Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is Wall Street Week. I'm David Weston bringing you
Speaker 2: stories of capitalism this week. Why families from Las Vegas
Speaker 2: to Vancouver can't afford to buy a house. If you
Speaker 2: can buy the house, why you may not be able
Speaker 2: to afford to ensure it, particularly if you live in
Speaker 2: Florida or in California. And US ports are consistently ranked
Speaker 2: among the least efficient in the world. What sort of
Speaker 2: investment would it take to fix that? But we start
Speaker 2: with the story about that trade balance. President Electroump focuses
Speaker 2: on so intently. On Thursday, we got the numbers, which
Speaker 2: once again showed the US in the red. But what
Speaker 2: does that tell us about the economy? And is restoring
Speaker 2: the balance, as mister Trump insists, really so important. Here's
Speaker 2: Bloomberg International Economics and Policy correspondent Michael McKee.
Speaker 3: There is a story about a college professor who told
Speaker 3: his economic students anyone who used the term bilateral trade
Speaker 3: balance would automatically fail. That's because international trade is a system,
Speaker 3: not a series of summable individual country by country relationships.
Speaker 3: A country's trade balance is the difference between what it
Speaker 3: consumes and what it produces. In the US, we consume
Speaker 3: more than we make. Aggregate demand is greater than aggregate supply,
Speaker 3: so we end up importing the difference to satisfy that demand.
Speaker 3: We have a trade deficit. China, on the other hand,
Speaker 3: produces more than it consumes. It sells its excess to
Speaker 3: US and the rest of the world. It has a
Speaker 3: trade surplus. To Donald Trump, the answer is to slap
Speaker 3: tariffs on Chinese made goods. But that won't solve the
Speaker 3: problem because we are the problem. As long as we
Speaker 3: demand more than we produce, the trade balance won't change.
Speaker 3: We will just buy more stuff from countries other than China.
Speaker 3: If China isn't the lowest cost supplier, someone else will be.
Speaker 3: Why won't we make more stuff here? We likely will
Speaker 3: just not enough. Meanwhile, our other economic policies are working
Speaker 3: to worsen the trade deficit. The US has a large
Speaker 3: and growing budget deficit, which we fund by selling debt.
Speaker 3: As the deficit rises, interest rates have to rise to
Speaker 3: attract buyers. That strengthens the dollar, which makes American exports
Speaker 3: more expensive and harder to sell. It makes imports cheaper.
Speaker 3: Tax cuts, meanwhile, give people more money to spend, increasing
Speaker 3: demand for those imports. We increase demand without increasing supply,
Speaker 3: and the trade deficit gets worse. Not even Donald Trump
Speaker 3: is above the law of supply and demand.
Speaker 2: So why the difference between exports and imports matter to
Speaker 2: a country that hasn't had a goods trade surplus since
Speaker 2: nineteen seventy five? We asked very lovely of the Peterson Institute.
Speaker 4: We shouldn't care about the trade balance. The trade balance
Speaker 4: is an accounting number, and sometimes a country has a
Speaker 4: trade surplus, sometimes it has a trade deficit. What it
Speaker 4: means is it reflects how much you are spending relative
Speaker 4: to how much you're earning. And just like in your
Speaker 4: own private life, there are times when you should spend
Speaker 4: more than you earn. For example, the country of Norway
Speaker 4: discovered north sea oil, and it did not want to
Speaker 4: depress the consumption of the current generation the people alive
Speaker 4: at that time to build up the investment necessary to
Speaker 4: exploit that new resource, and so they ran trade deficits
Speaker 4: as they bowered from the rest of the world to
Speaker 4: begin to drill and to get this precious resource from
Speaker 4: under the ocean, and lo and behold, now they run
Speaker 4: trade surfaces. So they invested the money wisely in an
Speaker 4: asset that played off for years to come. So the
Speaker 4: answer to is the trade devisit bad or good? Is
Speaker 4: really why do you have one?
Speaker 5: We like to buy, we're big consumers, we have the
Speaker 5: most open market, we have low tariffs, and it's actually
Speaker 5: been a benefit.
Speaker 2: Fred Hockberg was president of the Export Import Bank under
Speaker 2: President Obama and author of Trade is not a four
Speaker 2: letter word. Like Mary Lovely, he questions all the emphasis
Speaker 2: on the balance of trade.
Speaker 5: Yes, there are obviously some shortfalls, but we have the
Speaker 5: greatest array of products. You go to a supermarket, they're
Speaker 5: over thirty thousand different products. So that's been a great
Speaker 5: benefit to our economy.
Speaker 2: Even if it were important to address the trade balance.
Speaker 2: Lovely is not at all sure that the sixty percent
Speaker 2: tariffs on Chinese imports and twenty five percent reports from
Speaker 2: Mexico and Canada are the way to go.
Speaker 4: There's a misunderstanding of thinking that TIFFs, because they'll lower
Speaker 4: our imports, will change our trade deficit. So if President
Speaker 4: Trump goes ahead and put on tariffs, we would expect
Speaker 4: that the US dollar will strengthen. That will make our
Speaker 4: exports less attractive to foreign customers, to buyers abroad to
Speaker 4: have to pay more for them, and so both imports
Speaker 4: and exports can shrink and the balance could very well
Speaker 4: be unaffected. So it may have zero effect on the
Speaker 4: trade deficit. It could even increase the trade deficit, that is,
Speaker 4: if we don't handle the underlying drivers, which have to
Speaker 4: do with domestic saving and investment.
Speaker 2: When the President elect talks about the problem of the
Speaker 2: US trade deficit, he consistently focuses on goods, not services,
Speaker 2: when much of US strength is in the latter category.
Speaker 2: Hackwork says that means the trade balance numbers may be distorted.
Speaker 5: With the second largest export in the entire world, were
Speaker 5: second only to China, and one of the things we
Speaker 5: excel in is service exports, whether it's media like Bloomberg, media,
Speaker 5: financial services, insurance, travel, those are much harder to calculate
Speaker 5: and capture, so my hunches our exports is somewhat understated
Speaker 5: as a result.
Speaker 2: Beyond their effects on the trade balance, there's another aspect
Speaker 2: to tariffs that have attracted President elect Trump, the prospect
Speaker 2: of raising revenue.
Speaker 4: Why did we turn away from tariffs as a source
Speaker 4: of revenue? And the historical record shows us what folks
Speaker 4: were talking about one hundred years ago. What they were
Speaker 4: talking about is that it was a tax on consumption,
Speaker 4: and it left earnings that were saved untacked. So what
Speaker 4: you had was lower income people who save relatively small
Speaker 4: percentage or even zero of their income, really facing taxes
Speaker 4: on everything that they buy, whereas rich people were only
Speaker 4: taxed in the small share of their income that they
Speaker 4: actually used to buy things.
Speaker 2: Donald Trump is far from a loan in thinking that
Speaker 2: the sort of across the board free trade approach taken
Speaker 2: in the past has done real damage to certain industries
Speaker 2: and workers in some parts of the country. The question
Speaker 2: is whether tariffs are the best way to address the issue,
Speaker 2: or whether a more selective approach is called for.
Speaker 5: We have something called trade adjustment assistance. It's never been
Speaker 5: really fully funded to sort of support workers whose jobs
Speaker 5: have been compromised or loss due to trade, to make
Speaker 5: sure that they can find other jobs and seek other employment.
Speaker 5: That needs to be far more robust than it's ever been.
Speaker 2: To say that we may be misled by focusing too
Speaker 2: much on the trade deficit, or that imposing tariffs may
Speaker 2: not get us where we want to go, is not
Speaker 2: to say that the new President Trump's trade policies could
Speaker 2: not help the US accomplish things it needs to get
Speaker 2: done well.
Speaker 5: I think what he likes to do is one on
Speaker 5: one negotiations. He doesn't want to like the trans specific partnership,
Speaker 5: and there's a talk he might want to do some
Speaker 5: other one on one trade deals that would include higher
Speaker 5: tariffs that they would impose on China to sort of
Speaker 5: stop the Chinese overproduction. And China is overproducing and exporting
Speaker 5: a lot of the goods because they want to keep
Speaker 5: people employed. That hurts other countries that are trying to
Speaker 5: increase their businesses, their manufacturing, or their agriculture.
Speaker 2: In the end, maybe the most important point about the
Speaker 2: US trade deficit is that it can distract US from
Speaker 2: its underlying cause and a much bigger problem, how much
Speaker 2: the US is borrowing from the rest of the world.
Speaker 4: A trade surplus is the excess of your saving over investment,
Speaker 4: so that can change when you're saving the rate changes
Speaker 4: or when your investment rate changes. The US has had
Speaker 4: very healthy investment, and that's good. Our saving, though, has
Speaker 4: gone down, so we have a relatively low savings rate
Speaker 4: comparing across countries, and part of that is due to
Speaker 4: low private savings. But also low government savings. So here
Speaker 4: we get back to the large federal budget deficit and
Speaker 4: evaluating whether you think that deficit is something that should
Speaker 4: be made smaller.
Speaker 5: You know what drives our economy, it's consumer spending, business investment,
Speaker 5: government spending, and a deficit, whether it's exports or our
Speaker 5: budget deficit, so that it's only one of four components.
Speaker 5: We need to up our exports. We probably need to
Speaker 5: have our budget and better alignment because we are spending
Speaker 5: a lot more than we're taking in. It's one of
Speaker 5: the things Scott Bessant, the incoming Treasury nominee, says he
Speaker 5: wants to work on so that we have to look
Speaker 5: at in the totality. But it's easy to focus on
Speaker 5: the trade deficit because it's like foreign and we don't
Speaker 5: have to talk about raising taxes.
Speaker 2: Coming up. The US is way behind in the efficiency
Speaker 2: of its ports. Does it matter and what can be
Speaker 2: done about it? That's next on Wall Street Week. This
Speaker 2: is a story about American exceptionalism, but not necessarily the
Speaker 2: good kind.
Speaker 6: Their Rural Bank comes out with this list of the
Speaker 6: top four hundred or five hundred.
Speaker 7: The USA ports are not hardly ever in the top
Speaker 7: one hundred.
Speaker 2: That's Mario Cardera, CEO of the Port of Long Beach
Speaker 2: in California, America's second busiest port. It ranks number nine
Speaker 2: in the world and level of activity, but number three
Speaker 2: hundred and seventy three in the list. He refers to
Speaker 2: the World Bank's annual Container Port Performance Index, which measures
Speaker 2: efficiency based on how long a ship stays in port.
Speaker 2: That index for twenty twenty three ranked Yangshan, China, Salala, Oman,
Speaker 2: and Kartahina, Columbia, first, second, and third. The only US
Speaker 2: ports that made the top one hundred were Philadelphia at
Speaker 2: fifty five and New York, New Jersey at number ninety two.
Speaker 2: Of the bottom fifty ports listed, six of them are
Speaker 2: in the US, making America's shipping infrastructure exceptional in the
Speaker 2: length of its delays. Turlock Mooney is the global head
Speaker 2: of Port Intelligence and Analytics at S and P Global,
Speaker 2: which partnered with the World Bank to create the efficiency ranking.
Speaker 8: Ports are critical to fluid supply chains. Efficient ports are
Speaker 8: extremely necessary to keep goods flowing smoothly. Efficient ports are
Speaker 8: actually catalysts for development. They attract investment, they attract logistics infrastructure,
Speaker 8: and they ultimately helped to drive growth Conversely, in efficient
Speaker 8: ports can have the opposite effect.
Speaker 2: Time, as they say, is money, and when it comes
Speaker 2: to United States imports, it can be a lot of
Speaker 2: money given the importance of consumers, which makes ports like
Speaker 2: Long Beach an indicator of the strength of the economy.
Speaker 6: Overall, you have a great economy, and you know the
Speaker 6: amer consumer is spending in terms of peor Long beachs
Speaker 6: our numbers lately have been historic, so we're approximately now
Speaker 6: after nine months, we're up in terms of te volume.
Speaker 7: We're up about nineteen percent over and above last year's number.
Speaker 2: To handle all that volume, ports like Cordero's Long Beach
Speaker 2: have been changing the way they do business, trying to
Speaker 2: make sure that they're as efficient as they can be,
Speaker 2: improving that low ranking in the World Bank Index. And
Speaker 2: some of that requires automation.
Speaker 6: The research right now points to the fact that automation
Speaker 6: clearity is a cost reduction policy for the poor Long Beach.
Speaker 7: We're interested in productivity as.
Speaker 6: A global community. We've entered the fourth Industrial Revolution, so
Speaker 6: to speak, and that is the coming of robotics automation.
Speaker 6: If you go back to a report that mckensey issued
Speaker 6: back in twenty seventeen, they predicted that by twenty thirty
Speaker 6: we would lose two thirds of American jobs. As we know,
Speaker 6: for every robot that you put in place, there's six
Speaker 6: jobs that are limited. So I think for a poor
Speaker 6: long beach, how we navigate that issue as a public port.
Speaker 6: We have to consider all factors and I think what
Speaker 6: we've been successful at. Then when we do talk about
Speaker 6: automation or in the case of the Blombach container termal
Speaker 6: semi automation, we have that discussion as a stakeholder group,
Speaker 6: a collaborative effort.
Speaker 2: Automation at seaports is not an all or nothing proposition.
Speaker 2: Loading and offloading ships and moving cargo from one form
Speaker 2: of transportation to another involves many complex steps, some of
Speaker 2: which are more readily automated than others, and some of
Speaker 2: which don't lend themselves to automation at all given current technology.
Speaker 8: The main benefit of automation and the reason that it
Speaker 8: is the future and the reason that you see the
Speaker 8: most efficient ports and the world automating operations more and more,
Speaker 8: is that it sits very well with digitization. So it's
Speaker 8: an important part of the technical foundation for interoperable data
Speaker 8: sharing of data between different stakeholders. Sharing of good quality
Speaker 8: data so that action can be taken where necessary to
Speaker 8: drive efficiency and improve efficiency of port operations.
Speaker 2: Automation is far from the only way that ports like
Speaker 2: Long Beach are seeking to improve efficiency. Indeed, it may
Speaker 2: not even be the best way. A better approach may
Speaker 2: be to get more productivity from the system the way
Speaker 2: it's now configured, particularly by extending the hours the port operates.
Speaker 7: One of the things that I was very vocal about
Speaker 7: is how we move to twenty four to seven operations.
Speaker 6: Now we're not working twenty four hours a day, seven
Speaker 6: days a weekening time soon. Imagine if you told the
Speaker 6: American consumer you can only fly during the week and
Speaker 6: the airport will closed on weekends, or you can only
Speaker 6: fly between the hours of eight am and six pm.
Speaker 6: I mean, imagine what the airport bottleneck would be like.
Speaker 6: So I think the same emphasis needs to be put
Speaker 6: in terms of how we move cart.
Speaker 2: Another route to improve efficiency is rail. One train can
Speaker 2: carry seven hundred and fifty trucks worth of cargo, and
Speaker 2: earlier this year, Long Beach broke ground on a one
Speaker 2: point five billion dollar expansion of its rail yard that
Speaker 2: will triple the amount of cargo it can handle annually.
Speaker 2: John Gabriel is Group president for Consumer Products at b ANDSF,
Speaker 2: one of the two railroads servicing Long Beach.
Speaker 9: October of twenty twenty four was the biggest single month
Speaker 9: moving intermodal that we've had as BNSF Railway. Tying that
Speaker 9: back to the ports this year has it's on a
Speaker 9: record pace for the most shipped the train movements that
Speaker 9: we've done. It's the fastest we've ever gotten to a
Speaker 9: million containers loaded on the trains and departed out of
Speaker 9: the ports of LA and Long Beach. And I would
Speaker 9: certainly say that's a testament to, you know, the investments
Speaker 9: we've made. Again, we've invested in tracks facilities more than
Speaker 9: two and a half billion dollars over the last five years.
Speaker 9: I think it's a testament to the collaboration we have
Speaker 9: with the ports of LA and Long Beach and the
Speaker 9: investments they've made. That's so important. Right now, right now,
Speaker 9: we're handling more volume than we were post supply chain crisis,
Speaker 9: where we saw the huge uptick in consumer demand, you know,
Speaker 9: post pandemic, and we're doing it about fifty percent faster
Speaker 9: from ship to train and ultimately the ship to end destination.
Speaker 9: Across our animal network is about seventy five percent faster
Speaker 9: than it was from a transit perspective back in twenty
Speaker 9: twenty two. And you know, really, I would say the
Speaker 9: entire supply chain and all stakeholders have really stepped up
Speaker 9: and it's really been a great demonstration of you know,
Speaker 9: a capacity and supply chain resiliency for all the goods
Speaker 9: moving through the West Coast.
Speaker 10: Containers and Rossterdam are only thirty three percent off the
Speaker 10: total cargo through pit the major cargo nearly fifty percent
Speaker 10: of liquid bulk clicking i AIN World Away.
Speaker 2: Anna Steltzel is working on maximizing efficiency in Rotterdam, where
Speaker 2: she's the Director of Containers. It's the world's tenth busiest
Speaker 2: port and ranks ninety first in the World Banks Efficiency Index.
Speaker 2: As with Long Beach, Rotterdam is facing increasing demand.
Speaker 10: We're expanding our container capacity. We do know from research
Speaker 10: that to container business in Europe will be actually it
Speaker 10: will be growing all over the world. That has to
Speaker 10: do with containerization, that has to do with a growing
Speaker 10: middle class, and in order to prepare for their growth
Speaker 10: and to participate in their growth, we had decided to
Speaker 10: invest into our.
Speaker 2: Infrastructure Rotterdam is a leading port in a new system
Speaker 2: called Gemini, involving shipping companies HAPAC, Lloyd and Meersk.
Speaker 10: The trends that we see is that transhipment volumes are growing.
Speaker 10: That has to do, for example, with the fact that
Speaker 10: we have hubbinspoke concepts that are being introduced. Maersk, together
Speaker 10: with Harperkloyd, introduced the Gemini concept.
Speaker 2: The Gemini project features a series of hub ports around
Speaker 2: the world that handle the bulk of the cargo. Containers
Speaker 2: are then immediately loaded under smaller ships destined for spoke
Speaker 2: ports dotted all over the world. Central to the project
Speaker 2: in Rotterdam is APM, which bills itself as the most
Speaker 2: advance against most fully automated terminal in the world. Its
Speaker 2: CEO is Harold Kunst.
Speaker 1: The Gentleman and I approach is different than the traditional
Speaker 1: shipping line approach.
Speaker 10: We took for many decades.
Speaker 2: With the up structure integrated into the network of the
Speaker 2: five hubs in the East West approach from the trade
Speaker 2: is that we are able to enable the ships to
Speaker 2: be nine days earlier from far rays into Europe. Sports
Speaker 2: like Rotterdam in Europe and Long Beach in California are
Speaker 2: seeing greater demand than ever for cargo handling, and are
Speaker 2: investing and innovating to keep up with what's coming their way.
Speaker 2: So why is it that they still lag so far
Speaker 2: behind their counterparts in Asia, in the Middle East, and
Speaker 2: even in Latin America. Why is it that it takes
Speaker 2: two or three times as long to move a container
Speaker 2: at a US port than it does in China. It
Speaker 2: turns out that there are several reasons. First, and most
Speaker 2: basic is that twenty four to seven schedule that Cardero
Speaker 2: is pushing for at Long Beach, but that hasn't yet
Speaker 2: been accomplished.
Speaker 6: After nine months in the year twenty twenty four because
Speaker 6: of expanded hours of operation which commenced with the twenty
Speaker 6: four to seven conversation. Again, are we twenty four seven today? No,
Speaker 6: have we taken incremental steps to expand operation hours. Yes,
Speaker 6: that's a big reason why we don't have congestion and
Speaker 6: bottlenecks at the Pear Long Beach because our terminals have
Speaker 6: been able to work with us and making sure that
Speaker 6: we use night gates, we use early morning gates, we
Speaker 6: use weekend hours in times that we have historic volume,
Speaker 6: which is what we have done.
Speaker 7: So I think again we'll get there.
Speaker 2: Even if Long Beach were up and running all the time,
Speaker 2: it would be very difficult for it to approach the
Speaker 2: efficiency level of some major ports because of where it
Speaker 2: fits in the supply chain. Goods coming into Singapore or Oman,
Speaker 2: for example, are transferred from one ship to another rather
Speaker 2: than being moved over land by train or truck for distribute.
Speaker 2: In the United States, we're not a transhipment port.
Speaker 6: I mean some of the larger ports that you look at,
Speaker 6: for example Singapore, they are a transhipment port. They always
Speaker 6: have been, and the allies will.
Speaker 2: And finally, there is the question of automation, something that
Speaker 2: others make more use of than the US. But as
Speaker 2: much as automation promises to be an answer to so
Speaker 2: many prayers for greater efficiency, first it comes with a price,
Speaker 2: quite literally, in the investment it requires, with the associated
Speaker 2: questions of where the capital will come from and whether
Speaker 2: it will earn the return on investment normally required.
Speaker 7: There's about twelve hundred legitimate container terminals throughout the world,
Speaker 7: only about four percent are automated.
Speaker 6: So the challenge with any type of transformation of technology
Speaker 6: is a costly endeavor. So from a private sector perspective,
Speaker 6: what's the return on investment. I think that question is
Speaker 6: probably going to be more challenging moving forward, because obviously
Speaker 6: none of this happens under some private sector investment in.
Speaker 2: The United States. It's not just a question of the
Speaker 2: capital investment in return. Automation also has potentially substantial effects
Speaker 2: on employment, which led forty seven thousand members of the
Speaker 2: Longshoreman's Union to go on a three day strike in
Speaker 2: US ports on the Eastern Seaboard and Gulf Coast in October,
Speaker 2: something Cordero on the West Coast is very aware of.
Speaker 6: For a port like Low Beach, who are public ports,
Speaker 6: we need to take into account the social impacts that has.
Speaker 6: I think that at the Port of Lombreaes we're proud
Speaker 6: about the footprint that we have in terms of job production.
Speaker 6: You know, five hundred and thirty five thousand the local level,
Speaker 6: at the state level seven hundred and four thousand plus
Speaker 6: jobs directly and directly as a result of the pro
Speaker 6: Long Beach, and at the national levels the numbers like
Speaker 6: two play six million. So we just were talking earlier
Speaker 6: about the great economy that we have, our dependency of
Speaker 6: our GDP based on consumer spending robots don't spend money.
Speaker 7: Consumers do.
Speaker 6: So that's the conversation that I haven't really heard amplify
Speaker 6: it because for US, it's very important to keep labor
Speaker 6: in place, because hypothetically you eliminate labor, what are you
Speaker 6: doing to the economy and spending in terms of consumer spending.
Speaker 2: And that story will be an important part of the
Speaker 2: larger story of American exceptionalism and whether the US can
Speaker 2: remain the dominant economic force in an increasingly competitive world.
Speaker 2: Coming up by families from Las Vegas to Vancouver can't
Speaker 2: afford to buy a house. If you can buy the house,
Speaker 2: why you may not be able to afford to ensure it,
Speaker 2: particularly if you live in Florida or in California. On
Speaker 2: Wall Street Week, this is a story about risk, how
Speaker 2: much we are willing to pay to protect against the
Speaker 2: risk of losing something we value. It's a story that
Speaker 2: always begins when something goes very wrong.
Speaker 1: This is where we designated the water levels for Helene.
Speaker 2: Glenn Scarpa and his wife own Scarpu's Coastal restaurant in
Speaker 2: Boca Grande, a small island town in Florida.
Speaker 1: We cut everything around the whole restaurant at two feet,
Speaker 1: you know, to get all the wet stuff and insulation out.
Speaker 1: Ten twelve days later we got this one. And then
Speaker 1: we walked in here and said.
Speaker 2: O, December first marks the end of the Atlantic hurricane season,
Speaker 2: and it's been expensive and deadly. In Florida alone, three
Speaker 2: hurricanes made landfall in twenty twenty four, tying the highest
Speaker 2: years on record, And although the toll is still being
Speaker 2: added up, we now know the storms sweeping through the
Speaker 2: United States took more than three hundred lives and cost
Speaker 2: over one hundred and ninety billion dollars across the country.
Speaker 2: That price tag makes it the third costliest season in
Speaker 2: US history. Scarpa, like millions of other Floridians, turns to
Speaker 2: insurance to help protect against losses from extreme weather. As
Speaker 2: the insured, he's the first step in a food chain
Speaker 2: of risk that starts with individuals or businesses, goes up
Speaker 2: to insurers, then to reinsures, and ultimately can hit investors
Speaker 2: or even taxpayers. With each step, the risk is calculated, changed, repackaged,
Speaker 2: spread around. But one thing we know for certain, it
Speaker 2: never goes away. As risk increases in the United States
Speaker 2: and costs, two insurers stack up insurance premiums have also
Speaker 2: been on the rise. Are we in a historical high
Speaker 2: here in the cost of insuring a home?
Speaker 11: I'd say yes. The average cost for Florida homeowness policy
Speaker 11: is about six thousand dollars.
Speaker 2: Jerry Theodoru is director of the Finance, Insurance and Trade
Speaker 2: Policy Program at Our Street Institute, a DC based think
Speaker 2: tank that promotes free markets.
Speaker 11: In the insurance world. In rate making and pricing, the
Speaker 11: rate follows the risk. The risk magnitude has increased, So
Speaker 11: because the risk has increased, the losses have increased, and
Speaker 11: insurers are playing catch up and raising prices. And there
Speaker 11: are some unique factors for Florida which differentiated from the
Speaker 11: rest of the country.
Speaker 2: It turns out that extreme weather is only one of
Speaker 2: those unique factors. Insurance has also gone up because of
Speaker 2: people moving to the state and building more expensive houses
Speaker 2: in risky locations.
Speaker 11: There's more built up value. Had a population of two
Speaker 11: point two million in nineteen forty six and it's now
Speaker 11: twenty two million. It increased ten times, So there's a
Speaker 11: lot more built in value in Florida that's available there
Speaker 11: to be hit by hurricane and be destroyed. So we've
Speaker 11: got climate change We've got the built up environment which
Speaker 11: has grown, there's more real estate out there to be destroyed,
Speaker 11: and you have the inflation in these prices. So it's
Speaker 11: like a trifecta.
Speaker 12: A lot of circumstances hit at the same time.
Speaker 2: One step up the ladder of risk from insured to ensure.
Speaker 2: Tim Cirio is CEO of Citizens Property Insurance Corporation.
Speaker 12: You had, you know, COVID and post COVID, A lot
Speaker 12: of folks flocked to Florida. You had property values skyrocket,
Speaker 12: which you know, you could be very happy that your
Speaker 12: home was worth more, but if it costs a lot
Speaker 12: more to replace it, you know you're going to be
Speaker 12: paying more in insurance. You had inflation over the last
Speaker 12: several years which drove up construction calls cost to replace
Speaker 12: your home.
Speaker 2: It's not just Florida. It's been hit by higher insurance
Speaker 2: costs recently. Across the country. Insurance prices have surged over
Speaker 2: the past two years. Since the beginning of twenty twenty three,
Speaker 2: the cost of homeowners insurance nationwide has climbed over twenty
Speaker 2: one percent, while CPI rose just five percent. The price
Speaker 2: of some commercial insurance is up nearly fifteen percent over
Speaker 2: the same period. Theodorus says the greatest problems facing insurance
Speaker 2: markets have been man made. Companies leave states like Florida
Speaker 2: and California, not because they can't price climate risk, but
Speaker 2: because they know the risk and state laws and litigation
Speaker 2: won't always let them keep up with it.
Speaker 11: Now, if they're underpricing, they're not going to have a
Speaker 11: six percent profit margin, which is the going rate for
Speaker 11: insurance companies. Insurance companies are not fat rich organizations, so
Speaker 11: that's why you have this seeming exodus from California.
Speaker 2: This problem of insurance companies leading the state gave rise
Speaker 2: to Cirio's Citizens Property Insurance Company.
Speaker 12: Citizen is the state created insure of last resort. The
Speaker 12: idea is that we exist to help the people of
Speaker 12: Florida find insurance when they really have no options. Maybe
Speaker 12: it's because of maybe they're a higher risk, not necessarily
Speaker 12: because they've done anything wrong, but the characteristics of their home.
Speaker 2: Today, the last resort has become the only one for
Speaker 2: many who live in Florida. Citizens is the largest insurance
Speaker 2: firm in the state.
Speaker 12: Our rates were artificially suppressed and we became probably on
Speaker 12: the whole, the cheapest in the state. Of Florida, which
Speaker 12: caused us to grow exponentially, and that's not a good thing.
Speaker 12: There has been pretty much bipartisan agreement that a very
Speaker 12: large citizens is not healthy overall for Florida because if
Speaker 12: we grow too large and there's a storm or a
Speaker 12: series of storms and we can't pay our claims. The
Speaker 12: good news for our policyholders is their claims will always
Speaker 12: be paid because we have the requirement to levy a
Speaker 12: surcharge on citizens policy holders. And if that doesn't suffice
Speaker 12: to pay claims, then it's an assessment on policy holders
Speaker 12: and non policy holders alike to make sure claims are paid.
Speaker 2: Individuals may be struggling to pay their premiums and states
Speaker 2: may be struggling to keep premiums within reason, but it's
Speaker 2: not because the insurance companies are pocketing big profits. Profit
Speaker 2: margins for the S and P five hundred insurance sector
Speaker 2: have climbed over the last few years, but to levels
Speaker 2: that are far from shocking, peaking around twelve percent this
Speaker 2: year before sliding to seven percent in November. Compare that
Speaker 2: to twenty twenty four highs of around sixteen percent for
Speaker 2: the financial industry and over twenty four percent for big
Speaker 2: tech One factor constraining profit margins for insurers beyond the
Speaker 2: claims they're paying out, has been the rising cost of
Speaker 2: insurance that they themselves have to pay one more step
Speaker 2: up the latter of risk.
Speaker 13: Swissree is a global reinsurance company and our clients are
Speaker 13: insurance companies. We partner with insurance companies to protect their
Speaker 13: balance sheets.
Speaker 2: Monica Ningen is CEO of US Property and Casualty Reinsurance
Speaker 2: at Swiss Reed, one of the largest reinsurers in the world.
Speaker 13: When it comes to reinsurance rates, there is an impact
Speaker 13: from climate change, but it's relatively small. The other factors
Speaker 13: being economic inflation, wage inflation. Inflation of construction plays a
Speaker 13: big factor, especially in the last few years, but you
Speaker 13: also have things like urbanization and people moving into areas
Speaker 13: that are more susceptible to catastrophes.
Speaker 2: Each of those factors helped push reinsurance rates higher every
Speaker 2: year since twenty seventeen. Within especialist sharp rise in twenty
Speaker 2: twenty three, but early figures for this year suggest the
Speaker 2: trend might finally be leveling off. And even though we're
Speaker 2: closing the books on one of the worst hurricane seasons
Speaker 2: on record, signs are that this year's natural catastrophes haven't
Speaker 2: led to financial ones.
Speaker 11: It's a chain there that spreads the risk around so
Speaker 11: that when you have a catastrophic event like Hurricane Helene,
Speaker 11: it didn't hurt the third quarter earnings. A remarkable thing
Speaker 11: that happened at the end of September. Helene went up
Speaker 11: to North Carolina. But the insurance companies, they just reported
Speaker 11: the third quarter earnings last few weeks and they were
Speaker 11: pretty upbeat. Didn't lose a lot because very sound prudent
Speaker 11: use of reinsurance. And there's also private investors that want
Speaker 11: a piece of the action in the form of insurance
Speaker 11: linked securities also called catastrophe bonds. So there's a lot
Speaker 11: of capital. So whereas people are talking about, oh, this
Speaker 11: is going to be a forty billion dollar, fifty billion
Speaker 11: dollar event, insurance companies can handle that. They're built to
Speaker 11: do that, that's what they do. So we're seeing some positive,
Speaker 11: some tailwinds that are really worth watching.
Speaker 2: Despite all the factors driving insurance costs up. Those who
Speaker 2: know the industry well see cause for hope. At least
Speaker 2: in Florida, where the government has worked to reduce lawsuits
Speaker 2: that have cost a good deal to insurance companies.
Speaker 11: The good news is about a year and a half ago,
Speaker 11: the Governor of Florida as signed into law some comprehensive
Speaker 11: Tart reforms that really cut the feed out from the
Speaker 11: or cut the legs off from some of these excesses
Speaker 11: of litigation. After the Tart reforms went into effect last
Speaker 11: year in March, we've seen that the number of lawsuits
Speaker 11: in the first three quarters of the year, because we
Speaker 11: just saw of the Q three numbers went down by
Speaker 11: twenty four percent.
Speaker 12: We hit one point four to one million policies in
Speaker 12: October of twenty twenty three. We're a little over a
Speaker 12: million now we should end the year at around a
Speaker 12: little over nine hundred thousand policies. That means that private
Speaker 12: carriers are coming in, they're taking policies out of citizens,
Speaker 12: They're willing to write more risk. So I mean that
Speaker 12: is evidence that the market's getting healthier.
Speaker 11: Recently, one of the publicly traded insurance companies in Florida
Speaker 11: said that we're not doing more rate increases. So it
Speaker 11: appears as if the insurance industry has caught up with
Speaker 11: lost magnitude.
Speaker 2: Whether or not lower insurance rates find their way to
Speaker 2: businesses and homeowners in Florida and across the country. In
Speaker 2: the short term, we do know that climate risk and
Speaker 2: development in risky areas isn't going away. Monica and Ningen says,
Speaker 2: what happens next will come down in part to those
Speaker 2: of us at the bottom of the chain.
Speaker 13: So when you look to the future, I think there's
Speaker 13: a few things that will change. I think that consumers
Speaker 13: were still to better understand their own risk exposure and
Speaker 13: what their own resiliency looks like. As events impact our
Speaker 13: lives every day, whether it's snow impacting your commute to work,
Speaker 13: or it's a flood that's imposing on you returning back
Speaker 13: to your home, consumers are being more aware than they
Speaker 13: ever have been on the risks that their homes face.
Speaker 2: Back in Boca Grande, Glenn Scarpas says he's very aware
Speaker 2: of the risk of another hurricane, but he's hoping to
Speaker 2: manage with a little bit of luck and insurance.
Speaker 1: I mean, you've got to anticipate that it's probably going
Speaker 1: to happen again. Who knows it could happen next year,
Speaker 1: could be thirty years, it could be one hundred years,
Speaker 1: but it's going to happen. Again at some point.
Speaker 2: Having a business on the island Scarpus says is still
Speaker 2: worth the risk, But after moving there five years ago
Speaker 2: and seeing the destruction to both his restaurant and his home,
Speaker 2: he's decided to sell his condo and move inland onto
Speaker 2: greener and he hopes drier pastures. That does it for us.
Speaker 2: On Wall Street Week, I'm David Weston. We'll see you
Speaker 2: again next week for more stories of capitalism.