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. This transcript has been lightly edited for clarity.
Key insights from the pod:
How are damage costs estimated? — 7:02
Why do damage estimates vary and does it matter? — 11:10
Are natural disasters happening more often? — 14:15
Why are insurers leaving certain markets? — 16:17
Why can’t they just raise premiums? — 19:23
Should people just move from high-risk areas? — 22:52
What can states do to help? — 28:08
Possible risk-sharing arrangements — 31:06
Tying risk to a building versus a policyholder — 35:04
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Tracy Alloway: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal: (00:14)
And I'm Joe Weisenthal.
Tracy: (00:16)
Joe, do you do you like watching the weather?
Joe: (00:20)
Tracy: (00:21)
I can hear the pain in your voice, as soon as I asked that.
Joe: (00:25)
No. You know what? It's so funny, I was wondering how you're going to 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?
Tracy: (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 rain where we are and our basement starts to flood.
Joe: (01:02)
Oh yeah. I've lived in a house that had flood damage. It is an extremely stressful experience, 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 sort of like stressful things a homeowner can deal with.
Tracy: (01:21)
Well, you know, one of the stressful things happening right now, and we're recording this on, let's see, September 8th, 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 not it's going to sort of run up the Atlantic Coast might even get into New England. So an interesting one to watch.
Joe: (01:50)
Yes. And I guess by the time people listen to this, it'll 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 [the] Howard Hughes Holding CEO, where we talked about this huge surge in the cost that the company is paying for insurance. And there've 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, etc.
Tracy: (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 altogether because they're no longer profitable. Or in some cases -- like Florida -- they haven't actually been 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 $5,000 versus less than $2,000 for the rest of the US. So that gives you some idea of how this risk is starting to 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.
Joe: (03:31)
You know, thinking of things like flood insurance, which is already sort of socialized or that'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. So it's like if the private market leaves an area, you don't really see politicians be like, ‘Okay, well I guess we can't like build here anymore.’
There's usually the government steps in in some way. Maybe there's like a state insurer, a national insurer in the case of floods. But of course this creates its own issues. And then it's sort of another one of these financial services that's 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 it comes in a time of other tightening financial conditions, comes at [a time when there’s] so much attention played to climate risk. And I think we need to understand more of this area.
Tracy: (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'm 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 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 Odd Lots!
Melanie Gall: (04:51)
Thank you so much for having me.
Tracy: (04:53)
So maybe just to begin with, can you explain what the co-director of the Center for Emergency Management and Homeland Security at Arizona State actually does? What does that entail?
Melanie: (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 did in Africa. I was actually in Mozambique and I did training on, you know, how do you collect data in the field with the GPS, this kind of information.
And it was after a massive flood event. And then I realized, oh, there's a great connection between what I was doing, geographic information system and emergency management because you need a lot of logistic support. You need to know where your stuff is, where you should set up shelters and the like.
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 and an undergrad program in emergency management and Homeland Security. And I do numerous research projects. I work with our nonprofit organizations here in Arizona. So it's really a broad variety of things. So it's very exciting as a job I have to say.
Joe: (06:11)
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 [me as] difficult and what these trends are.
And I could 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 [seems hard]. 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, then you have to start with like, well what is the dollar value of the property in an area? So talk to us about the challenges of measuring these types of things.
Melanie: (07:02)
So let me start with telling you a little bit about where we get our data from, and then into 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 Centers for Environmental information – NCEI -- 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 this arena of collecting disaster losses way back in the days when I was a PhD student, where my professor had this idea that, hmmm, as a geography it should be fairly easy to develop profiles for the country. You know, does County A suffer more from hurricane damage than flood damage than County B?
And lo and behold, there was not really a 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 NCEI is one of our main data sources. And then we also use data from the US Geological Survey, especially related to geological hazards, earthquake damage, volcanic eruption damage, tsunamis, and the like, because the weather service obviously only collects data related to meteorological and hydrological events. But we are interested in compiling a database that covers all natural hazards. So we are vastly 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 more serious about collecting that data. And so we decided that we want to include landslide data in our database and that's where we then started like scouring newspapers or 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 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're not required to compile what 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. And these 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. There's what's called direct losses and indirect losses.
So direct losses 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 property damage, direct crop damage, injuries and fatality. So that would be, for instance, a person, 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 underestimating really the burden of losses that we have in the country from natural hazards.
Tracy: (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 were something like $125 billion versus what SHELDUS says at $80 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?
Melanie: (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 analysis to justify why it makes sense to invest, maybe, you know, building a new retention pond or you know, changing their building 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 are 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 in estimates that you just mentioned is really, that's our standard business because it is so tricky to estimate these losses. 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 slice 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, NOAA, the National Oceanic and Atmospheric Administration, they have what is called billion dollar events. They get cited all over and their estimates are always vastly higher than what we have in our database because they rely heavily on insured data.
And so insured 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 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 overestimating losses, but that really just, you know, might aggravate the problem because we already have an underestimation problem and then we are conservative. But that is the approach we've taken at the start of, you know, developing this database.
Joe: (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 things, well, ‘Oh, is it just that we're getting more attention to natural disasters in the media?’ And is it just a sort of, is it just a narrative that there are more wildfires, etc.? Or is it like, what are we actually seeing big picture in the data? Are things, you know, is it getting worse?
Melanie: (14:15)
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 people living in high-risk areas, right? 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 are experiencing. Or it could also be that we have not as resilient of a society, or resilient infrastructure, resilient, you know, residential homes and/or it could also be an increase in what we call social vulnerability, meaning you have more people that lack the capacity to prepare for, respond to or recover from an event.
Tracy: (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 understanding is there's different layers of private insurance and then there's sort of federal support potentially as well. And of course there are also the reinsurers who are sort of backing the upfront insurers. Can you walk us through how all that would work in a typical case?
Melanie: (16:12)
Yes. So, you know, just let me say it again. I'm a geographer in training. I'm not in insurance, nor an economist expert.
Tracy: (16:16)
Of course, of course.
Melanie: (16:17)
But I could 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.
So I think most people assume all this is covered in my homeowner's insurance, and it is not. And it depends on where you live. Like for instance, landslide risk is 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 for it.
So let's go to Florida. So if you live in Florida, so you would, let's say [an] ideal scenario as a homeowner, you have homeowner's 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 policy from your local agent, but actually, you know, the company that insures you is the federal government.
And then depending on what state you're 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 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 homeowner's 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, 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 caused by flooding.
And we see discrepancies where, you know, one neighbor, their wind insurance paid out because their insurance company said, ‘yes, we recognize this is wind damage.’ And the other neighbor didn't get anything from their policy because they, the insurer 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 there might be disputes with regard to what type of hazard caused that damage?
Joe: (18:48)
Wow. Why are insurance rates up so much? I mean, I know this is like the whole question, it's big, but if someone asks you that – me -- why? Like in Florida, you know, I saw there's a stat: 42% higher for homeowner home insurance premiums. I mean, I get that like, okay, generally speaking, maybe natural disasters, they're trending higher. But that is a staggering amount. And you know, I'll add to that. When you see companies desert estate, 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?
Melanie: (19:23)
So let's maybe start with the statements that these insurance companies released, why they're pulling out of the markets, especially like in Florida. So they cited a higher risk, in California, it was higher wildfire risk, which yes, check we see higher risk of that.
They had higher building costs. You know, spending, paying for the cost of 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 rate 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 costs that we have and create an insurance product that is competitive in the market? So can they then offer an 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, because calling this a pause is important because this is not the first 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 where this happened before. 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 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 there needs 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, 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 are 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 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.
Joe: (21:44)
Tracy, Melanie said something, there's a lot there, but one thing that I just want to 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, etc. I mean, if it's significantly more expensive in 2023 to rebuild a home than in 2019 than just, everything else aside, like mathematically you'd expect yeah, of course insurers have got to be you know, compensated for that.
Tracy: (22:10)
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-rone areas by not providing them 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?
Melanie: (22:52)
So what really encourages people to have insurance is having gone through a disaster. Like we know a key driving 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 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.
Tracy: (23:22)
So no so will change their behavior until they've actually been flooded out of their house?
Melanie: (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'll 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.’
[That] 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 to make, 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 think 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 a high chance, unless you forced, you are 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 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 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, or 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 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 so there's not maybe a lot of money you 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? Is it hurricanes, is it earthquakes? Because if you think about earthquakes, I mean there is not many people that should be living in California, right?
Tracy: (26:05)
All of California needs to move immediately.
Melanie: (26:08)
Exactly. 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 that because the Midwest has hurricanes -- not hurricanes, no good thing they don't. They have tornadoes. You know, you also have winter storms. They have massive hail events sometimes.
So there 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 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 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 been impacted by a disaster, they actually don't tend to move very far. So they still tend to stay within their state. They may move, you know, within the county, maybe to the neighboring county, but people don't tend to pack up and leave and move from, let's say from Louisiana to New Jersey or something like that.
Joe: (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 what do you think like when you see a company leave California or Florida or some of these other markets, what are the policy levers that these states could pull in order to, or are pulling, in order to bring more competition and carriers back into the state? Or historically, what types of changes prompt an insurer to come back into a given market?
Melanie: (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 would decide or decides to protect insurance companies, you know, only up to a certain level is when they have to step in with payments. And then the state, you know, jumps in above that level.
And Louisiana also has, they have what's called an insurer of last resort. So if you know you as a homeowner, you can’t find a policy from a private insurer, then you can insure with Citizens. So it has the same name as the program in Florida. But they're distinctly different because in Louisiana, Citizens, it’s 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 premiums.
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 along with now the National Flood insurance program because when you set insurance premiums too low, then the 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.
So you actually start incentivizing staying in high-risk areas if you set the premium to low. So back to Tracy's point about thinking about migrating and shouldn't people move? So also when you have insurance premiums being really high, you as a homeowner or as a renter, you can make the decision, ‘Okay, am I purchase insurance to stay here? Sort of being able to sleep at night, not freaking out about the risk I'm facing or 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 insurance.
Tracy: (30:48)
Just in terms of things that governments could do, again, going back to this idea of insurers maybe wanting something 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?
Melanie: (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 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 risk so that people don't have to purchase flood insurance. 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 100 year flood plain, plus you hold a mortgage from us, you have to buy flood insurance.’
But if you live in a 100-year flood plain 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 free decision to purchase insurance. And so the question is, the government could step in.
There's 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. 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 were to offer this. 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, 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. In setting those premiums, does the government, if let's say the federal government, were to offer an insurance product, 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 were to get into this business.
And then also insurance companies can, you know, you get a letter every year if you want to renew your homeowner’s insurance or not. 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 stay in your property, you might be able to switch, but you don't have this annual choice of what you want to do.
Joe: (34:20)
Tracy, I was going to save this thought to the end, but I just keep getting flashbacks to, it's like the bank conversation all over again because we think of this as a private market deposit taking, but why don't we all…
Tracy: (34:31)
Have direct insurance with the Fed?
Joe: (34:32)
Well right, but this is like the degree to which it's really a public utility, or is this private, it's like so many of the same sort of philosophical economic moral questions come up in deposit insurance and things like that as insurance. I want to go back to something -- you mentioned that the Louisiana approach and the Florida approach are different. They're two sort of state-level public insurers -- they both happen to be named Citizens. Can you compare and contrast what Florida is doing versus what Louisiana has done in the past?
Melanie: (35:04)
So in Florida you do not have this requirement that Citizen has to offer a fairly high premium for product. So there, the amount of properties that are now insured by the state, that number has exploded. Plus it 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 Florida, that's really the big issue, this 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 an insurance program that's backed by the state and you hold that much risk, I find very concerning in terms of, you know, financial 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 Kunreuther, 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.
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 quicker than 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 square footage and how many bedrooms and do you have granite in the kitchen? This, now when you look at those websites, it just happened over the recent years. You get a little bit in of information on what, you know, it's labeled 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 really translated in actionable information. You know, what are you going to do as a potential home buyer with 15 different hazard types? How does that factor into your decision making if the risk goes up or not?
It 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 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 are 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. 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 Carfax on your home? No. Do you know how many times this property has been flooded before or damaged, you know, by a windstorm? We don't have that information.
It's, if you think of it, 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 it gets disclosed. And we only look at sort of the superficial things 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 of the structure in the house to, you know, withstand hurricane forest winds, we just somehow assume because we got a building permit 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 are really, I think at a point right now where there is maybe also more demand from potential home buyers to want to have information about the risks that they are taking on when you are purchasing a property because you are also purchasing the risk that comes with that property.
Tracy: (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 Odd Lots. That was great.
Melanie: (39:55)
Thank you so much for having me. I know it's a slightly depressing topic.
Tracy: (40:13)
Joe, 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.
Joe: (40:35)
There were so many things that were interesting. So the one thing I knew is that a typical homeowner's insurance policy doesn't have floods. So I was aware of 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 that can protect against landslides, which I have to imagine in places like California is tricky.
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, you're not going to get any price. And so it sort of makes sense to see, okay, going to companies going to leave for a while. Like if there's just so much complexity with the rising number of natural disasters or the rising cost, maybe the market just doesn't work.
Tracy: (41:14)
Well, 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.
Joe: (41:33)
Well, and furthermore, even if you did have like, say, 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, oh my gosh, you'd have some people in some places like ‘No, why are you pricing it in Texas and Florida and California this way? Is this because it's a red state or a blue?’ It would, you could do it and then it would introduce a whole new set of complications that wouldn't exist in a private market.
Tracy: (41:59)
Absolutely. And can I just say I live in fear of bureaucratic paperwork.
Joe: (42:03)
Oh, me too. And the, and the idea of having to like talk -- 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 levels.
Joe: (42:15)
Well, I was going to say this, but I 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 have put some fear of God put in them because well, and then the insurance company leaves the state because you have this highly litigious state, like you need to see…
Tracy: (42:39)
Well, I think also one of the issues in Florida is that a lot of those lawsuits are fraudulent in one way or another. There's all these roofing scams that are in and of themselves quite interesting and would make an interesting episode.
Joe: (42:50)
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.
Tracy: (42:58)
Yeah, well we're definitely going to be doing some more insurance episodes in the future I feel. But for now, shall we leave it there?
Joe: (43:04)
Let’s leave it there.
You can follow Melanie Gall at
@melaniegall
.