
more complex by the day, So let's dig into it.
I am very pleased to say that we really do
have the perfect guest. We are going to be speaking
with Melanie gall She's the co director of the Center
for Emergency Management and Homeland Security at Arizona State University.
She also manages the Spatial Hazard Events and Losses Database
(04:42):
for the United States, something known as SHELDUS. We're going
to dig into exactly what that is in a few minutes,
but Melanie, thank you so much for coming on all thoughts.
Speaker 3 (04:51):
Thank you so much for having me.
Speaker 1 (04:53):
So maybe just to begin with, can you explain what
the co director of the Center for Emergency MA Management
and Homeland Security at Arizona State actually does. What does
that entail?
Speaker 3 (05:04):
So I may be the kind of person that you
don't necessarily directly associate with, that kind of you know,
leadership position because by training, I am a geographer. I
started out making maps, digital maps, and I came into
the field of emergency management through a stint that I
(05:24):
did in Africa. I was actually in Mozambique and I
did training on you know, how do you collect data
in the field with a GPS, this kind of information.
And it was after a massive flood event and then
I realized, ooh, there's a great connection between what I
was doing geographic information system and emergency management because you
need a lot of logistics support, you need to know
(05:45):
where your stuff is, where you should set up shelters
and alike. And that was my route into emergency management.
And so what I do here now at Arizona State University,
I teach. Obviously, we have a master's degree in an
undergrad program in emergency management and homeland security, and I
do numerous research projects. I work with out a nonprofit
organizations here in Arizona. So it's really a broad variety
(06:08):
of things. So it's very exciting as a job.
Speaker 2 (06:10):
I have to say, you mentioned data collection, and of
course you have this database, and you know, it strikes
me that collecting natural disaster data seems extremely difficult for
all kinds of reasons. I mean, even something as simple
as like tallying up the dollar amounts spent on recovery
strikes difficult. And what these trends are and I could
(06:32):
imagine that you could have an increase in dollar amounts
for an area and because there's more disasters, or maybe
because there's just more building and more people there that
could also cause that, and so like disambiguating some of
these effects. Talk to us a little bit about just
the challenge of measurement, because if we're going to get
into insurance and know like how much risk is in
a given area that you have to start with, like, well,
(06:54):
how much dollar what is the dollar value of the
property in an area? So talk to us about the
challenges of measuring these types of things.
Speaker 3 (07:02):
So let me start with telling you a little bit
about where we get our data from, and then too
the measurement because we are a secondary user of disaster
loss information. So we get the vast majority of our
data from the National Weather Service or better you know,
the National Weather Service feeds the information to the National
(07:23):
Centers for Environmental Information in CI, and that is where
we get the majority of the data from. So it
is actually your local forecast office, your local meteorologist that
collects that information. So it is not an economist or
an assessor or anything like this. So it's the local
forecast office that collects that information. So I came into
(07:47):
this arena of collecting disaster losses way back in the
days when I was a PhD student, where my professor
had this idea that as a geographer, it should be
fairly easy to develop profiles for the country. You know,
how does County A suffer more from hurricane damage than
flood damage than County B and LO and behold, there
(08:08):
was not really easily accessible database where you can get
this information, and that was really the starting point for
setting up this database. So now we are in the
business of compiling data that is already assessed from different
federal agencies. So NCI is one of our main data sources,
(08:29):
and then we also use data from the US Geological Survey,
especially related to geological hazards earthquake damage, volcanic eruption damage
tsunamis analyte because the Weather Service obviously only collects data
related to mitrological and hydrological events, but we are interested
in compiling a database that covers all natural hazards. So
(08:53):
we are vistly using data. And there's only a tiny
fraction where we compile our own data, and that is
landslide data. So landslide data is really not or has
not been easily accessible. There was a Landslide Act passed
a few years ago, so that now triggered the US
Geological Survey to get most serious about collecting that data.
(09:15):
And so we decided that we want to include landslide
data in our database. And that's where we then started
like scouring newspapers, websites, and we're applying the same sort
of assessment methodology that the Weather Service is employing. Because
the main users of our data are local planners, hazard
(09:37):
mitigation planners. And hazard mitigation planners sit in the emergency
management division of your county or of your state, and
they are actually charged by law. They are not required
to compile what it is called hazard mitigation plans, but
they are incentivized to compile these hazard mitigation plans. And
in these plans you have to do risk assessments. These
(10:00):
risk assessments need to include a history of past losses
and that's then when people tend to come to us.
So measuring losses and assessing them goes exactly you know, Joe,
you already mentioned it's a question of you know, how
much property do we have in an area and what's
the property worth. So there are two types of losses.
(10:22):
There's what's called direct losses and indirect losses. So direct
loss is when you see, you know, the destruction of
a storm or a hurricane, like a loss directly tied
to the event. That is what we include in our database.
We only include direct proper damage, direct crrupt damage, injuries,
and fatality, So that would be for instance, a person
(10:44):
you know, who got injured or drowned in a flood
or something like that. And the indirect losses is, for instance,
when a business has to shut down for a given
time because they can't operate their power is down or
something like that. And the indirect losses we do not
include in our database. So what I'm trying to say
is even what we have in our database is way
(11:04):
underestimating really the burden of losses that we have in
the country from natural hazards.
Speaker 1 (11:10):
So I was going to ask, what happens when you
see I mean, you just gave us a great summary
of how tricky it can be to measure some of
these costs. But what is happening if you get a
wildly different estimate of the cost of a certain disaster?
And for instance, one thing I read was that, I
think the NCDC estimates that the damages from Hurricane Katrina
(11:32):
or something like one hundred and twenty five billion dollars
versus what Shelda says at eighty billion. What's happening there
when you get a discrepancy like that, And does it
matter in the real world in terms of contingency planning?
Speaker 3 (11:47):
So it does to some degree. So it matters when
you as a community have to justify why you need
money and why you want to invest to reduce the losses.
So communities have to do cost benefit analyses to justify
why it makes sense to invest maybe you know, building
a new retention pond or you know changing their building
(12:10):
codes and anything that has a price tag associated with it.
You know, these communities have to run benefit cost analysis
and say, what we're investing is reducing losses in the
long run. And that's where it matters what you can
document in terms of past hazards. So the discrepancy and
estimates that you just mentioned is really that's our standard
business because it is so tricky to estimate these losses.
(12:33):
There's the direct, there's the indirect losses. There's also insured
and uninsured losses. So it's always a question of sort
of what slices of the pie and how much of
the pie people looking at when they estimate losses. And
that's also where you see you've probably seen it many times, Noah,
the National Oceanic and Atmospheric Administration, they have what is
(12:53):
called billion dollar events. They get cited all over and
their estimates are always vast hire than what we have
in our database because they rely heavily on enshort data
and so in short data is again different from direct
losses what we document, and this is where all these
discrepancies come from. So in my line of business, when
(13:17):
it comes to direct losses, we tend to be conservative.
So if we have competing estimates, we use the lower
estimate just to be on the safe side of not
over estimating losses. But that really just you know, might
aggravate the problem because we already have under estimation problem
and then we are conservative. But that is the approach
(13:37):
we've taken at the start of you know, developing this database.
Speaker 2 (13:40):
Well, I want to get into you know, obviously we
want to get into what's happening right now and what
we're seeing in insurance markets. But I think just to like,
before we get to that, are the cost of natural
disasters going up? And maybe that's a naive question, but
I always have these states, Oh, is it just that
we're getting more attention to natural disasters in the media,
(14:02):
and is it just a sort of like is it
just a narrative that there are more that there are
more wildfires, et cetera, Or is it like, what are
we actually seeing big picture in the data. Are things
are we you know, is it getting worse?
Speaker 3 (14:16):
It is getting worse, So our risk is going up.
We have more severe events, we have more events. The
question is why do we see higher losses. So higher
losses could be a function of simply having, you know,
more events, more extreme events, and or it could also
be a function of what you mentioned earlier, Joe, more
(14:38):
people living in high risk areas, more property, or simply
more value being accumulated in high risk areas. It could
also be that maybe as a society we don't do
enough to mitigate these losses so that we get outpaced
by the risk that we're experiencing. Or it could also
be that we have not as resilient of a society,
(15:00):
resilient infrastructure, resilient residential homes, and or it could also
be an increase in what we call social and nobility,
meaning you have more people that lack the capacity to
prepare for, respond to, or recover from an event.
Speaker 1 (15:32):
Let's pivot to insurance and talk about what's going on there,
And maybe just to begin with, could you sort of
walk us through the landscape of this type of insurance
as it exists now, So let's say, you know, a
hurricane happens in Florida. What's the sort of process by
which a homeowner would expect to get reimbursed? Because my
(15:55):
understanding is there's different layers of private insurance and then
there's sort of federal potentially as well, and of course
there are also the reinsurers who are sort of backing
the upfront insurans. Can you walk us through how all
that would work in a typical case.
Speaker 3 (16:12):
Yes, so you know, just let me stay again. I'm
a geographer and training, I'm not an economists expert, but
I can tell you that a it's very complex because
it varies, like you said, from state to state. And
I think what a lot of people don't realize is
you might have to purchase different insurance policies to be covered.
(16:35):
So I think most people assume all this is covered
in my homeowner is insurance, and it is not, and
it depends on where you live. Like, for instance, landslide
risk not covered in any policy in any state in
the US. So landslide risk is something that you cannot
file an insurance claim on because you can't get insurance
(16:58):
for it. So let's go to Florida. So if you
live in Florida, so you would let's say ideal scenario,
as a homeowner, you have homeowners insurance. You also have
flood insurance from the federal government. Also, many people don't
realize that that's a federal program because it's ministered by
your local insurance agent. So you buy your flood insurance
(17:19):
policy from your local agent, but actually you know the
company that ensures you is the federal government. And then
depending on what stayed you in and exactly how you
know the policy works. You also have to buy wind insurance,
and states have different sort of thresholds. You know, when
(17:40):
is a storm actually a hurricane, does it have to
reach a certain wind speed then for the wind insurance
to pay out over the homeowners insurance. So for you
as an individual a you have to navigate what do
I want to ensure, what can I afford to ensure,
what kind of different policies do I need to buy?
And then when you actually have damage from an event,
(18:03):
and we've seen this for instance after Hurricane Katrina, you
very often might face a situation where you then have
to argue with the insurance company if the damage that
you have was caused by wind or cause by flooding amazing,
and we've seen discrepancies where you know, one neighbor their
wind insurance paid out because their insurance company said, yes,
(18:26):
we recognize that this is wind damage, and the other
neighbor didn't get anything from their policy because they're the
insurance said, oh, this is flood damage that you have.
So having insurance does not necessarily mean that policy is
also going to kick in because they might be disputes
with regard to what type of data, but what type
(18:46):
hazard caused that damage?
Speaker 2 (18:50):
What insurance rates up so much? I mean, I know
this is like the whole question, but if someone asked
you that me why, Like in Florida, you know, I
saw there's a stat forty two percent higher for home
owned home insurance premiums. I mean I get that, like, okay,
generally speaking, maybe natural disasters they're trending higher, but that
is like a staggering amount. And you know, I'll add
(19:12):
to that. You see when you see companies dessert a state, why,
I mean, why can't why don't they just charge more?
And what's happened in the last couple of years that's
so different than in the past.
Speaker 3 (19:23):
So let's maybe start with the statements that these insurance
companies released why they are shoring out of the market,
especially like in Florida. So they cited a higher risk
in California was higher, while fire risk, which guest check,
we see higher risk of that. They had higher building costs,
so yeah, you know, spending paying for the cost of
(19:45):
somebody rebuilding a home that has gone up as well.
And then they also cited an increase in their own
insurance policies, meaning insurance companies ensuring with what is called
a reinsurance company that raid has also gone up for them.
So they had to make a decision, you know, are
we going to or can we pass on these higher
(20:07):
costs that we have and create an insurance product that
is competitive in the market. So can they then offer
a insurance premium that people would be willing to pay?
And obviously they made the decision that they're going to
pause writing policies. And I think, you know, calling this
a pause is important because this is not the first
(20:27):
time that we've seen this happen. Insurance companies have retreated
for a certain time period and then have come back
into the market. So we've seen this, for instance, in
the state of Louisiana when this happened before the same
happened in Florida. You could also what you didn't see
in the statement, you could also interpret this. This is
what I personally interpret this approach as well, is sort
(20:50):
of a signal to a state government saying maybe we
need to rethink our partnership or maybe we need to
engage in a partnership, and maybe they need to be
legislation that incentivizes us to come back. Because, as you
mentioned earlier, we do not want people to be without
insurance because we know research shows that people recover much
(21:14):
much slower from a disaster if they do not have insurance.
And it's obvious because you don't have the financial resources.
Unless you have massive savings, then maybe you don't need insurance.
But if you're a person like me who doesn't have
massive savings, I need insurance if I need to recover
and rebuild my home. And so we want people to
(21:35):
be insured. So the fewer people we have that have insurance,
we are really foregoing what we know is a key
factor to disaster recovery.
Speaker 2 (21:44):
Tracy Melanie said something, there's a lot there, but one
thing that I just want to or sort of pull out.
Is that point about higher construction costs because we talk
about this all the time with inflation and labor costs
and materials, et cetera. I mean, if it's like significantly
more expensive in twenty two twenty three to rebuild a
home than in twenty nineteen, then just not everything else aside,
(22:05):
like mathematically you'd expect. Yeah, of course, like Insuran's got
to be a compensated for.
Speaker 1 (22:10):
That, absolutely, Melanie. I want to go back to something
you just said about, Well, maybe the insurers are sort
of angling for legislative assistance and no one wants people
to go uninsured. I mean, another way of looking at
it is maybe we should be incentivizing people to move
out of these risk prone areas by not providing them
(22:34):
insurance and saying like, hey, if you want to live here,
you're on your own, and if something happens, that's on you.
I mean, is that a legitimate thought to have about this?
And is there any evidence that people not having insurance
actually does encourage them to move elsewhere?
Speaker 3 (22:53):
So what really encourages people to have insurance is having
gone through a disaster, like we know, a key drive
force for people to become proactive for instance, with regard
to maybe thinking about elevating their home, purchasing insurance, maybe
even moving, sort of really bracing for a future event
(23:13):
and preparing to have less impacts in the future. The
key driver for that is having gone through a disaster before,
so experience is a key factor.
Speaker 1 (23:22):
So no, not change their behavior until they've actually been
flooded out of their house.
Speaker 3 (23:28):
Very much. For a lot of people, yes, that's the
case because you see it all the time. Like you
turn on the you know, turn on the TV. You
will see people say all the time, Oh, I've never
thought this is going to happen. And this I never
thought is going to happen factors into the decision to
not buy insurance because you know, if you think it's
likely to happen, and it's a good investment for you
(23:51):
to make, Like you know, you only have a limited
amount of resources, so you have to make trade off decisions.
Do I spend what I have on buying insurance. You
will do this if you see it's likely to happen,
so that you have a backstop when the event actually unfolds.
But if you in your mind think, oh this is
so unlikely, I'm not going to do it, then there's
(24:12):
a high chance unless you force you not going to
buy insurance. I mean, think about it. It's very similar
to our thinking with health insurance investing in retirement. We
humans have a real problem thinking about the future and
not discounting the future. So this is why we have,
you know, sort of carrot and stick approaches to being
(24:35):
insured regarding any health issues and retirement because we are
not very good with this long term thinking, and buying
insurance also factors into that long term thinking. So it's
really really hard now to your point about moving. So
I have to say, I get this question quite a lot.
Should people not just move? I always, you know, sort
(24:59):
of just ask yourself, where would you move and how
likely would you be to move? How far away would
you move? Like what holds you? You know, what ties
you to this place that you're in right now? Is
it your job opportunities? Is it your family? Is it
maybe the amenities of where you live and most of
(25:19):
the time, you know, it's sort of a combination of
all of these things. Or it could be you know,
your family lived in this place for a long time,
maybe you inherited the land that you live on, and
for a lot of people moving is not necessarily a
thing they want to do or they can do, especially
maybe if you live in a maybe more rural area
or so there's not maybe a lot of money you
(25:41):
can get for selling your property and then moving somewhere
else and starting over. So the question of you know,
willingness to move is one thing, and then you know
for which type of hazards sort of where would we
start making people move, Like is it hurricanes? Is it earthquakes?
Because if you think about earthquakes, I mean, there is
(26:03):
not many people that should be living in.
Speaker 1 (26:04):
California right, All of California needs to move immediately exactly.
Speaker 3 (26:09):
So there is really if you like break it down
and say, okay, everybody has to move out of high
risk areas, there is not a lot of you know,
land that will be left for then because the Midwest
has hurricanes, you not hurricanes, no good things. They don't
have her they have tornadoes. You know, you also have
winter storms. They have massive hail events sometimes, so there
(26:32):
is really no place to hide in the country, I
would say, or hardly any So how would you make
that decision? I think that is I mean, I think
ethically and politically a topic you people really don't want
to get into. And I think what's happening is we
have sort of implicit migration out of high risk events
(26:57):
when something happens, you know, because when something happens, people
have to make a decision. Am I staying here? Am
I rebuilding here? Or am I moving? And the research
shows that people who decide to move after they've after
they've been impacted by a disaster, they actually don't tend
to move very far. So they still tend to stay
within their state. They maybe move, you know, within the county,
(27:21):
maybe to the neighboring county, But people don't take tend
to pack up and leave and move from let's say,
from from Louisiana to New Jersey or something like that.
Speaker 2 (27:31):
I want to ask you about you know, you mentioned
that companies leave states, but then they might come back,
and part of it is an implicit negotiation with state
regulators and state governments to change some policies. What do
we think I mean, like, what do you think, like
when you see a company leave California or Florida or
some of these other markets are there, what are the
(27:52):
policy levers that these states could pull in order to
or are pulling in order to bring more competition and
care back into the state, or like what is historically
what types of changes prompt and insured to come back
into a given market.
Speaker 3 (28:08):
So the market in the state of Louisiana is actually
often referred to as an example of what could be
good policy choices or offerings to the insurance market. So
meaning the state what decide or decides to protect insurance companies,
you know, only up to a certain level is when
(28:29):
they have to step in with payments, and then the state,
you know, jumps in above that level. And it's Louisiana
also has they have a what's called the insurer of
last resort, So if you know, you as a homeowner,
you can find a policy from a private insurer, then
you can ensure with Citizens. So it has the same
(28:51):
name as the program in Florida, but they are distinctly
different because in Louisiana, Citizens is required that they do
offer the premium at a slightly higher price than the
private market. Okay, so they do not offer let's just
call it reduced or kind of sort of cheaper insurance premium.
(29:14):
So there's not a lot of savings because when it
comes to insurance what's really really tricky in setting these
premiums if you don't want to set them too high,
because then people forego insurance. But you also don't want
to set it too low, and that's something that we've
struggled with all along with now the National Flood Insurance Program,
because when you set insurance premiums too low, then the
(29:35):
decision to live and stay in a high risk area,
you don't really have to pay for that risk. You
don't have to pay the adequate price for that risk.
So let's say the risk is fairly high, but your
premium is not very high, so the decision to stay
where you are is easy because your premium is not
high and it doesn't cost you a lot of money.
(29:56):
So you actually start incentivizing stay in high risk areas
if you set the premium too low. So back to
Tracy's point about thinking about migrating, migrating and shouldn't people move.
So also when you have insurance premium being really high,
you as a homeowner or as a renter, you can
make the decision, okay, am I purchase insurance to stay here,
(30:19):
sort of being able to sleep at night not freaking
out about the risk I'm facing will possibly also move.
You know, that's kind of a signal that really the
risk is really high in this location and it's not
easy to get.
Speaker 1 (30:32):
Insurance, just in terms of things like governments could do. Again,
going back to this idea of insurers maybe wanting something
(30:55):
from either state or federal government, like what would be
the risk sharing arrangements here? Would it be something on
the level of the flood insurance that exists now.
Speaker 3 (31:06):
So when you think about managing risk, the question is
for governments, insurance companies, any private sector company. You as
an individual, how much are you willing to pay to
reduce your risk. So it's really a decision about of
(31:26):
how much or how low you want the risk for
people to be. And so there's different when you look
around the globe, there's different approaches. Like in the Netherlands,
people don't have flood insurance. Why do they not have
flood insurance because the government is committed to reducing flood
risks so that people don't have to purchase flood insurance.
(31:47):
It's not an option for us. And here in the
US our flood insurance program there is no requirement. Nobody
is forced to buy flood insurance unless you purchase a
mortgage from a federally backed mortgage company. So then the
government says, okay, if you live in a one hundred
(32:08):
year floodplan, plus you hold a mortgage from US, you
have to buy flood insurance. But if you live in
a one hundred year floodplane and you maybe hold your
house free and clear, nobody is forcing you to purchase
flood insurance. So it's really still up to people to
buy insurance. For the vast majority, you know, it's a
(32:30):
free decision to purchase insurance. And so the question is
the government could step in. There are always discussions about,
you know, should we have national disaster insurance? You see
this sort of the topic rises and falls very much
depending on, you know, the crises of disasters we face.
(32:51):
That could be a potential, But think about, you know,
what kind of risk the government would be taking on
in terms of financial costs if the government where to
offer them, And then the government also has to decide,
you know, then what is the premium for these policies.
It's really there is no easy answer to this. I mean,
(33:12):
I would also say, you know, when you think about
purchasing insurance, what is often forgotten an insurance company or
insurance is a highly highly highly data driven process and
product and setting those premiums. Does the government, if let's
say the federal government, where to offer an insurance product.
(33:33):
Does the government even have the data and the information
to really price a product like that adequately. We are
already struggling, you know, on trying to understand how many
people should have flood insurance versus how many people actually
have flood insurance. So I think data would be really
really important if the government where to get into this business.
(33:53):
And then also insurance companies, can you know you get
a letter every year if you want to renew your
homeowners insurance on that you as a person are not
deciding every year are you moving or not? So the
insurance market is so much more volatile in terms of
being able to offer it or retreat. And you as
a homeowner, you know, you are in your property, you
(34:14):
stay in your property. You might be able to switch,
but you don't have this annual choice off what you
want to do.
Speaker 2 (34:21):
I was going to save this thought to the end,
but I just keep getting flashbacks to like it's like
the bank conversation all over again, because we think of
this as a private market deposit taking.
Speaker 1 (34:30):
Why don't we all have direct insurance? Right?
Speaker 2 (34:33):
But this is like the degree to which it's really
a public utility. It's like so many of the same
like sort of philosophical economic moral questions come up, and
like deposit insurance and things like that. As an insurance insurance.
I want to go back to something you mentioned that
the Louisiana approach in the Florida approach are different. There's
two sort of like state level public insurance. They both
(34:56):
happen to be named citizens. Can you compare and control?
Asked what Florida is doing versus what Louisiana has done
in the past.
Speaker 3 (35:04):
So in Florida you do not have this requirement that
citizen has to offer a fairly high premium four product.
So they're the amount of property properties that are now
insured by the state. That number has exploded. Plus it
(35:25):
is truly a state backed insurance program, so the state
holds the risk. Plus Florida's also apparently a highly litigious state,
so a lot of the insurance companies have to deal
with homeowners filing lawsuits, which is completely different from any
other state here in the US. And this is for
(35:47):
Florida that's really the big issue, the sort of litigation
against insurance companies and for how long you can file
a lawsuit in Florida. So that's what makes Florida very different.
But the fact that you truly have insurance program that's
backed by the state and you hold that much risk
I find very concerning in terms of, you know, financial
(36:09):
soundness of a state budget. So that's very very different.
It's very unique in terms of insurance solution. So one
thing I wanted to mention. So there's a researcher, Howard
come Ruther, and he unfortunately just recently passed away. He
has long proposed this idea of maybe having the policy
not with you as a person, but with the home,
(36:31):
because that would incentivize that maybe people invest more in
building or reconstructing disaster resistant homes because what happens right
now and maybe this is going to change cricket. Then
we think about right now, the risk is not priced
into a home like you know, you go on a
website like Zillow or redfin you see, okay, what's your
(36:54):
square footage and how many bedrooms and do you have
granted in the kitchen. Now, when you look at those websites.
It just happened over the recent years. You get a
little bit of information on what they know slabeled climate
risks are, and then it will say, oh, your risk
for heat is going up, and maybe you have limited
flood risk. But the information I personally think is not
(37:17):
really translated in actionable information. You know, what are you
going to do as a potential home buyer with fifteen
different hazard types? How does that factor into your decision making?
If the risk goes up or not? Factors into your
decision making when it affects the home price. And for
a lot of people, there is now something starting where
people decide or potential buyers decide they have there's a
(37:41):
contingency to buy the home or not if they are
able to buy insurance, purchase insurance for that home. And
I feel like, you know, these struggles that we're seeing
in the insurance market, the ability to buy insurance might
be really the starting point the impetus for possibly risk
being priced into home values, and that hasn't happened yet,
(38:05):
so it's not very common right now that people are
aware of the risk. There's also no disclosure of risks,
so there's also different policies across the country, for instance,
in Louisiana. Now there are some risks that have to
be disclosed to you as a home buyer, but very often,
you know, you buy a home, do you get a
car fax on your home? Do you know how many
(38:27):
times this property has been flooded before or damaged, you know,
by a windstorm. We don't have that information. It's if
you're thinking of it's kind of crazy, you know, because
it's a pretty substantial investment when you buy a home
and you don't have that history of a property because
there's no requirement in many states that that gets disclosed,
and we only look at sort of the superficial things
(38:50):
in a home square footage, number of bedrooms. But do
people know, you know, if they actually have the appropriately
rated shingles on top of their roof, or if their
roof is connected adequately to the rest or the structure
in the house to you know, withstand hurricane forced winds.
We just somehow assume, because we got a building permit
(39:14):
from our local community, that this is a safe place.
And then when a home inspector comes, you know, for
you to decide if you want to buy this house.
You also don't get much information all that. So we really,
I think at a point right now where there is
maybe also more demand from potential home buyers to want
(39:36):
to have information about the risks that they are taking
on when you are purchasing a property, because you're also
purchasing the risk that comes with that property.
Speaker 1 (39:45):
Melanie, that was a fantastic overview of this very complicated issue.
We're going to leave it there, but thank you so
much for coming on all thoughts. That was great.
Speaker 3 (39:55):
Thank you so much for having me. I know it's
a slightly depressing topic.
Speaker 2 (40:13):
Joe.
Speaker 1 (40:13):
That was a great overview of that topic. I feel
like we hit a lot of the major points. The
one thing that Melanie brought up that was really interesting
to me was that idea of tying the insurance policy
to the house itself as a way of incentivizing, you know,
better construction methods or more resiliency to disaster risk.
Speaker 2 (40:35):
There were so many things that were interesting. So the
one thing I knew is that a typical homeowners insurance
policy doesn't have floods, right you like sure, So I
was aware that I didn't realize that wind insurance was
often in many cases a separate thing. I didn't realize
that there is no insurance policy whatsoever they can protect
against landslides, which I have to imagine in places like California. Yeah,
(40:55):
and then the big thing that really drove me home
is just like the sheer complexity, right, if you can't
really calculate it, well, like you're not going to get
any price, And so it sort of makes sense to
see like, Okay, we're gonna companies is gonna leave for
a while, Like if there's just so much like complexity
with the rising number of natural disasters or the rising costs,
like maybe the market just doesn't work. Well.
Speaker 1 (41:15):
Also the point about well why don't we all just
have federal insurance? You know, to some extent, maybe that
makes sense, But then how does the federal government with
no expertise in this or very little expertise, very little data,
actually start to price those products and that risk that
seems really interesting.
Speaker 2 (41:33):
Well, and furthermore, even if you did have like say
like a public option for national homeowners insurance, it would
inevitably be subject also to political fights like should the
government you know, It's like you'd have some people in
some places like no, why are you like not, why
are you pricing it? In Texas and Florida and California
this way is this because it's a red state or
like they're just it would you could do it, and
(41:54):
then it would introduce a whole new set of complications
that wouldn't exist in a private market.
Speaker 1 (41:58):
Absolutely. I just say I live in fear of bureaucratic
paperwork and the idea of having to like talk to
you if your house is destroyed by a hurricane and
then having to file paperwork about whether or not the
damage was caused by wind or flooding. That's just my nightmare.
On many leave.
Speaker 2 (42:15):
Well, I was gonna say this, but like you, I'm
completely agree. So it's like your house is damaged and
you're trying to get through to an insurance agent and
talk to them and prove and have the paperwork, and
then it's like, yeah, I kind of want maybe the
Florida system where you could just sue your insurer and
then it's right, and then it's like it have put
some fear of God in them because well, and then
(42:35):
the insurance company leaves the state because you have this
highly litigious state like well.
Speaker 1 (42:39):
I think also one of the issues in Florida is
that a lot of those lawsuits are fraudulent in one
way or another. Sure, there's all these roofing scams that
are in and of themselves quite interesting and would make
an interesting episode.
Speaker 2 (42:50):
Uh No, there's just there's a lot there and no
easy answers. But I feel like that helped me understand,
like why this space is such a mess right now.
Speaker 1 (42:58):
Yeah. Well, we're definitely to be doing some more insurance
episodes in the future, I feel but for now, shall
we leave it there?
Speaker 2 (43:04):
Let's leave it there?
Speaker 3 (43:05):
All right?
Speaker 1 (43:05):
This has been another episode of the oud Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (43:11):
I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carmen Arman and Dashel
Bennett at dashbot, and check out all of our podcasts
under the handle at podcasts and for more odd Lots content,
go to bloomberg dot com slash odd Lots, where we
have a blog, we post transcripts, we have a weekly newsletter,
and I'm sure there's gonna be a lot to talk
(43:33):
about this one discord dot gg. Slash odd Lots is
where listeners hang out and chat twenty four to seven
about all of these topics. Go there and check it out.
Speaker 1 (43:43):
And if you enjoy Odd Lots, if you would like
us to do an episode on Florida roofing, insurance scandals
and frauds, then please leave us a positive review on
your favorite podcast platform. Thanks for listening in
Hello, and welcome to another episode of the Odd Loots Podcast.
I'm Tracy Alloway.
Speaker 2 (00:15):
And I'm Joe Whysenthal.
Speaker 1 (00:16):
Joe, do you do you like watching the weather? I
can hear the pain in your voice as soon as
I asked them.
Speaker 2 (00:26):
It's so funny. I didn't. I was wondering how you're
gonna start this one. I hate rain. I hate rain
so much. Other than that, I don't know. It's not
a big thing for me. What about you up in Connecticut?
Is it a bigger deal up there?
Speaker 1 (00:38):
I love weather. I am sort of an armchair meteorologist,
by which I mean I have several weather apps. I
get very excited about thunderstorms and other types of storms.
My husband, however, does not. He gets extremely anxious whenever
there's a forecast of a severe thunderstorm because inevitably it
ends up dumping like two inches of where we are,
(01:00):
and our basement starts to flood.
Speaker 2 (01:02):
I've lived in a house that had flood damage. It
is extremely stressful experience too. I mean there's just like
the direct issue of like cleaning up all of the
lost damage and then like compensation and damage to the
house is probably one of the more like sort of
like stressful things a homeowner can deal with.
Speaker 1 (01:21):
Well, you know one of the stressful things happening right now,
and we're recording this on let's see September eighth. There's
a major hurricane brewing in the Atlantic right now, Hurricane Lee.
It exploded from a tropical storm I think just two
days ago into a category four hurricane. Now it's category
five and there's a lot of deliberation about whether or
(01:43):
not it's going to sort of run up the Atlantic coast,
might even get into New England. So an interesting one to.
Speaker 2 (01:50):
Watch, yes, and I guess I guess by the time
people listen to this will be resolved. But I'm glad
you mentioned that. But it's also coming in the context
of a time when there is a lot of anxiety
about the property market and insurance. And this came up
on our recent episode that we did with Howard Hughes
Holding CEO. We talked about this huge surge in the
(02:12):
cost that the company is paying for insurance. And there
have been so many stories about natural disaster prone areas
and homeowners are either just getting staggering sticker shock when
it comes to the cost of homeowners insurance and other
property insurance or there's no one at all, or you know,
companies abandoning markets like Florida, like California, et cetera.
Speaker 1 (02:32):
Absolutely, and it's not just hurricanes and floods. Of course,
we've seen wildfire risk becoming a more major thing, particularly
in Hawaii and Maui. Recently, there have been a number
of headlines, as you just mentioned, of certain insurance companies
pulling out of markets all together because they're no longer profitable,
or in some cases, like Florida, they haven't actually been
(02:54):
profitable for a very very long time. And insurance premiums
are going up all over the United States. But it's
really interesting if you look at them on a regional basis.
I think in Miami the average cost of insurance is
something like five thousand dollars versus less than two thousand
dollars for the rest of the US. So that gives
you some idea of how this risk is starting to
(03:17):
get repriced. But it opens up all these interesting questions
about what is going to happen to cities, to houses,
to other buildings that are in these natural disaster prone areas.
Speaker 2 (03:31):
You know, the thinking of things like flood insurance, which
is already sort of socialized or there's publicly funded. There
doesn't seem to be a lot of appetite politically to
let property owners sort of completely be without insurance in
other words, right, So it's like if the private market
leaves an area, you don't really see politicians like, Okay, well,
(03:51):
I guess we can't build here anymore. There's usually the
government steps in in some way, maybe there's like a
state insure, a national insurre in the case of flood.
And of course this creates its own issues, and that
it's sort of another one of these financial services that's
like sort of post market, kind of like banking in
some respects. And so there is a lot going on
with this market. And you know, obviously comes in the
(04:13):
time of other financial tightening financial conditions, comes at so
much attention played to climate risk, and I think we
need to understand more of this area.
Speaker 1 (04:20):
Absolutely, it's a complex market. It seems to be getting
more complex by the day, So let's dig into it.
I am very pleased to say that we really do
have the perfect guest. We are going to be speaking
with Melanie gall She's the co director of the Center
for Emergency Management and Homeland Security at Arizona State University.
She also manages the Spatial Hazard Events and Losses Database
(04:42):
for the United States, something known as SHELDUS. We're going
to dig into exactly what that is in a few minutes,
but Melanie, thank you so much for coming on all thoughts.
Speaker 3 (04:51):
Thank you so much for having me.
Speaker 1 (04:53):
So maybe just to begin with, can you explain what
the co director of the Center for Emergency MA Management
and Homeland Security at Arizona State actually does. What does
that entail?
Speaker 3 (05:04):
So I may be the kind of person that you
don't necessarily directly associate with, that kind of you know,
leadership position because by training, I am a geographer. I
started out making maps, digital maps, and I came into
the field of emergency management through a stint that I
(05:24):
did in Africa. I was actually in Mozambique and I
did training on you know, how do you collect data
in the field with a GPS, this kind of information.
And it was after a massive flood event and then
I realized, ooh, there's a great connection between what I
was doing geographic information system and emergency management because you
need a lot of logistics support, you need to know
(05:45):
where your stuff is, where you should set up shelters
and alike. And that was my route into emergency management.
And so what I do here now at Arizona State University,
I teach. Obviously, we have a master's degree in an
undergrad program in emergency management and homeland security, and I
do numerous research projects. I work with out a nonprofit
organizations here in Arizona. So it's really a broad variety
(06:08):
of things. So it's very exciting as a job.
Speaker 2 (06:10):
I have to say, you mentioned data collection, and of
course you have this database, and you know, it strikes
me that collecting natural disaster data seems extremely difficult for
all kinds of reasons. I mean, even something as simple
as like tallying up the dollar amounts spent on recovery
strikes difficult. And what these trends are and I could
(06:32):
imagine that you could have an increase in dollar amounts
for an area and because there's more disasters, or maybe
because there's just more building and more people there that
could also cause that, and so like disambiguating some of
these effects. Talk to us a little bit about just
the challenge of measurement, because if we're going to get
into insurance and know like how much risk is in
a given area that you have to start with, like, well,
(06:54):
how much dollar what is the dollar value of the
property in an area? So talk to us about the
challenges of measuring these types of things.
Speaker 3 (07:02):
So let me start with telling you a little bit
about where we get our data from, and then too
the measurement because we are a secondary user of disaster
loss information. So we get the vast majority of our
data from the National Weather Service or better you know,
the National Weather Service feeds the information to the National
(07:23):
Centers for Environmental Information in CI, and that is where
we get the majority of the data from. So it
is actually your local forecast office, your local meteorologist that
collects that information. So it is not an economist or
an assessor or anything like this. So it's the local
forecast office that collects that information. So I came into
(07:47):
this arena of collecting disaster losses way back in the
days when I was a PhD student, where my professor
had this idea that as a geographer, it should be
fairly easy to develop profiles for the country. You know,
how does County A suffer more from hurricane damage than
flood damage than County B and LO and behold, there
(08:08):
was not really easily accessible database where you can get
this information, and that was really the starting point for
setting up this database. So now we are in the
business of compiling data that is already assessed from different
federal agencies. So NCI is one of our main data sources,
(08:29):
and then we also use data from the US Geological Survey,
especially related to geological hazards earthquake damage, volcanic eruption damage
tsunamis analyte because the Weather Service obviously only collects data
related to mitrological and hydrological events, but we are interested
in compiling a database that covers all natural hazards. So
(08:53):
we are vistly using data. And there's only a tiny
fraction where we compile our own data, and that is
landslide data. So landslide data is really not or has
not been easily accessible. There was a Landslide Act passed
a few years ago, so that now triggered the US
Geological Survey to get most serious about collecting that data.
(09:15):
And so we decided that we want to include landslide
data in our database. And that's where we then started
like scouring newspapers, websites, and we're applying the same sort
of assessment methodology that the Weather Service is employing. Because
the main users of our data are local planners, hazard
(09:37):
mitigation planners. And hazard mitigation planners sit in the emergency
management division of your county or of your state, and
they are actually charged by law. They are not required
to compile what it is called hazard mitigation plans, but
they are incentivized to compile these hazard mitigation plans. And
in these plans you have to do risk assessments. These
(10:00):
risk assessments need to include a history of past losses
and that's then when people tend to come to us.
So measuring losses and assessing them goes exactly you know, Joe,
you already mentioned it's a question of you know, how
much property do we have in an area and what's
the property worth. So there are two types of losses.
(10:22):
There's what's called direct losses and indirect losses. So direct
loss is when you see, you know, the destruction of
a storm or a hurricane, like a loss directly tied
to the event. That is what we include in our database.
We only include direct proper damage, direct crrupt damage, injuries,
and fatality, So that would be for instance, a person
(10:44):
you know, who got injured or drowned in a flood
or something like that. And the indirect losses is, for instance,
when a business has to shut down for a given
time because they can't operate their power is down or
something like that. And the indirect losses we do not
include in our database. So what I'm trying to say
is even what we have in our database is way
(11:04):
underestimating really the burden of losses that we have in
the country from natural hazards.
Speaker 1 (11:10):
So I was going to ask, what happens when you
see I mean, you just gave us a great summary
of how tricky it can be to measure some of
these costs. But what is happening if you get a
wildly different estimate of the cost of a certain disaster?
And for instance, one thing I read was that, I
think the NCDC estimates that the damages from Hurricane Katrina
(11:32):
or something like one hundred and twenty five billion dollars
versus what Shelda says at eighty billion. What's happening there
when you get a discrepancy like that, And does it
matter in the real world in terms of contingency planning?
Speaker 3 (11:47):
So it does to some degree. So it matters when
you as a community have to justify why you need
money and why you want to invest to reduce the losses.
So communities have to do cost benefit analyses to justify
why it makes sense to invest maybe you know, building
a new retention pond or you know changing their building
(12:10):
codes and anything that has a price tag associated with it.
You know, these communities have to run benefit cost analysis
and say, what we're investing is reducing losses in the
long run. And that's where it matters what you can
document in terms of past hazards. So the discrepancy and
estimates that you just mentioned is really that's our standard
business because it is so tricky to estimate these losses.
(12:33):
There's the direct, there's the indirect losses. There's also insured
and uninsured losses. So it's always a question of sort
of what slices of the pie and how much of
the pie people looking at when they estimate losses. And
that's also where you see you've probably seen it many times, Noah,
the National Oceanic and Atmospheric Administration, they have what is
(12:53):
called billion dollar events. They get cited all over and
their estimates are always vast hire than what we have
in our database because they rely heavily on enshort data
and so in short data is again different from direct
losses what we document, and this is where all these
discrepancies come from. So in my line of business, when
(13:17):
it comes to direct losses, we tend to be conservative.
So if we have competing estimates, we use the lower
estimate just to be on the safe side of not
over estimating losses. But that really just you know, might
aggravate the problem because we already have under estimation problem
and then we are conservative. But that is the approach
(13:37):
we've taken at the start of you know, developing this database.
Speaker 2 (13:40):
Well, I want to get into you know, obviously we
want to get into what's happening right now and what
we're seeing in insurance markets. But I think just to like,
before we get to that, are the cost of natural
disasters going up? And maybe that's a naive question, but
I always have these states, Oh, is it just that
we're getting more attention to natural disasters in the media,
(14:02):
and is it just a sort of like is it
just a narrative that there are more that there are
more wildfires, et cetera, Or is it like, what are
we actually seeing big picture in the data. Are things
are we you know, is it getting worse?
Speaker 3 (14:16):
It is getting worse, So our risk is going up.
We have more severe events, we have more events. The
question is why do we see higher losses. So higher
losses could be a function of simply having, you know,
more events, more extreme events, and or it could also
be a function of what you mentioned earlier, Joe, more
(14:38):
people living in high risk areas, more property, or simply
more value being accumulated in high risk areas. It could
also be that maybe as a society we don't do
enough to mitigate these losses so that we get outpaced
by the risk that we're experiencing. Or it could also
be that we have not as resilient of a society,
(15:00):
resilient infrastructure, resilient residential homes, and or it could also
be an increase in what we call social and nobility,
meaning you have more people that lack the capacity to
prepare for, respond to, or recover from an event.
Speaker 1 (15:32):
Let's pivot to insurance and talk about what's going on there,
And maybe just to begin with, could you sort of
walk us through the landscape of this type of insurance
as it exists now, So let's say, you know, a
hurricane happens in Florida. What's the sort of process by
which a homeowner would expect to get reimbursed? Because my
(15:55):
understanding is there's different layers of private insurance and then
there's sort of federal potentially as well, and of course
there are also the reinsurers who are sort of backing
the upfront insurans. Can you walk us through how all
that would work in a typical case.
Speaker 3 (16:12):
Yes, so you know, just let me stay again. I'm
a geographer and training, I'm not an economists expert, but
I can tell you that a it's very complex because
it varies, like you said, from state to state. And
I think what a lot of people don't realize is
you might have to purchase different insurance policies to be covered.
(16:35):
So I think most people assume all this is covered
in my homeowner is insurance, and it is not, and
it depends on where you live. Like, for instance, landslide
risk not covered in any policy in any state in
the US. So landslide risk is something that you cannot
file an insurance claim on because you can't get insurance
(16:58):
for it. So let's go to Florida. So if you
live in Florida, so you would let's say ideal scenario,
as a homeowner, you have homeowners insurance. You also have
flood insurance from the federal government. Also, many people don't
realize that that's a federal program because it's ministered by
your local insurance agent. So you buy your flood insurance
(17:19):
policy from your local agent, but actually you know the
company that ensures you is the federal government. And then
depending on what stayed you in and exactly how you
know the policy works. You also have to buy wind insurance,
and states have different sort of thresholds. You know, when
(17:40):
is a storm actually a hurricane, does it have to
reach a certain wind speed then for the wind insurance
to pay out over the homeowners insurance. So for you
as an individual a you have to navigate what do
I want to ensure, what can I afford to ensure,
what kind of different policies do I need to buy?
And then when you actually have damage from an event,
(18:03):
and we've seen this for instance after Hurricane Katrina, you
very often might face a situation where you then have
to argue with the insurance company if the damage that
you have was caused by wind or cause by flooding amazing,
and we've seen discrepancies where you know, one neighbor their
wind insurance paid out because their insurance company said, yes,
(18:26):
we recognize that this is wind damage, and the other
neighbor didn't get anything from their policy because they're the
insurance said, oh, this is flood damage that you have.
So having insurance does not necessarily mean that policy is
also going to kick in because they might be disputes
with regard to what type of data, but what type
(18:46):
hazard caused that damage?
Speaker 2 (18:50):
What insurance rates up so much? I mean, I know
this is like the whole question, but if someone asked
you that me why, Like in Florida, you know, I
saw there's a stat forty two percent higher for home
owned home insurance premiums. I mean I get that, like, okay,
generally speaking, maybe natural disasters they're trending higher, but that
is like a staggering amount. And you know, I'll add
(19:12):
to that. You see when you see companies dessert a state, why,
I mean, why can't why don't they just charge more?
And what's happened in the last couple of years that's
so different than in the past.
Speaker 3 (19:23):
So let's maybe start with the statements that these insurance
companies released why they are shoring out of the market,
especially like in Florida. So they cited a higher risk
in California was higher, while fire risk, which guest check,
we see higher risk of that. They had higher building costs,
so yeah, you know, spending paying for the cost of
(19:45):
somebody rebuilding a home that has gone up as well.
And then they also cited an increase in their own
insurance policies, meaning insurance companies ensuring with what is called
a reinsurance company that raid has also gone up for them.
So they had to make a decision, you know, are
we going to or can we pass on these higher
(20:07):
costs that we have and create an insurance product that
is competitive in the market. So can they then offer
a insurance premium that people would be willing to pay?
And obviously they made the decision that they're going to
pause writing policies. And I think, you know, calling this
a pause is important because this is not the first
(20:27):
time that we've seen this happen. Insurance companies have retreated
for a certain time period and then have come back
into the market. So we've seen this, for instance, in
the state of Louisiana when this happened before the same
happened in Florida. You could also what you didn't see
in the statement, you could also interpret this. This is
what I personally interpret this approach as well, is sort
(20:50):
of a signal to a state government saying maybe we
need to rethink our partnership or maybe we need to
engage in a partnership, and maybe they need to be
legislation that incentivizes us to come back. Because, as you
mentioned earlier, we do not want people to be without
insurance because we know research shows that people recover much
(21:14):
much slower from a disaster if they do not have insurance.
And it's obvious because you don't have the financial resources.
Unless you have massive savings, then maybe you don't need insurance.
But if you're a person like me who doesn't have
massive savings, I need insurance if I need to recover
and rebuild my home. And so we want people to
(21:35):
be insured. So the fewer people we have that have insurance,
we are really foregoing what we know is a key
factor to disaster recovery.
Speaker 2 (21:44):
Tracy Melanie said something, there's a lot there, but one
thing that I just want to or sort of pull out.
Is that point about higher construction costs because we talk
about this all the time with inflation and labor costs
and materials, et cetera. I mean, if it's like significantly
more expensive in twenty two twenty three to rebuild a
home than in twenty nineteen, then just not everything else aside,
(22:05):
like mathematically you'd expect. Yeah, of course, like Insuran's got
to be a compensated for.
Speaker 1 (22:10):
That, absolutely, Melanie. I want to go back to something
you just said about, Well, maybe the insurers are sort
of angling for legislative assistance and no one wants people
to go uninsured. I mean, another way of looking at
it is maybe we should be incentivizing people to move
out of these risk prone areas by not providing them
(22:34):
insurance and saying like, hey, if you want to live here,
you're on your own, and if something happens, that's on you.
I mean, is that a legitimate thought to have about this?
And is there any evidence that people not having insurance
actually does encourage them to move elsewhere?
Speaker 3 (22:53):
So what really encourages people to have insurance is having
gone through a disaster, like we know, a key drive
force for people to become proactive for instance, with regard
to maybe thinking about elevating their home, purchasing insurance, maybe
even moving, sort of really bracing for a future event
(23:13):
and preparing to have less impacts in the future. The
key driver for that is having gone through a disaster before,
so experience is a key factor.
Speaker 1 (23:22):
So no, not change their behavior until they've actually been
flooded out of their house.
Speaker 3 (23:28):
Very much. For a lot of people, yes, that's the
case because you see it all the time. Like you
turn on the you know, turn on the TV. You
will see people say all the time, Oh, I've never
thought this is going to happen. And this I never
thought is going to happen factors into the decision to
not buy insurance because you know, if you think it's
likely to happen, and it's a good investment for you
(23:51):
to make, Like you know, you only have a limited
amount of resources, so you have to make trade off decisions.
Do I spend what I have on buying insurance. You
will do this if you see it's likely to happen,
so that you have a backstop when the event actually unfolds.
But if you in your mind think, oh this is
so unlikely, I'm not going to do it, then there's
(24:12):
a high chance unless you force you not going to
buy insurance. I mean, think about it. It's very similar
to our thinking with health insurance investing in retirement. We
humans have a real problem thinking about the future and
not discounting the future. So this is why we have,
you know, sort of carrot and stick approaches to being
(24:35):
insured regarding any health issues and retirement because we are
not very good with this long term thinking, and buying
insurance also factors into that long term thinking. So it's
really really hard now to your point about moving. So
I have to say, I get this question quite a lot.
Should people not just move? I always, you know, sort
(24:59):
of just ask yourself, where would you move and how
likely would you be to move? How far away would
you move? Like what holds you? You know, what ties
you to this place that you're in right now? Is
it your job opportunities? Is it your family? Is it
maybe the amenities of where you live and most of
(25:19):
the time, you know, it's sort of a combination of
all of these things. Or it could be you know,
your family lived in this place for a long time,
maybe you inherited the land that you live on, and
for a lot of people moving is not necessarily a
thing they want to do or they can do, especially
maybe if you live in a maybe more rural area
or so there's not maybe a lot of money you
(25:41):
can get for selling your property and then moving somewhere
else and starting over. So the question of you know,
willingness to move is one thing, and then you know
for which type of hazards sort of where would we
start making people move, Like is it hurricanes? Is it earthquakes?
Because if you think about earthquakes, I mean, there is
(26:03):
not many people that should be living in.
Speaker 1 (26:04):
California right, All of California needs to move immediately exactly.
Speaker 3 (26:09):
So there is really if you like break it down
and say, okay, everybody has to move out of high
risk areas, there is not a lot of you know,
land that will be left for then because the Midwest
has hurricanes, you not hurricanes, no good things. They don't
have her they have tornadoes. You know, you also have
winter storms. They have massive hail events sometimes, so there
(26:32):
is really no place to hide in the country, I
would say, or hardly any So how would you make
that decision? I think that is I mean, I think
ethically and politically a topic you people really don't want
to get into. And I think what's happening is we
have sort of implicit migration out of high risk events
(26:57):
when something happens, you know, because when something happens, people
have to make a decision. Am I staying here? Am
I rebuilding here? Or am I moving? And the research
shows that people who decide to move after they've after
they've been impacted by a disaster, they actually don't tend
to move very far. So they still tend to stay
within their state. They maybe move, you know, within the county,
(27:21):
maybe to the neighboring county, But people don't take tend
to pack up and leave and move from let's say,
from from Louisiana to New Jersey or something like that.
Speaker 2 (27:31):
I want to ask you about you know, you mentioned
that companies leave states, but then they might come back,
and part of it is an implicit negotiation with state
regulators and state governments to change some policies. What do
we think I mean, like, what do you think, like
when you see a company leave California or Florida or
some of these other markets are there, what are the
(27:52):
policy levers that these states could pull in order to
or are pulling in order to bring more competition and
care back into the state, or like what is historically
what types of changes prompt and insured to come back
into a given market.
Speaker 3 (28:08):
So the market in the state of Louisiana is actually
often referred to as an example of what could be
good policy choices or offerings to the insurance market. So
meaning the state what decide or decides to protect insurance companies,
you know, only up to a certain level is when
(28:29):
they have to step in with payments, and then the state,
you know, jumps in above that level. And it's Louisiana
also has they have a what's called the insurer of
last resort, So if you know, you as a homeowner,
you can find a policy from a private insurer, then
you can ensure with Citizens. So it has the same
(28:51):
name as the program in Florida, but they are distinctly
different because in Louisiana, Citizens is required that they do
offer the premium at a slightly higher price than the
private market. Okay, so they do not offer let's just
call it reduced or kind of sort of cheaper insurance premium.
(29:14):
So there's not a lot of savings because when it
comes to insurance what's really really tricky in setting these
premiums if you don't want to set them too high,
because then people forego insurance. But you also don't want
to set it too low, and that's something that we've
struggled with all along with now the National Flood Insurance Program,
because when you set insurance premiums too low, then the
(29:35):
decision to live and stay in a high risk area,
you don't really have to pay for that risk. You
don't have to pay the adequate price for that risk.
So let's say the risk is fairly high, but your
premium is not very high, so the decision to stay
where you are is easy because your premium is not
high and it doesn't cost you a lot of money.
(29:56):
So you actually start incentivizing stay in high risk areas
if you set the premium too low. So back to
Tracy's point about thinking about migrating, migrating and shouldn't people move.
So also when you have insurance premium being really high,
you as a homeowner or as a renter, you can
make the decision, okay, am I purchase insurance to stay here,
(30:19):
sort of being able to sleep at night not freaking
out about the risk I'm facing will possibly also move.
You know, that's kind of a signal that really the
risk is really high in this location and it's not
easy to get.
Speaker 1 (30:32):
Insurance, just in terms of things like governments could do. Again,
going back to this idea of insurers maybe wanting something
(30:55):
from either state or federal government, like what would be
the risk sharing arrangements here? Would it be something on
the level of the flood insurance that exists now.
Speaker 3 (31:06):
So when you think about managing risk, the question is
for governments, insurance companies, any private sector company. You as
an individual, how much are you willing to pay to
reduce your risk. So it's really a decision about of
(31:26):
how much or how low you want the risk for
people to be. And so there's different when you look
around the globe, there's different approaches. Like in the Netherlands,
people don't have flood insurance. Why do they not have
flood insurance because the government is committed to reducing flood
risks so that people don't have to purchase flood insurance.
(31:47):
It's not an option for us. And here in the
US our flood insurance program there is no requirement. Nobody
is forced to buy flood insurance unless you purchase a
mortgage from a federally backed mortgage company. So then the
government says, okay, if you live in a one hundred
(32:08):
year floodplan, plus you hold a mortgage from US, you
have to buy flood insurance. But if you live in
a one hundred year floodplane and you maybe hold your
house free and clear, nobody is forcing you to purchase
flood insurance. So it's really still up to people to
buy insurance. For the vast majority, you know, it's a
(32:30):
free decision to purchase insurance. And so the question is
the government could step in. There are always discussions about,
you know, should we have national disaster insurance? You see
this sort of the topic rises and falls very much
depending on, you know, the crises of disasters we face.
(32:51):
That could be a potential, But think about, you know,
what kind of risk the government would be taking on
in terms of financial costs if the government where to
offer them, And then the government also has to decide,
you know, then what is the premium for these policies.
It's really there is no easy answer to this. I mean,
(33:12):
I would also say, you know, when you think about
purchasing insurance, what is often forgotten an insurance company or
insurance is a highly highly highly data driven process and
product and setting those premiums. Does the government, if let's
say the federal government, where to offer an insurance product.
(33:33):
Does the government even have the data and the information
to really price a product like that adequately. We are
already struggling, you know, on trying to understand how many
people should have flood insurance versus how many people actually
have flood insurance. So I think data would be really
really important if the government where to get into this business.
(33:53):
And then also insurance companies, can you know you get
a letter every year if you want to renew your
homeowners insurance on that you as a person are not
deciding every year are you moving or not? So the
insurance market is so much more volatile in terms of
being able to offer it or retreat. And you as
a homeowner, you know, you are in your property, you
(34:14):
stay in your property. You might be able to switch,
but you don't have this annual choice off what you
want to do.
Speaker 2 (34:21):
I was going to save this thought to the end,
but I just keep getting flashbacks to like it's like
the bank conversation all over again, because we think of
this as a private market deposit taking.
Speaker 1 (34:30):
Why don't we all have direct insurance? Right?
Speaker 2 (34:33):
But this is like the degree to which it's really
a public utility. It's like so many of the same
like sort of philosophical economic moral questions come up, and
like deposit insurance and things like that. As an insurance insurance.
I want to go back to something you mentioned that
the Louisiana approach in the Florida approach are different. There's
two sort of like state level public insurance. They both
(34:56):
happen to be named citizens. Can you compare and control?
Asked what Florida is doing versus what Louisiana has done
in the past.
Speaker 3 (35:04):
So in Florida you do not have this requirement that
citizen has to offer a fairly high premium four product.
So they're the amount of property properties that are now
insured by the state. That number has exploded. Plus it
(35:25):
is truly a state backed insurance program, so the state
holds the risk. Plus Florida's also apparently a highly litigious state,
so a lot of the insurance companies have to deal
with homeowners filing lawsuits, which is completely different from any
other state here in the US. And this is for
(35:47):
Florida that's really the big issue, the sort of litigation
against insurance companies and for how long you can file
a lawsuit in Florida. So that's what makes Florida very different.
But the fact that you truly have insurance program that's
backed by the state and you hold that much risk
I find very concerning in terms of, you know, financial
(36:09):
soundness of a state budget. So that's very very different.
It's very unique in terms of insurance solution. So one
thing I wanted to mention. So there's a researcher, Howard
come Ruther, and he unfortunately just recently passed away. He
has long proposed this idea of maybe having the policy
not with you as a person, but with the home,
(36:31):
because that would incentivize that maybe people invest more in
building or reconstructing disaster resistant homes because what happens right
now and maybe this is going to change cricket. Then
we think about right now, the risk is not priced
into a home like you know, you go on a
website like Zillow or redfin you see, okay, what's your
(36:54):
square footage and how many bedrooms and do you have
granted in the kitchen. Now, when you look at those websites.
It just happened over the recent years. You get a
little bit of information on what they know slabeled climate
risks are, and then it will say, oh, your risk
for heat is going up, and maybe you have limited
flood risk. But the information I personally think is not
(37:17):
really translated in actionable information. You know, what are you
going to do as a potential home buyer with fifteen
different hazard types? How does that factor into your decision making?
If the risk goes up or not? Factors into your
decision making when it affects the home price. And for
a lot of people, there is now something starting where
people decide or potential buyers decide they have there's a
(37:41):
contingency to buy the home or not if they are
able to buy insurance, purchase insurance for that home. And
I feel like, you know, these struggles that we're seeing
in the insurance market, the ability to buy insurance might
be really the starting point the impetus for possibly risk
being priced into home values, and that hasn't happened yet,
(38:05):
so it's not very common right now that people are
aware of the risk. There's also no disclosure of risks,
so there's also different policies across the country, for instance,
in Louisiana. Now there are some risks that have to
be disclosed to you as a home buyer, but very often,
you know, you buy a home, do you get a
car fax on your home? Do you know how many
(38:27):
times this property has been flooded before or damaged, you know,
by a windstorm. We don't have that information. It's if
you're thinking of it's kind of crazy, you know, because
it's a pretty substantial investment when you buy a home
and you don't have that history of a property because
there's no requirement in many states that that gets disclosed,
and we only look at sort of the superficial things
(38:50):
in a home square footage, number of bedrooms. But do
people know, you know, if they actually have the appropriately
rated shingles on top of their roof, or if their
roof is connected adequately to the rest or the structure
in the house to you know, withstand hurricane forced winds.
We just somehow assume, because we got a building permit
(39:14):
from our local community, that this is a safe place.
And then when a home inspector comes, you know, for
you to decide if you want to buy this house.
You also don't get much information all that. So we really,
I think at a point right now where there is
maybe also more demand from potential home buyers to want
(39:36):
to have information about the risks that they are taking
on when you are purchasing a property, because you're also
purchasing the risk that comes with that property.
Speaker 1 (39:45):
Melanie, that was a fantastic overview of this very complicated issue.
We're going to leave it there, but thank you so
much for coming on all thoughts. That was great.
Speaker 3 (39:55):
Thank you so much for having me. I know it's
a slightly depressing topic.
Speaker 2 (40:13):
Joe.
Speaker 1 (40:13):
That was a great overview of that topic. I feel
like we hit a lot of the major points. The
one thing that Melanie brought up that was really interesting
to me was that idea of tying the insurance policy
to the house itself as a way of incentivizing, you know,
better construction methods or more resiliency to disaster risk.
Speaker 2 (40:35):
There were so many things that were interesting. So the
one thing I knew is that a typical homeowners insurance
policy doesn't have floods, right you like sure, So I
was aware that I didn't realize that wind insurance was
often in many cases a separate thing. I didn't realize
that there is no insurance policy whatsoever they can protect
against landslides, which I have to imagine in places like California. Yeah,
(40:55):
and then the big thing that really drove me home
is just like the sheer complexity, right, if you can't
really calculate it, well, like you're not going to get
any price, And so it sort of makes sense to
see like, Okay, we're gonna companies is gonna leave for
a while, Like if there's just so much like complexity
with the rising number of natural disasters or the rising costs,
like maybe the market just doesn't work. Well.
Speaker 1 (41:15):
Also the point about well why don't we all just
have federal insurance? You know, to some extent, maybe that
makes sense, But then how does the federal government with
no expertise in this or very little expertise, very little data,
actually start to price those products and that risk that
seems really interesting.
Speaker 2 (41:33):
Well, and furthermore, even if you did have like say
like a public option for national homeowners insurance, it would
inevitably be subject also to political fights like should the
government you know, It's like you'd have some people in
some places like no, why are you like not, why
are you pricing it? In Texas and Florida and California
this way is this because it's a red state or
like they're just it would you could do it, and
(41:54):
then it would introduce a whole new set of complications
that wouldn't exist in a private market.
Speaker 1 (41:58):
Absolutely. I just say I live in fear of bureaucratic
paperwork and the idea of having to like talk to
you if your house is destroyed by a hurricane and
then having to file paperwork about whether or not the
damage was caused by wind or flooding. That's just my nightmare.
On many leave.
Speaker 2 (42:15):
Well, I was gonna say this, but like you, I'm
completely agree. So it's like your house is damaged and
you're trying to get through to an insurance agent and
talk to them and prove and have the paperwork, and
then it's like, yeah, I kind of want maybe the
Florida system where you could just sue your insurer and
then it's right, and then it's like it have put
some fear of God in them because well, and then
(42:35):
the insurance company leaves the state because you have this
highly litigious state like well.
Speaker 1 (42:39):
I think also one of the issues in Florida is
that a lot of those lawsuits are fraudulent in one
way or another. Sure, there's all these roofing scams that
are in and of themselves quite interesting and would make
an interesting episode.
Speaker 2 (42:50):
Uh No, there's just there's a lot there and no
easy answers. But I feel like that helped me understand,
like why this space is such a mess right now.
Speaker 1 (42:58):
Yeah. Well, we're definitely to be doing some more insurance
episodes in the future, I feel but for now, shall
we leave it there?
Speaker 2 (43:04):
Let's leave it there?
Speaker 3 (43:05):
All right?
Speaker 1 (43:05):
This has been another episode of the oud Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (43:11):
I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Carmen Arman and Dashel
Bennett at dashbot, and check out all of our podcasts
under the handle at podcasts and for more odd Lots content,
go to bloomberg dot com slash odd Lots, where we
have a blog, we post transcripts, we have a weekly newsletter,
and I'm sure there's gonna be a lot to talk
(43:33):
about this one discord dot gg. Slash odd Lots is
where listeners hang out and chat twenty four to seven
about all of these topics. Go there and check it out.
Speaker 1 (43:43):
And if you enjoy Odd Lots, if you would like
us to do an episode on Florida roofing, insurance scandals
and frauds, then please leave us a positive review on
your favorite podcast platform. Thanks for listening in
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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