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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.

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Speaker 3: I'm Joe Wisenthal and I'm Tracy Alloway.

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Speaker 2: Tracy, it's funny that, like in all the coverage of

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Speaker 2: finance generally, you know, we talk about banking, we talk

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Speaker 2: about brokerage, we talk about deals, there's not a lot

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Speaker 2: of talk about insurance.

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Speaker 3: I know, it's so weird. I feel like it's kind

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Speaker 3: of a blind spot for financial journalism. And I'm sure

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Speaker 3: I'm gonna get a lot of tweets and emails from

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Speaker 3: dedicated insurance correspond yes, but there should be more of them. Yes,

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Speaker 3: that's basically what we're saying. It's a huge pool of capital,

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Speaker 3: and also it has real life consequences, right, I think

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Speaker 3: those aren't discussed enough. Like there's a sort of feedback

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Speaker 3: loop where insurers are often deciding what is economically acceptable

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Speaker 3: in terms of risk, and so their decisions have actual

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Speaker 3: impact on you know, people's lives and the way we

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Speaker 3: behave where we live. Things like that.

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Speaker 2: It's interesting to think about, like the similarities between insurance

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Speaker 2: and deposit banking, because both industries are basically, I give

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Speaker 2: an institution an amount of money, and I expect at

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Speaker 2: some point to get it all back, and in the

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Speaker 2: meantime that company that I gave it to gets to

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Speaker 2: lend it out or invest it or something like that.

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Speaker 2: The difference is with banking, you sort of like get

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Speaker 2: the money back whenever you want it. With insurance, on

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Speaker 2: the other.

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Speaker 3: Hand, when something bad happens.

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Speaker 2: It'll probably happen at some point in your life. You

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Speaker 2: just have no idea when it'll unfortunately almost always be

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Speaker 2: when a very bad incident that you want to ensure against.

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Speaker 2: But yeah, it really is interesting how there's this huge

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Speaker 2: thing and as you say, it touches every aspect of

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Speaker 2: life in many cases dictates even what people can and

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Speaker 2: can't do. But it's like we know so little about

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Speaker 2: like there's so little talk about it.

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Speaker 3: It's the lesser known supply shock, let's put it that way. Recently,

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Speaker 3: we did that episode on the Fed's Preferred measure of inflation,

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Speaker 3: and we were talking in that about the insurance component

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Speaker 3: and the impact that's been having on the headline number.

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Speaker 2: Right, So this is the one aspect of insurance that

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Speaker 2: has gotten a fair amount of coverage over the last

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Speaker 2: several years, which is that in certain states, particularly California

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Speaker 2: and Florida and maybe some others, there have been these

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Speaker 2: huge upward shocks to the cost of covering your home.

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Speaker 2: We actually talked about this with the Howard Hughes CEO

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Speaker 2: last autumn, where he was talking about their insurance surge.

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Speaker 2: But I have to say, like, in my head, like

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Speaker 2: I still don't totally understand what's driven these huge spikes

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Speaker 2: in premiums, particularly for homeowner's insurance.

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Speaker 3: So I think what's confusing about this whole discussion is

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Speaker 3: you see two very different headlines. So on the inflation side,

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Speaker 3: you see things like, oh, the cost of insurance is

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Speaker 3: surging in Florida and California, it's unaffordable to live in

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Speaker 3: those specific places or specific areas within those states. But

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Speaker 3: on the other hand, you also see headlines that say

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Speaker 3: things like insurers are sixty percent behind in terms of

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Speaker 3: pricing from where they need to be, and insurers say

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Speaker 3: the market is uneconomic, they can't make the numbers work,

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Speaker 3: And so you're left kind of head scratching, Well, is

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Speaker 3: this about insurers trying to cover extra costs? Is it

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Speaker 3: price gouging? Is it that there's something fundamentally too risky

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Speaker 3: about this particular line of business. Is it political posturing?

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Speaker 3: This is the other thing that happens here in California

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Speaker 3: and Florida. They have very particular regulatory systems around insurance.

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Speaker 3: It's really hard to disentangle it's actually going on completely.

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Speaker 2: And there's always this question anytime you see an insurer

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Speaker 2: like pull out of a state, like I never understand that, Like,

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Speaker 2: why not just price it higher where it's like, oh,

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Speaker 2: this is uninsurable. Yeah, no, certainly, like there's some risk

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Speaker 2: that someone will desire to be compensated for. But yet

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Speaker 2: you see this line uninsurable. I do think obviously, in

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Speaker 2: the case of Florida and California, we've seen disasters. Of course,

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Speaker 2: we've seen various wildfires over the last several years in California,

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Speaker 2: Florida hit by a number of hurricanes, so there's a

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Speaker 2: climate change element. But in my mind, I do not

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Speaker 2: feel like I understand the whole story of why. At

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Speaker 2: least in a handful of states, homeowner insurance premiums have

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Speaker 2: spiked at levels that like basically it feels like no

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Speaker 2: one has seen before in history.

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Speaker 3: Yeah, And at the same time, the insurers say they

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Speaker 3: can't make any money. I was just looking at a

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Speaker 3: little article from credit site saying that the majority of

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Speaker 3: the top twenty underwriters of Californian retail, home and auto

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Speaker 3: insurance at this point have either entirely withdrawn or significantly

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Speaker 3: curtailed their participation in the state given profitability challenges. So

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Speaker 3: there's clearly something going on. The pool of available insurers

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Speaker 3: seems to be dwindling. But the question is why.

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Speaker 2: Yes, I think we really need to dig into this

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Speaker 2: further and get a better handle on like how these markets,

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Speaker 2: these heavily regulated markets, but at these markets, how they

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Speaker 2: actually work, and how insurers think about managing risk, and

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Speaker 2: how prices are determined and how capacity ebbs and flows.

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Speaker 2: So time to give it the outlaws treatment.

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Speaker 3: Yeah, this is an episode we've been meaning to do

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Speaker 3: for a while, and to compensate for not doing it

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Speaker 3: for months, we actually have two guests, two perfect guests

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Speaker 3: for you.

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Speaker 2: So we are going to be speaking with first someone

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Speaker 2: who is on the business side of insurance, someone who's

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Speaker 2: actually involved in regular operations and can talk about how

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Speaker 2: prices are determined and how supply is determined. And then

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Speaker 2: we're going to be speaking with someone who has a

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Speaker 2: been a deeper understanding of the regulatory side. So we're

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Speaker 2: going to first be speaking with Amias Garrity. He is

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Speaker 2: a partner at QED Investors. It does a lot of

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Speaker 2: fintech investing, and he is on the board of Kin,

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Speaker 2: which is a direct household insurance company. So, Amias, thank

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Speaker 2: you so much for coming on.

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Speaker 4: Odd lots my pleasure.

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Speaker 2: Why do you tell us first, like, what do you do,

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Speaker 2: what's your background, and what do you do in this

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Speaker 2: space of home insurance.

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Speaker 4: So I'm on the board of a direct consumer home

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Speaker 4: insurance company called Kin, and Kin really focuses on exactly

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Speaker 4: this problem of what do we do in catastrophe affected areas?

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Speaker 4: What do we do with the incredible change that we're

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Speaker 4: dealing with in terms of hurricane and windstorms and ultimately fire.

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Speaker 3: What's a direct to consumer insurer? How does that differ

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Speaker 3: from a normal insurance model.

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Speaker 4: So one of the really important elements of the structure

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Speaker 4: of the insurance market is that almost everybody gets their

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Speaker 4: insurance through an agent, and it actually really impacts the

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Speaker 4: economics of the industry because agents are typically paid commissions

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Speaker 4: around fifteen percent, and also because of that, all of

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Speaker 4: the insurance company's access to information actually comes through agents.

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Speaker 4: So with the Kin model, one of the reasons why

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Speaker 4: we think this direct to consumer makes more sense is one,

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Speaker 4: you get actually more economics to play with, so you

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Speaker 4: can spend that money on data science, you can spend

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Speaker 4: that money on aerial photography. And then also because the

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Speaker 4: environment is changing so quickly and knowing what's going on

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Speaker 4: in a house is so much more knowable now that

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Speaker 4: you actually would prefer to get your information through data

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Speaker 4: science than through an independent agent, like looking at a

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Speaker 4: roof and saying, I don't know, roof looks pretty good.

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Speaker 2: So big picture, we've all seen these stories, but oh,

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Speaker 2: it's so hard to get insurance in a state like Florida,

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Speaker 2: or people seeing their premiums jump thirty five or fifty

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Speaker 2: or sixty percent. Just let's start a big picture, like

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Speaker 2: how would you describe the problem or just the market

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Speaker 2: environment of the last few years.

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Speaker 4: Yeah, so the problem is pretty straightforward, which is insurance

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Speaker 4: is there to protect people from losses that are gonna

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Speaker 4: happen pretty infrequently. But if you just think about the math, right,

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Speaker 4: so Hurricane Ian two years ago, right about twenty billion

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Speaker 4: dollars of losses, So twenty five thousand claims ish, and

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Speaker 4: you know, if that's gonna happen every twenty years, you're

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Speaker 4: gonna need to pay just for that one storm probability

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Speaker 4: twelve hundred.

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Speaker 2: Bucks, okay. And this is twelve hundred bucks a year.

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Speaker 2: Twelve hundred bucks a year, okay, Right.

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Speaker 4: And so what we're dealing with is a pretty and

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Speaker 4: we all know that climate change is real. So if

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Speaker 4: you go back in history, typically our last forty years

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Speaker 4: or so, they were about eight billion dollar events per year.

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Speaker 4: So where the insurance industry deals with a billion dollars

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Speaker 4: loss from one event, in the last five years the

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Speaker 4: average was sixteen. So the change is real, and the

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Speaker 4: cost of insurance is real. But at the same time,

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Speaker 4: you know, if you look across you know these markets,

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Speaker 4: the costs are going up, but we also have house

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Speaker 4: prices going up, we have inflation. So over the last

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Speaker 4: ten years, you know, the national data actually only goes

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Speaker 4: through twenty one, but the price increase has been a

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Speaker 4: little bit higher than inflation, but not a lot higher

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Speaker 4: than inflation. And I think this is partly what we're

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Speaker 4: all dealing with, is we're coming to grips with a

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Speaker 4: bunch of different forces coming and hitting homeowners in exactly

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Speaker 4: the same time in the same way.

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Speaker 3: Joe, did you know the most expensive hurricane of all

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Speaker 3: time was nineteen thirty eight in New England. I can't

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Speaker 3: remember if that's inflation adjusted or not. It must be, yeah,

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Speaker 3: it must be, and I always that's a good fact

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Speaker 3: for Yes, you're welcome. There's a really good book about

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Speaker 3: it called Sudden Sea, The Great Hurricane of nineteen thirty eight.

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Speaker 3: But okay, wait a second. So whenever we have these

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Speaker 3: conversations about insurers, a lot of the numbers here kind

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Speaker 3: of blow my mind, because, as Joe just mentioned, we

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Speaker 3: talk about insurance premiums going up by sometimes insane amounts.

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Speaker 3: I was reading a Bloomberg article that came out recently,

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Speaker 3: and it was the owner of a business I think

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Speaker 3: in Colorado who was paying forty thousand dollars and his

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Speaker 3: insurance premium jumped to four hundred thousand dollars a year,

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Speaker 3: and he thought it was a typo initially, and then

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Speaker 3: I read analysis from people like the strategists over at

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Speaker 3: credit sites, and they say that they think insurers maybe

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Speaker 3: sixty percent behind in terms of pricing where they actually

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Speaker 3: need to be. And then I look at the numbers

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Speaker 3: behind the amount of capital that's actually flowing into the

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Speaker 3: insurance industry, where you know, it's not just people paying premiums,

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Speaker 3: it's also stock, it's also bonds that are being issued.

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Speaker 3: These just seem like insane numbers don't seem to match

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Speaker 3: up what is happening here.

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Speaker 4: So two things. One is that always the question is

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Speaker 4: how do we get this price right? And so a

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Speaker 4: lot of times what people feel is I can't get insured,

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Speaker 4: But what's actually going economically is I can't get insured.

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Speaker 3: At that price right, the price you want right.

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Speaker 4: The price that you want. I think there's also some

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Speaker 4: dynamics where fire is scarier in a lot of ways

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Speaker 4: compared to hurricane and wind. Partly this is a dynamic,

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Speaker 4: which is the hurricane increase has been quite extreme but

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Speaker 4: also relatively linear, right, so there are more storms, they

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Speaker 4: tend to be a little bit more severe, but fire

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Speaker 4: has been a little bit more of a tipping point.

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Speaker 4: So if you were living in Colorado, you probably didn't

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Speaker 4: think about fire risk as like a really important part

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Speaker 4: of your home insurance until only last ten or fifteen years.

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Speaker 4: So there is a more of a tipping point dynamic

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Speaker 4: with fire as compared to hurricane where it's just culturally

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Speaker 4: understood that if you live in Florida, you're going to

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Speaker 4: deal with hurricanes. If you live in the Carolinas, you're

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Speaker 4: going to deal with hurricanes.

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Speaker 3: So, just on the pricing point, one thing I wonder

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Speaker 3: about all the time is what do the pricing models

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Speaker 3: actually look like? And again, that sixty percent estimate that

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Speaker 3: I mentioned is based on the actuarial models of insurers,

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Speaker 3: like this is what their model says they should be

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Speaker 3: charging currently based on I assume forward projections of what

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Speaker 3: the weather is going to be. But of course the

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Speaker 3: question always is if you're having forward projections, if you're

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Speaker 3: forecasting something, I mean insures our for profit enterprises, why

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Speaker 3: not say that the risk of catastrophic events is much

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Speaker 3: higher and therefore we need to charge this particular amount.

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Speaker 3: You're trying to discern the future. It's not like anyone

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Speaker 3: is going to be able to say, no, you're wrong.

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Speaker 4: Well, first of all, a lot of the price comes

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Speaker 4: from the reinsurers, and the reinsurance prices have been increasing,

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Speaker 4: but it's been a roller coaster ride. So if you

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Speaker 4: look at like a history of reinsurance prices since ninety four,

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Speaker 4: so think about Hurricane Andrew as kind of you know,

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Speaker 4: for those of us who are gen xers, like this

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Speaker 4: is the time in which we started to really think

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Speaker 4: about hurricane So you know, early teenage years for me,

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Speaker 4: the price shot up post Andrew, then it came down steadily,

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Speaker 4: shot up again in Katrina, came down steadily, and then

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Speaker 4: in the last five years is shot up again. So

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Speaker 4: even though the trend is up, it's very boom and

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Speaker 4: bust in terms of reinsurance prices. And that also you

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Speaker 4: see the same dynamic with home insurers. And this goes

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Speaker 4: back to your earlier question about having an independent agent.

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Speaker 4: So if you are an insurance carrier and you think

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Speaker 4: you need to raise prices, but one percent of your

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Speaker 4: clients are intermediated through an agent, if you're the first

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Speaker 4: carrier to raise prices, all of your customers will move.

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Speaker 3: Oh, there's a first mover.

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Speaker 4: There's a first mover disadvantage. So everybody needs to reprice,

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Speaker 4: but they're very afraid of repricing because of the insurance agents.

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Speaker 4: And then the last thing, and this is what you

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Speaker 4: see happening in the debate in California right now, is

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Speaker 4: that in California, until very recently, it was literally not

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Speaker 4: allowed to take into account future casts, and so there

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Speaker 4: are a bunch of different things going on that make

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Speaker 4: that repricing very messy.

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Speaker 2: You said, there's not really so much a shortage of

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Speaker 2: insurance so much as a shortage of insurance at the

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Speaker 2: price that people think they should pay. But we do

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Speaker 2: get these stories right of insurancing. We're just out of

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Speaker 2: this market, right, And I think we've seen it a

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Speaker 2: lot in California. I think Florida is.

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Speaker 4: You've seen it in Florida as well.

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Speaker 2: So what it goes into that decision where an insurers like,

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Speaker 2: we just we're not in this market. Yeah, so because

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Speaker 2: that is a real thing.

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Speaker 4: Right absolutely, And that too is kind of the fractal

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Speaker 4: geometry of the thing. Right. So, at the level of

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Speaker 4: your house, you're saying, like, I think this price is crazy.

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Speaker 4: I can't get anyone to ensure my house at a

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Speaker 4: price that makes sense. And then at the level of

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Speaker 4: the state, the insurers are going to the regulators and saying, well,

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Speaker 4: if you don't let me raise my prices by x,

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Speaker 4: I'm going to pull out entirely. And so what you

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Speaker 4: see in these kind of big crackups with large insurers

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Speaker 4: pulling out is usually a dialogue or you know, a

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Speaker 4: disagreement about the regulatory framework and how quickly they can

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Speaker 4: raise prices.

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Speaker 3: Oh yeah, there's always a discussion about whether or not

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Speaker 3: this is political posturing because they want the actual regulation

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Speaker 3: to be changed. But what happens when an area this

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Speaker 3: is an extreme statement, but if an area becomes unensurable,

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Speaker 3: So if the bulk of insurers decide to move out

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Speaker 3: of particular counties in California, things like that, what happens

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Speaker 3: to home owners, business owners, car owners totally.

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Speaker 4: So in both Florida and California, which are sort of

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Speaker 4: the furthest along vanguard states for this kind of catastrophe risk,

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Speaker 4: both of those states have public insurers of last resort

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Speaker 4: and so they will give you insurance at a price

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Speaker 4: that is underwritten by the state. Now, there's complicated rules

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Speaker 4: about what the state has to charge, but those get

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Speaker 4: very political. And in Florida, for example, this has followed

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Speaker 4: a little bit of that same boom and bus cycle

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Speaker 4: that we've seen with reinsurance rates. So currently citizens in

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Speaker 4: Florida has about one point two million policies. This is

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Speaker 4: the this is the state insurer, So the state sponsored

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Speaker 4: insurer today has one point two million policies in Florida.

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Speaker 4: That's about twenty five percent or more of the state.

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Speaker 4: That's actually significantly up from five years ago, almost three

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Speaker 4: x up, but it's down from when it's last peaked

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Speaker 4: in twenty eleven. So there is this dynamic of waxing

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Speaker 4: and waning. What we're seeing in California is just a

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Speaker 4: straight upward tick. Now there it's only about three percent

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Speaker 4: of the state, but in the counties that are worst off,

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Speaker 4: it's about twenty percent.

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Speaker 3: In Florida, didn't they start cracking down on the roof

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Speaker 3: scandals as well? Wasn't that part of it where these

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Speaker 3: roofing frauds were so prevalent that they were actually boosting

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Speaker 3: premiums for everyone in the state.

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Speaker 4: Yeah, that was a really significant issue. So this issue

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Speaker 4: Tracy is called assignment of benefits. Where you could come

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Speaker 4: as a roofer. You could come to Tracy's house post

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Speaker 4: hurricane and say, hey, I'll take care of this, and

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Speaker 4: then you assign your benefit to me, and now I'll

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Speaker 4: go deal with the insurance company on your behalf. Now,

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Speaker 4: the challenge of this is that there's a bunch of

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Speaker 4: different things going on, but one of things had to

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Speaker 4: do with what were the terms under which you could litigate,

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Speaker 4: what were the terms under which the insurance company had

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Speaker 4: to pay the lawyer's fees, and whether assignment of benefits

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Speaker 4: was possible. And Florida has done a series of reforms

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Speaker 4: to try and pull that in, you know, the other

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Speaker 4: piece going back to the direct consumer element here, this

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Speaker 4: is also a place where from where we sit, we

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Speaker 4: do think there's a ton of opportunity for technology and

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Speaker 4: for companies to do better because the reason why there

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Speaker 4: was assignment of benefits is because homeowners were frustrated. And

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Speaker 4: so like again, after a storm, every single policy holder

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Speaker 4: gets a text message and within a couple of days

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Speaker 4: we'll do aerial imagery and say, hey, look you might

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Speaker 4: have had to evacuate, but here's an aerial image of

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Speaker 4: your house. Would you like to start your claim. So

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Speaker 4: there's a bunch of things that you can do to

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Speaker 4: make the system better. But yeah, there was a pretty

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Speaker 4: significant reform effort.

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Speaker 2: And so what was the basics of the scam?

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Speaker 4: Okay, so the basics of the scam are your house

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Speaker 4: is damaged, I'm a roofer instead of you contracting with

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Speaker 4: me and then you following up with the insurance company.

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Speaker 4: You assign your benefits to me, I do the work.

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Speaker 4: You know, maybe the price is the right price, maybe

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Speaker 4: it's a much higher price, and then I, with your

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Speaker 4: legal rights, sue the insurance company. And in that context, right,

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Speaker 4: you've got big players on both sides. There was a

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Speaker 4: litigation finance dynamic here. There were hedge funds getting into

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Speaker 4: the market to finance lawyers because there were dynamics in

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Speaker 4: the Florida market where if there was any settlement at all,

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Speaker 4: the insurer had to pay the legal fees. Oh yeah,

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Speaker 4: So there was a bunch of incentives built into the

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Speaker 4: system that made it very advantageous to sue even if

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Speaker 4: you weren't being you know, truthful about the amount of

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Speaker 4: cost that it actually took to fix the house.

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Speaker 3: My impression was also that in addition to all these

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Speaker 3: legal peculiarities that you just described, it was just really common.

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Speaker 3: Like you would get a knock on your door and

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Speaker 3: it would your roof for going like, hey, do you

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Speaker 3: want a new roof? No worries, I'll take care of

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Speaker 3: it for you. All you have to do is sign

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Speaker 3: away you know the right to file a claim and

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Speaker 3: then suit your insurer.

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Speaker 4: Yeah, and this goes back to this idea of are

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Speaker 4: we using the best in modern technology or not?

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Speaker 5: Right.

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Speaker 4: If I have an aerial image of your house two

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Speaker 4: weeks before the storm and two days after, my ability

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Speaker 4: to know whether that's a roofing scam or a proper

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Speaker 4: claim goes way way up. If you know, the last

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Speaker 4: time I saw your house was an independent insurance agent

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Speaker 4: coming to sell you the policy five years ago, it's

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Speaker 4: a lot harder to defend against the exact same facts.

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Speaker 4: And so there's a lot of room in the insurance

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Speaker 4: market for things to get better, in addition to the

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Speaker 4: fact that we've got to find ways to get the

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Speaker 4: regulations right and ultimately model the climate correctly.

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Speaker 2: So something I'm interested in is, you know, Florida in

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Speaker 2: many parts of California, I mean actually the whole country,

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Speaker 2: but there's two states that have just seen these incredible

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Speaker 2: like real estate booms, and Florida's always in a real

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Speaker 2: estate boom, but the incredible price, especially over the last

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Speaker 2: five years in the post COVID environment. And so you're

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Speaker 2: in a situation which maybe like so someone you know

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Speaker 2: bought their house in nineteen ninety five, or I don't know,

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Speaker 2: two hundred thousand dollars and now it's worth two million

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Speaker 2: dollars or something like that. And so the homeowner is

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Speaker 2: paying insurance on a two million dollar house even if

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Speaker 2: that's right, if it's much bigger, Yeah, that's exactly right.

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Speaker 4: And if you think about how much Florida home insurance

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Speaker 4: has gone up, yeah, right, if you're a homeowner, what

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Speaker 4: you feel is, oh my gosh, Florida home insurance over

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Speaker 4: the last three years has gone up nine percent a year.

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Speaker 4: But what you don't recognize because you're the homeowner is

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Speaker 4: Tampa real estate has gone up ten percent a year.

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Speaker 2: Just on this sort of similar point, particularly in the

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Speaker 2: sort of inflation that we've seen. I mean, I imagine just

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Speaker 2: the cost of repairs, even on a given structure, given

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Speaker 2: we know labor shortages and cost shortages, et cetera. Just

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Speaker 2: the actual process of putting a roof back on whatever

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Speaker 2: must be much more expensive than it used to be.

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Speaker 4: Yeah, that's right, and this is part of what disrupts

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Speaker 4: the industry. But that should come out in the WAH. Right,

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Speaker 4: we see that in the inflation data. We see the

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Speaker 4: premiums going up about the same rate of inflation. In fact,

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Speaker 4: Over the ten years from twenty eleven to twenty twenty one,

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Speaker 4: Florida home insurance went up less than inflation. But since

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Speaker 4: it's gone up a little bit faster.

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Speaker 3: I realized we probably should have asked you this earlier.

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Speaker 3: But what's the pitch to investors in insurance companies now,

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Speaker 3: whether it's through buying equity or you know, buying something

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Speaker 3: like a cap bond something like that. It used to

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Speaker 3: be that you have these uncorrelated returns. Natural disasters don't

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Speaker 3: really have anything to do with the market. But if

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Speaker 3: natural disasters are happening on a more frequent basis, then

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Speaker 3: it seems like some of that correlation argument sort of

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Speaker 3: falls by the wayside.

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Speaker 4: Yeah, I mean, there is a sense in which reinsurance

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Speaker 4: costs are, like almost everything else we see, affected by

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Speaker 4: interest rates because there is capital scarcity in the world

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Speaker 4: when the risk free rate is five and a half percent.

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Speaker 4: And also, the reinsurance markets happen on an annual basis,

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Speaker 4: just like the home insurance markets happen on an annual basis,

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Speaker 4: So there's a lot of friction and slow movingness that

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Speaker 4: is built into the system. So the average home insurer

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Speaker 4: in Florida will place their reinsurance, you know, somewhere between

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Speaker 4: March and June. If you think about that from a

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Speaker 4: capital allocation perspective, you're a reinsurer. You're making that decision. Okay,

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Speaker 4: what are we going to bid on? What capacity do

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Speaker 4: we want to give to this market. You're making that

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Speaker 4: decision as a bureaucratic matter, not like naturally fluctuating with

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Speaker 4: the prices. So you definitely have this idea that And

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Speaker 4: by the way, what's on the reinsurance balance sheets?

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Speaker 3: A bunch of bonds, right, those are making more money?

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Speaker 4: No? But those no, because those bonds repriced down when

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Speaker 4: rates go right. So, Tracy, to your point, your intuition

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Speaker 4: exactly right. That you have both kind of climate shock

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Speaker 4: over the last couple of years and you had a

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Speaker 4: capital supply shock over the last couple of years as

436
00:24:08,240 --> 00:24:11,680
Speaker 4: bonds repriced on insurance balance That's great.

437
00:24:11,720 --> 00:24:15,280
Speaker 2: Talk to us more about that capital supply aspect. So, oh,

438
00:24:15,440 --> 00:24:17,399
Speaker 2: so they take a hit on their balante because their

439
00:24:17,440 --> 00:24:20,840
Speaker 2: bond portfolio is down. So does that mean just the

440
00:24:20,880 --> 00:24:23,720
Speaker 2: sheer amount of dollars that they can then lend out?

441
00:24:23,960 --> 00:24:26,200
Speaker 2: Talk to us about that. I guess, like supply chain

442
00:24:26,240 --> 00:24:29,040
Speaker 2: of dollars and how it feeds down to the end homeowner.

443
00:24:29,160 --> 00:24:31,439
Speaker 4: Yeah, so the supply chain of dollars is you know,

444
00:24:31,760 --> 00:24:34,720
Speaker 4: like everything is kind of simple. Right, You've got large

445
00:24:34,720 --> 00:24:38,640
Speaker 4: pools of capital looking for return. In reinsurance, those are

446
00:24:39,240 --> 00:24:44,360
Speaker 4: an increasingly diverse mixed insurance link securities, cap bonds, captive reinsurers.

447
00:24:44,400 --> 00:24:46,880
Speaker 4: You know, hedge funds can go into it directly, you can,

448
00:24:47,160 --> 00:24:48,920
Speaker 4: you know, there's a bunch of different things you can do,

449
00:24:49,160 --> 00:24:51,960
Speaker 4: but they all come back to this idea that I'm

450
00:24:52,000 --> 00:24:53,800
Speaker 4: sitting on a pool of capital. I'm trying to figure

451
00:24:53,840 --> 00:24:55,840
Speaker 4: out what's the best way to get returned for that capital.

452
00:24:56,119 --> 00:25:00,520
Speaker 4: And that return is in a world of low interest rates, right,

453
00:25:00,600 --> 00:25:04,680
Speaker 4: this climate risk is extremely attractive because it's uncorrelated and

454
00:25:04,720 --> 00:25:08,760
Speaker 4: it provides a rate of return that is sort of

455
00:25:09,119 --> 00:25:13,359
Speaker 4: set by the actuarial tables, not set by you know,

456
00:25:13,440 --> 00:25:17,000
Speaker 4: global macro. In a world where rates go way up,

457
00:25:17,400 --> 00:25:21,720
Speaker 4: now that implied hurdle rate, right, the actuarial return is

458
00:25:21,760 --> 00:25:25,360
Speaker 4: going to be still the same. Right, It's basically set

459
00:25:25,560 --> 00:25:28,159
Speaker 4: by what's the risk of a storm and what's the

460
00:25:28,240 --> 00:25:30,440
Speaker 4: right way to price that. But then as the risk

461
00:25:30,520 --> 00:25:32,800
Speaker 4: view rate goes way up, you know what else should

462
00:25:32,800 --> 00:25:34,479
Speaker 4: I do with the dollars. Should I just buy treasury,

463
00:25:34,520 --> 00:25:37,359
Speaker 4: should I buy corporates? Whatever it is that sort of

464
00:25:37,480 --> 00:25:40,520
Speaker 4: gets a little bit more competitive. And then the last thing,

465
00:25:40,560 --> 00:25:44,480
Speaker 4: of course, is that reinsurance markets do have this unfortunate

466
00:25:44,560 --> 00:25:45,640
Speaker 4: boom bust dynamic.

467
00:25:46,040 --> 00:25:46,240
Speaker 6: Right.

468
00:25:46,359 --> 00:25:50,320
Speaker 4: So one of the great stories about you know, Berkshire

469
00:25:50,359 --> 00:25:57,120
Speaker 4: Hathaway is that they wrote reinsurance after Hurricane Andrew. Right,

470
00:25:57,200 --> 00:26:00,119
Speaker 4: so they took basically no losses in Hurricane Andrew. When

471
00:26:00,119 --> 00:26:03,320
Speaker 4: they came into the market, there was very little reinsurance capacity,

472
00:26:03,640 --> 00:26:05,640
Speaker 4: and so they wrote reinsurance into Florida in the wake

473
00:26:05,640 --> 00:26:08,560
Speaker 4: of Hurricane Andrew. So these stories are relatively common, and

474
00:26:08,600 --> 00:26:11,480
Speaker 4: you see this. Actually there was a sequence of three

475
00:26:11,560 --> 00:26:15,160
Speaker 4: years where reinsurance got super expensive in Florida, and over

476
00:26:15,200 --> 00:26:17,399
Speaker 4: the last year it's actually come down and flattened a

477
00:26:17,400 --> 00:26:20,720
Speaker 4: little bit because make people make money. Oh, then the

478
00:26:21,040 --> 00:26:21,919
Speaker 4: capital piles in.

479
00:26:23,359 --> 00:26:27,280
Speaker 3: So you mentioned investments, So you have this pool of

480
00:26:27,440 --> 00:26:29,720
Speaker 3: money and obviously you can invest it in different things,

481
00:26:29,720 --> 00:26:32,760
Speaker 3: whether it's corporate debt or treasuries. You also mentioned technology

482
00:26:32,880 --> 00:26:38,199
Speaker 3: earlier on what levers do insurers have to pull in

483
00:26:38,280 --> 00:26:42,439
Speaker 3: a situation where risks are going up, expenses are going

484
00:26:42,520 --> 00:26:45,480
Speaker 3: up in some areas of the country. They're still limited

485
00:26:45,520 --> 00:26:47,800
Speaker 3: in terms of how much of a premium increase they

486
00:26:47,800 --> 00:26:50,800
Speaker 3: can pass on. How do they go about reducing costs.

487
00:26:51,600 --> 00:26:54,920
Speaker 4: So the first thing is insurance is all about getting

488
00:26:55,040 --> 00:26:59,680
Speaker 4: the price right. And while it is hard to model,

489
00:26:59,840 --> 00:27:03,640
Speaker 4: it's not impossible to model right. So, as you said earlier, right,

490
00:27:04,000 --> 00:27:06,760
Speaker 4: we're all capitalists here, we can sort of figure out, Okay, well,

491
00:27:06,920 --> 00:27:09,040
Speaker 4: next year, we think the chance of a hurricane is

492
00:27:09,080 --> 00:27:10,800
Speaker 4: a little bit higher than it was ten years ago,

493
00:27:10,880 --> 00:27:13,199
Speaker 4: so we can adjust the price for that. So the

494
00:27:13,240 --> 00:27:15,919
Speaker 4: first thing is getting the price right, and we have

495
00:27:16,160 --> 00:27:21,960
Speaker 4: seen a lot of innovation around just understanding that climate

496
00:27:22,000 --> 00:27:26,040
Speaker 4: science and building that into the system. The second thing is.

497
00:27:25,960 --> 00:27:28,800
Speaker 3: Wait, can can you expand on that a little bit more?

498
00:27:28,840 --> 00:27:31,760
Speaker 3: Because as someone who spends a certain amount of time

499
00:27:31,800 --> 00:27:34,879
Speaker 3: in New England nowadays, I feel like the weather forecast

500
00:27:35,000 --> 00:27:37,160
Speaker 3: still leaves something to be desired.

501
00:27:37,480 --> 00:27:43,520
Speaker 5: Yes, so the weather is hard to predict, but climate

502
00:27:43,560 --> 00:27:47,760
Speaker 5: is the climate, you know, moves in ways that are

503
00:27:48,080 --> 00:27:51,320
Speaker 5: you don't care whether the hurricane comes on Tuesday or Thursday.

504
00:27:51,359 --> 00:27:54,960
Speaker 4: You care about what's the probability of a hurricane this year. Now,

505
00:27:55,040 --> 00:27:58,440
Speaker 4: even within that right, we had hurricane in and then

506
00:27:58,520 --> 00:28:01,360
Speaker 4: last year was a more mild here. So it's not

507
00:28:01,480 --> 00:28:04,160
Speaker 4: that they're so good at predicting the where and the when,

508
00:28:04,640 --> 00:28:07,800
Speaker 4: but we can see the trends, and so you start

509
00:28:07,800 --> 00:28:09,840
Speaker 4: with that. The second thing you start with is just

510
00:28:10,040 --> 00:28:14,760
Speaker 4: actually getting much more sophisticated about the interactions between the

511
00:28:14,760 --> 00:28:18,480
Speaker 4: house and the weather. Right, so houses can be hardened,

512
00:28:18,840 --> 00:28:23,600
Speaker 4: building codes, roofs. Think about California fire breaks, right like,

513
00:28:23,800 --> 00:28:26,600
Speaker 4: do you have a bunch of shrubbery in your lawn

514
00:28:26,720 --> 00:28:28,840
Speaker 4: or do you have a bunch of pebbles? Like these

515
00:28:28,880 --> 00:28:32,680
Speaker 4: actually make a real difference to your risk of catastrophe,

516
00:28:32,960 --> 00:28:35,600
Speaker 4: you know, And so at least at Kin, what we

517
00:28:35,680 --> 00:28:38,840
Speaker 4: see is that it really matters which house on the

518
00:28:38,840 --> 00:28:41,080
Speaker 4: block you underwrite, because some of the houses are just

519
00:28:41,160 --> 00:28:44,840
Speaker 4: naturally harder, or they're shaped a little bit differently relative

520
00:28:44,840 --> 00:28:47,120
Speaker 4: to where the water might come.

521
00:28:47,760 --> 00:28:51,000
Speaker 3: I learned that word today, Joe hardened, like the idea

522
00:28:51,200 --> 00:28:54,239
Speaker 3: of protecting houses in this way. And now I have

523
00:28:54,320 --> 00:28:57,080
Speaker 3: this idea in my head of like these hard houses

524
00:28:57,200 --> 00:28:59,880
Speaker 3: walking around going on, I'm so hard you can't get me.

525
00:29:00,640 --> 00:29:02,960
Speaker 2: You reaised that, like, you know, sometimes when people are

526
00:29:02,960 --> 00:29:05,960
Speaker 2: talking about health insurance, like oh, the health insurance should

527
00:29:05,960 --> 00:29:08,320
Speaker 2: give you incentives like go to the gym or whatever.

528
00:29:08,600 --> 00:29:11,440
Speaker 2: And my understanding is that that stuff doesn't really work

529
00:29:11,480 --> 00:29:15,040
Speaker 2: that much. But I guess, like with technology in theory,

530
00:29:15,120 --> 00:29:17,880
Speaker 2: are you able to say, like a homeowner comes to

531
00:29:17,960 --> 00:29:21,239
Speaker 2: you and you say, okay, it'd be this price, but

532
00:29:21,360 --> 00:29:23,840
Speaker 2: if you do X to your property, it could be

533
00:29:23,880 --> 00:29:24,360
Speaker 2: this price.

534
00:29:24,800 --> 00:29:25,160
Speaker 6: Yeah.

535
00:29:25,200 --> 00:29:28,040
Speaker 4: So it's probably not quite that much of a negotiation, okay,

536
00:29:28,080 --> 00:29:31,360
Speaker 4: but implicitly it is. Right, how old is your roof, Okay,

537
00:29:31,440 --> 00:29:34,160
Speaker 4: what are your singles? Do you have tile or tar?

538
00:29:34,880 --> 00:29:37,480
Speaker 4: And so these kinds of things are directly impacted in

539
00:29:37,520 --> 00:29:40,000
Speaker 4: the price. And then sometimes I mean, we're not investors

540
00:29:40,000 --> 00:29:42,000
Speaker 4: in any of these companies, but we have seen home

541
00:29:42,040 --> 00:29:46,240
Speaker 4: insurers in California say like, literally, you come to us,

542
00:29:46,400 --> 00:29:49,040
Speaker 4: we underwrite your house, and then we're gonna tell you

543
00:29:49,080 --> 00:29:51,719
Speaker 4: what to do with your backyard. Oh and then some

544
00:29:51,760 --> 00:29:53,320
Speaker 4: are trying to do this, some are trying.

545
00:29:53,160 --> 00:29:53,480
Speaker 5: To do that.

546
00:30:08,720 --> 00:30:11,360
Speaker 2: You mentioned fire, So as you said, like this sort

547
00:30:11,360 --> 00:30:14,080
Speaker 2: of like hurricane risk over time has been sort of

548
00:30:14,120 --> 00:30:17,840
Speaker 2: linearly going up, fire has been sort of less predictable.

549
00:30:18,160 --> 00:30:20,320
Speaker 2: There have been a little bit more of a tipping

550
00:30:20,360 --> 00:30:23,520
Speaker 2: point issue, I would call it. Does the industry feel

551
00:30:23,560 --> 00:30:26,160
Speaker 2: like it has a good way of modeling fire at

552
00:30:26,240 --> 00:30:28,560
Speaker 2: risk or at this point because it's sort of hitting

553
00:30:28,560 --> 00:30:31,920
Speaker 2: this tipping point, do the insurers or the reinsurers like

554
00:30:32,160 --> 00:30:34,760
Speaker 2: need a margin, a bigger margin of era, a bigger

555
00:30:34,800 --> 00:30:37,720
Speaker 2: cushion due to the sort of the tipping point or

556
00:30:37,720 --> 00:30:38,760
Speaker 2: the novelty of the risk.

557
00:30:38,920 --> 00:30:41,280
Speaker 4: So there's two issues that make this question a little

558
00:30:41,320 --> 00:30:44,600
Speaker 4: bit hard to answer. Okay, The first is that California

559
00:30:45,280 --> 00:30:48,400
Speaker 4: is historically underpriced, as we talked about earlier. So the

560
00:30:48,480 --> 00:30:53,160
Speaker 4: average home insurance cost premium in California is only about

561
00:30:53,480 --> 00:30:57,400
Speaker 4: thirty dollars more than the national average. So and again

562
00:30:57,400 --> 00:30:59,680
Speaker 4: this is twenty twenty one data, so it's probably moved

563
00:30:59,680 --> 00:31:02,719
Speaker 4: a bit, but that is kind of interesting. It demonstrates

564
00:31:02,760 --> 00:31:06,640
Speaker 4: to Tracy's point earlier that California is more behind, whereas

565
00:31:06,920 --> 00:31:09,560
Speaker 4: in Florida is more like twenty four hundred dollars. So

566
00:31:09,600 --> 00:31:13,840
Speaker 4: the first thing is the gap between what California is

567
00:31:13,920 --> 00:31:16,800
Speaker 4: charging and where insurers want to be is so vast

568
00:31:17,200 --> 00:31:19,480
Speaker 4: that it's a little bit of a little bit harder thing.

569
00:31:19,560 --> 00:31:21,640
Speaker 4: On top of that, I do think fire is harder

570
00:31:21,680 --> 00:31:24,240
Speaker 4: to model. A lot of the work modeling it is

571
00:31:24,280 --> 00:31:27,960
Speaker 4: around these topographical models, right, so where are you relative

572
00:31:28,040 --> 00:31:30,040
Speaker 4: to the wind? Where are you relative to the hills?

573
00:31:30,040 --> 00:31:32,560
Speaker 4: Where are you relative? And I think there's definitely a

574
00:31:32,560 --> 00:31:35,280
Speaker 4: lot of work still to be done there, But right

575
00:31:35,320 --> 00:31:37,520
Speaker 4: now it's a little bit hard to tell how much

576
00:31:37,720 --> 00:31:39,880
Speaker 4: whether the margin really is on just getting the price

577
00:31:39,960 --> 00:31:43,360
Speaker 4: right or the margin is on better modeling. But either way,

578
00:31:43,600 --> 00:31:45,800
Speaker 4: you come back to Tracy's word of hardening the house.

579
00:31:46,160 --> 00:31:47,840
Speaker 4: Hardening the house is going to make a big difference.

580
00:31:48,680 --> 00:31:51,080
Speaker 3: Oh, I would have thought for California, maybe it's drought

581
00:31:51,160 --> 00:31:54,840
Speaker 3: conditions or something like that, where I guess twenty twenty

582
00:31:54,880 --> 00:31:58,360
Speaker 3: three was a historic drought in that state, and then

583
00:31:58,640 --> 00:32:01,240
Speaker 3: flipping into twenty twenty four, I think we've seen a

584
00:32:01,400 --> 00:32:03,920
Speaker 3: historic amount of rain. So maybe the hope was that

585
00:32:04,320 --> 00:32:07,320
Speaker 3: fire premiums would start to come down. But I guess

586
00:32:07,320 --> 00:32:09,800
Speaker 3: that's not the case. That's never the case. Price never

587
00:32:10,240 --> 00:32:10,680
Speaker 3: it could be.

588
00:32:10,720 --> 00:32:13,920
Speaker 4: I mean, we've seen this again in Florida. You see

589
00:32:13,920 --> 00:32:16,600
Speaker 4: this like premiums went way up, right ten years ago

590
00:32:16,760 --> 00:32:20,080
Speaker 4: or thirteen years ago, we hit a peak of people

591
00:32:20,120 --> 00:32:23,280
Speaker 4: moving into the public option came down, come back up.

592
00:32:23,440 --> 00:32:26,280
Speaker 4: I think with California it's a little too early to know.

593
00:32:27,320 --> 00:32:31,720
Speaker 3: You mentioned people going into the public option. Do insurers

594
00:32:31,960 --> 00:32:36,440
Speaker 3: in places like Florida see that public option as a

595
00:32:36,480 --> 00:32:38,200
Speaker 3: competitor to their business?

596
00:32:38,920 --> 00:32:42,280
Speaker 4: Yes, But most of the time the states set these

597
00:32:42,400 --> 00:32:46,040
Speaker 4: up so that you have to prove that you couldn't

598
00:32:46,080 --> 00:32:49,719
Speaker 4: get insurance, and that's obviously ends up being a price

599
00:32:49,920 --> 00:32:53,960
Speaker 4: question as well. And so, for instance, I believe in Florida,

600
00:32:54,320 --> 00:32:57,960
Speaker 4: the rule is if a Florida carrier is willing to

601
00:32:58,040 --> 00:33:02,120
Speaker 4: quote you within twenty percent of the Citizens price, the

602
00:33:02,160 --> 00:33:05,880
Speaker 4: public price, then you no longer become eligible. So that's

603
00:33:05,880 --> 00:33:09,240
Speaker 4: how they manage it. So the states generally don't want

604
00:33:09,240 --> 00:33:12,720
Speaker 4: to be in this business, and so they try to

605
00:33:12,840 --> 00:33:17,760
Speaker 4: set up situations where Citizens is or the Fair Plan

606
00:33:17,800 --> 00:33:21,880
Speaker 4: in California is an insurer last resort rather than a competitor, just.

607
00:33:21,840 --> 00:33:24,800
Speaker 2: Out of curiosity from the perspective of like a startup

608
00:33:25,320 --> 00:33:29,600
Speaker 2: tech forward insurer, how do people believe you that you'll

609
00:33:29,640 --> 00:33:32,720
Speaker 2: pay out? I mean, you know, it's like companies have

610
00:33:32,760 --> 00:33:35,240
Speaker 2: heard of All State or AIG or whatever. It's like, yeah,

611
00:33:35,240 --> 00:33:38,200
Speaker 2: they probably have the money, and it's good. Kin comes

612
00:33:38,240 --> 00:33:40,360
Speaker 2: along and I don't know what it is and maybe

613
00:33:40,360 --> 00:33:43,160
Speaker 2: it looks like an app or something like that. Like,

614
00:33:43,280 --> 00:33:46,640
Speaker 2: is there an FDIC equivalent of insurance where it's like, Okay,

615
00:33:46,640 --> 00:33:49,480
Speaker 2: they have that FDIC stamp, so I feel comfortable that

616
00:33:49,520 --> 00:33:51,640
Speaker 2: they'll like hold my money, Like, how do you How

617
00:33:51,720 --> 00:33:52,280
Speaker 2: is that a step?

618
00:33:52,440 --> 00:33:55,560
Speaker 4: Yeah, so there's not an FDIC, but it is. It

619
00:33:55,600 --> 00:33:58,840
Speaker 4: is highly regulated, right, and it's it's a combination of

620
00:33:58,880 --> 00:34:02,160
Speaker 4: insurance regulation and then rating agencies, and so there's insurance

621
00:34:02,200 --> 00:34:05,640
Speaker 4: specific rating agencies, and so that's why if you actually

622
00:34:05,640 --> 00:34:10,000
Speaker 4: pay attention to the insurance ads that you'll get, they'll say,

623
00:34:10,040 --> 00:34:12,919
Speaker 4: you know, rated by am Best or rated by Demo Tech,

624
00:34:12,960 --> 00:34:16,120
Speaker 4: which is the sort of predominant Florida specific rating agency.

625
00:34:16,600 --> 00:34:19,120
Speaker 3: But going back to the first part of Joe's question,

626
00:34:19,200 --> 00:34:22,080
Speaker 3: how do you convince customers that you're going to pay out?

627
00:34:22,160 --> 00:34:25,200
Speaker 3: Because this seems to be the focus of nearly every

628
00:34:25,480 --> 00:34:28,920
Speaker 3: insurance commercial in existence, and insurance is also still one

629
00:34:28,960 --> 00:34:31,799
Speaker 3: of the industries where word of mouth actually matters. So

630
00:34:31,960 --> 00:34:34,480
Speaker 3: people will say, I had a good experience with this

631
00:34:34,600 --> 00:34:37,439
Speaker 3: insurer when I was filing my claim, you should go

632
00:34:37,640 --> 00:34:39,960
Speaker 3: with it too. How do you go about having that

633
00:34:40,120 --> 00:34:44,440
Speaker 3: discussion with people for an industry where the incentives are

634
00:34:44,440 --> 00:34:47,839
Speaker 3: not necessarily aligned the insurer wants to make money, and

635
00:34:48,040 --> 00:34:50,759
Speaker 3: the customer wants to get as much as they can

636
00:34:51,120 --> 00:34:53,960
Speaker 3: out of putting their money into premiums.

637
00:34:54,080 --> 00:34:56,840
Speaker 4: Yeah, so I think you hit the nail exactly on

638
00:34:56,880 --> 00:34:59,319
Speaker 4: the head, which is the dynamic is actually less about

639
00:34:59,320 --> 00:35:03,000
Speaker 4: the financial strength and more about the customer experience. And

640
00:35:03,040 --> 00:35:05,640
Speaker 4: that's where you know, for us, we put a lot

641
00:35:05,640 --> 00:35:09,040
Speaker 4: of effort into this idea of how do I give

642
00:35:09,160 --> 00:35:12,520
Speaker 4: people the customer experience that when they come to us

643
00:35:12,560 --> 00:35:17,160
Speaker 4: with a claim they actually feel satisfied. Now, naturally, customer

644
00:35:17,200 --> 00:35:21,720
Speaker 4: satisfaction post claim always drops. That's just like a rule

645
00:35:21,800 --> 00:35:24,160
Speaker 4: of life, but by how much? And so I talked

646
00:35:24,200 --> 00:35:26,760
Speaker 4: about like this thing about people left their homes after

647
00:35:26,800 --> 00:35:30,480
Speaker 4: Ian and we sent them text messages that said, here's

648
00:35:30,520 --> 00:35:33,520
Speaker 4: an aerial image of your house. We're sorry to tell

649
00:35:33,560 --> 00:35:35,759
Speaker 4: you that your roof is destroyed. Would you like to

650
00:35:35,800 --> 00:35:39,520
Speaker 4: start your claim? Now, that's an incredibly positive experience for someone.

651
00:35:39,640 --> 00:35:43,120
Speaker 4: Usually the other dynamic here is just you know, within Kin,

652
00:35:43,200 --> 00:35:46,040
Speaker 4: we actually did it as a capital structure issue as well.

653
00:35:46,080 --> 00:35:49,480
Speaker 4: So Kin uses what's called a reciprocal So the carrier

654
00:35:49,520 --> 00:35:54,680
Speaker 4: itself is a nonprofit owned by the policyholders, and then

655
00:35:54,840 --> 00:35:58,560
Speaker 4: the technology company is what's called an attorney in fact,

656
00:35:58,840 --> 00:36:02,000
Speaker 4: so that technology company managing the pricing, the underwriting, the

657
00:36:02,000 --> 00:36:06,000
Speaker 4: consumer response, but the carrier itself, the risk is all

658
00:36:06,080 --> 00:36:08,319
Speaker 4: born as if it were a mutual. So we have

659
00:36:08,400 --> 00:36:11,120
Speaker 4: done some interesting things and that's why people like mutuals

660
00:36:11,440 --> 00:36:12,560
Speaker 4: in the insurance industry.

661
00:36:12,840 --> 00:36:16,040
Speaker 3: And so the carrier pays a fee presumably to the

662
00:36:16,080 --> 00:36:17,399
Speaker 3: technology company.

663
00:36:17,360 --> 00:36:21,120
Speaker 2: Exactly as you mentioned, what was the peak year for

664
00:36:21,320 --> 00:36:23,200
Speaker 2: citizens twenty eleven.

665
00:36:23,320 --> 00:36:23,880
Speaker 4: Twenty eleven.

666
00:36:23,920 --> 00:36:27,520
Speaker 2: So it sounds like, even though there's a ton of

667
00:36:27,560 --> 00:36:30,399
Speaker 2: focus on what's going on in Florida right now, what's

668
00:36:30,440 --> 00:36:34,720
Speaker 2: going on in California, et cetera, that it's not necessarily

669
00:36:34,760 --> 00:36:38,560
Speaker 2: a death spiral dynamic. That we have these crazy moves,

670
00:36:38,719 --> 00:36:42,000
Speaker 2: but it doesn't mean they happen in perpetuity and that

671
00:36:42,320 --> 00:36:45,640
Speaker 2: the nature of the business is such that you could

672
00:36:45,680 --> 00:36:47,480
Speaker 2: just have years where they thinks swing wildly.

673
00:36:48,080 --> 00:36:51,680
Speaker 4: Yeah, that's right. I mean, unfortunately, insurance does have a

674
00:36:51,719 --> 00:36:56,880
Speaker 4: little bit of this boom and bust dynamic. And that's why,

675
00:36:57,040 --> 00:36:59,319
Speaker 4: you know, when we think about it, you know, when

676
00:36:59,320 --> 00:37:02,000
Speaker 4: we're sitting in the boardroom, we're talking about strategy. From

677
00:37:02,040 --> 00:37:04,719
Speaker 4: the perspective insurance, it's all about getting the price right.

678
00:37:05,480 --> 00:37:08,760
Speaker 3: So you've been talking a lot about that boom bust cycle,

679
00:37:08,880 --> 00:37:10,640
Speaker 3: and in some respects that makes a lot of sense

680
00:37:10,680 --> 00:37:14,680
Speaker 3: because you're dealing with nature and extreme events within the

681
00:37:14,680 --> 00:37:16,759
Speaker 3: weather or the climate, and so you could see how

682
00:37:16,800 --> 00:37:18,839
Speaker 3: one year will be terrible and then the next year

683
00:37:18,880 --> 00:37:21,520
Speaker 3: will be bad, and the insurance industry is kind of

684
00:37:21,520 --> 00:37:24,759
Speaker 3: trying to catch up or react to those events all

685
00:37:24,800 --> 00:37:27,879
Speaker 3: the time. But is there stuff that could be done

686
00:37:28,040 --> 00:37:31,080
Speaker 3: to try to smooth that boom bust cycle.

687
00:37:31,680 --> 00:37:35,239
Speaker 4: So from the perspective of the actual insurance carriers that

688
00:37:35,239 --> 00:37:39,040
Speaker 4: are dealing with homeowners, that's actually their core mission, right,

689
00:37:39,200 --> 00:37:41,719
Speaker 4: is that there's gonna be a little bit of a

690
00:37:41,719 --> 00:37:44,640
Speaker 4: boom and bust cycle when you think about what's capital

691
00:37:44,680 --> 00:37:49,360
Speaker 4: market's appetite to buy climate risk. And similarly, there's gonna

692
00:37:49,400 --> 00:37:52,239
Speaker 4: be bad years and good years when it comes to

693
00:37:52,239 --> 00:37:53,839
Speaker 4: the question of what's the weather going to be like,

694
00:37:53,840 --> 00:37:56,680
Speaker 4: what's the hurricane? And the whole point of insurance is

695
00:37:56,719 --> 00:37:59,080
Speaker 4: to act as the buffer between those things. And so

696
00:37:59,400 --> 00:38:01,239
Speaker 4: even though I talk about this boom and bicycle, that's

697
00:38:01,280 --> 00:38:04,600
Speaker 4: really more about access to capital and pricing, and it

698
00:38:04,680 --> 00:38:07,640
Speaker 4: is the role of both insurance regulators and insurance companies

699
00:38:07,920 --> 00:38:12,040
Speaker 4: to keep that customer interface smooth. So that's why you

700
00:38:12,120 --> 00:38:15,080
Speaker 4: see a lot of pressure on both sides. But it

701
00:38:15,120 --> 00:38:18,120
Speaker 4: comes out in price, right, it comes out in how

702
00:38:18,160 --> 00:38:22,240
Speaker 4: do we serve our customers and then increase the prices

703
00:38:22,320 --> 00:38:25,760
Speaker 4: as necessary to make it actually really sound and that

704
00:38:25,760 --> 00:38:28,919
Speaker 4: that's really the whole mission of insurance. But it puts

705
00:38:28,960 --> 00:38:30,240
Speaker 4: a lot of pressure on both sides.

706
00:38:31,160 --> 00:38:33,759
Speaker 2: Mayas Garrity, thank you so much for coming on od lots.

707
00:38:33,760 --> 00:38:35,160
Speaker 2: That was fascinating, my pleasure.

708
00:38:35,480 --> 00:38:40,399
Speaker 3: That was our conversation with Amayas Garrity, partner at QED Investors.

709
00:38:40,560 --> 00:38:43,200
Speaker 3: And now we are on to our second guest. We're

710
00:38:43,200 --> 00:38:45,480
Speaker 3: going to be speaking with r J. Lehman. He's the

711
00:38:45,680 --> 00:38:50,239
Speaker 3: editor and chief for the International Center for Law and Economics. RJ,

712
00:38:50,360 --> 00:38:52,080
Speaker 3: thank you so much for coming on ad lots.

713
00:38:52,480 --> 00:38:53,279
Speaker 6: Thank you for having me.

714
00:38:53,840 --> 00:38:55,840
Speaker 2: Uh, why don't you tell us a little bit? I

715
00:38:55,840 --> 00:38:58,920
Speaker 2: guess why are we telling you? What is your background

716
00:38:59,040 --> 00:39:02,359
Speaker 2: and sort of like your work and understanding the sort

717
00:39:02,400 --> 00:39:04,680
Speaker 2: of regulatory environment for home insurance.

718
00:39:05,000 --> 00:39:07,640
Speaker 6: Sure thing my background is I was journalists. I was

719
00:39:07,680 --> 00:39:12,280
Speaker 6: business journalists. Like y'all, there's hope for us, there's hope.

720
00:39:12,480 --> 00:39:16,000
Speaker 6: Insurance was my beat and I recommend it to anyone

721
00:39:16,400 --> 00:39:20,600
Speaker 6: who is considering going into financial journalism, insurance is the

722
00:39:20,640 --> 00:39:25,279
Speaker 6: best beat. It touches everything, and although there are parts

723
00:39:25,320 --> 00:39:28,480
Speaker 6: of it that are dry, you have the greatest panoply

724
00:39:28,600 --> 00:39:32,719
Speaker 6: of potential subjects to expound upon. So I was a journalist.

725
00:39:32,920 --> 00:39:37,360
Speaker 6: I entered think tank lend back in twenty twelve. I

726
00:39:37,440 --> 00:39:39,680
Speaker 6: co founded a group called the R. Street Institute with

727
00:39:39,719 --> 00:39:44,719
Speaker 6: Eli Laher. Initially, Our Street was overwhelmingly insurance focused. It

728
00:39:44,840 --> 00:39:49,120
Speaker 6: is diversified over the years. I led their insurance program

729
00:39:49,440 --> 00:39:51,719
Speaker 6: as long as I was there, which was until late

730
00:39:51,800 --> 00:39:56,400
Speaker 6: twenty twenty. Most notably, I produced for them an annual

731
00:39:56,480 --> 00:40:00,319
Speaker 6: report card of the fifty states with respect to their

732
00:40:00,440 --> 00:40:05,080
Speaker 6: insurance regulatory environments, ranking who was doing a good job,

733
00:40:05,120 --> 00:40:10,000
Speaker 6: who was in need of improvement. California in particular, was

734
00:40:10,040 --> 00:40:13,839
Speaker 6: always near the bottom because of the system in California

735
00:40:14,360 --> 00:40:17,440
Speaker 6: Florida over the years had been by the time I

736
00:40:17,600 --> 00:40:20,160
Speaker 6: left Our Street and stopped doing that report card, had

737
00:40:20,200 --> 00:40:24,360
Speaker 6: been creeping up from the very bottom to towards the top.

738
00:40:25,000 --> 00:40:28,520
Speaker 6: But they've certainly had some challenges in the past few years.

739
00:40:28,840 --> 00:40:31,200
Speaker 3: So one thing I always wonder when we have these

740
00:40:31,440 --> 00:40:35,160
Speaker 3: insurance discussions, I think there's a tendency to look at

741
00:40:35,400 --> 00:40:39,080
Speaker 3: the current system and feel like it was inevitable. And

742
00:40:39,400 --> 00:40:42,399
Speaker 3: this isn't just regarding insurance, but a lot of things

743
00:40:42,400 --> 00:40:44,880
Speaker 3: in the financial system. But how is it that we

744
00:40:45,120 --> 00:40:51,239
Speaker 3: ended up in a place where insurance premiums are regulated,

745
00:40:51,800 --> 00:40:55,360
Speaker 3: especially in places like California and Florida, And we have

746
00:40:55,480 --> 00:41:00,440
Speaker 3: this mix of private insurance companies but also again in

747
00:41:00,480 --> 00:41:02,960
Speaker 3: places like Florida, a public backstop.

748
00:41:03,520 --> 00:41:07,920
Speaker 6: So why are they regulated? Goes back to basically anti

749
00:41:07,960 --> 00:41:10,759
Speaker 6: trust law. Just after World War Two, there was a

750
00:41:10,800 --> 00:41:16,280
Speaker 6: famous Supreme Court case that determined that insurance was interstate commerce.

751
00:41:17,200 --> 00:41:20,760
Speaker 6: The Congress responded by passing a law called the mccaren

752
00:41:20,760 --> 00:41:23,840
Speaker 6: Ferguson Act that acknowledged that case and acknowledged that it

753
00:41:23,880 --> 00:41:27,000
Speaker 6: was interstate commerce, but nonetheless left it to the states

754
00:41:27,440 --> 00:41:31,920
Speaker 6: to handle regulation of the business of insurance. And insurers,

755
00:41:31,960 --> 00:41:36,480
Speaker 6: particularly back then, used to file rates collectively. The reason

756
00:41:36,520 --> 00:41:38,839
Speaker 6: this was an anti trust concern was because they used

757
00:41:38,920 --> 00:41:42,880
Speaker 6: underwriting bureaus where they shared data because no one insurer

758
00:41:43,000 --> 00:41:46,399
Speaker 6: was large enough to know what the correct rate should be,

759
00:41:46,920 --> 00:41:50,520
Speaker 6: and that was collusion, and so the states initially just

760
00:41:50,760 --> 00:41:55,120
Speaker 6: accepted or rejected rates from the industry as a whole

761
00:41:55,560 --> 00:41:59,320
Speaker 6: and individual insurers only differed in how much they charged

762
00:41:59,360 --> 00:42:02,520
Speaker 6: for market expenses and things like that for their agent force.

763
00:42:03,160 --> 00:42:05,960
Speaker 6: That system kind of broke apart by the late seventies

764
00:42:06,480 --> 00:42:11,760
Speaker 6: when insurers started, especially the larger ones in the personal lines,

765
00:42:11,800 --> 00:42:15,280
Speaker 6: which is home in auto, basically started having enough data

766
00:42:15,280 --> 00:42:18,479
Speaker 6: on their own to make credible actuarial projections without using

767
00:42:18,719 --> 00:42:21,279
Speaker 6: a rating bureau. And that's when you started to have

768
00:42:21,719 --> 00:42:26,600
Speaker 6: actually more complicated regulatory systems, because rather than just accept

769
00:42:26,640 --> 00:42:28,960
Speaker 6: or reject a rate for the whole industry, you had

770
00:42:29,000 --> 00:42:32,840
Speaker 6: to look at each individual company's filing. And so initially

771
00:42:33,160 --> 00:42:35,880
Speaker 6: what most states did was leave it to the market

772
00:42:36,200 --> 00:42:39,160
Speaker 6: in most cases to determine what the best rate would be.

773
00:42:40,040 --> 00:42:43,319
Speaker 6: But some states in the eighties started having issues with

774
00:42:43,600 --> 00:42:47,160
Speaker 6: rates climbing up. There was concern about especially in auto

775
00:42:47,360 --> 00:42:51,280
Speaker 6: more than homeowners. There was concern about profiteering and gouging,

776
00:42:51,760 --> 00:42:55,759
Speaker 6: and so some states responded by having a more intense

777
00:42:56,120 --> 00:43:00,239
Speaker 6: what's called prior approval regulatory system. California did this ineteen

778
00:43:00,280 --> 00:43:03,560
Speaker 6: eighty eight by a ballot initiative called Prop One O three.

779
00:43:03,880 --> 00:43:08,080
Speaker 6: Florida does not have the same prior approval system as California,

780
00:43:08,080 --> 00:43:11,000
Speaker 6: but what Florida was challenged with was after Hurricane Andrew,

781
00:43:11,640 --> 00:43:15,240
Speaker 6: a number of companies simply had not been charging enough

782
00:43:15,600 --> 00:43:19,600
Speaker 6: and were rendered and solvent, especially regional and domestic companies.

783
00:43:20,080 --> 00:43:22,759
Speaker 6: Some of the larger companies want to get out of

784
00:43:22,800 --> 00:43:27,319
Speaker 6: the state altogether. Florida responded by creating these entities what

785
00:43:27,360 --> 00:43:31,799
Speaker 6: are called residual markets, insurers of last resort. Florida's kind

786
00:43:31,840 --> 00:43:35,480
Speaker 6: of unique in two respects. One is, most states do

787
00:43:35,640 --> 00:43:39,320
Speaker 6: have some kind of residual market for auto and for home,

788
00:43:39,480 --> 00:43:41,920
Speaker 6: but it's usually like an assigned risk pool life. You

789
00:43:41,920 --> 00:43:46,080
Speaker 6: can't get coverage, then you will be assigned to an insurer,

790
00:43:46,160 --> 00:43:49,800
Speaker 6: and those assignments will be made based on insurers overall

791
00:43:49,920 --> 00:43:54,560
Speaker 6: market share. In Florida, you have two entities, the Florida

792
00:43:54,600 --> 00:44:00,800
Speaker 6: Citizens Property Insurance Corporation, which is a freestanding owners insurer

793
00:44:01,040 --> 00:44:04,080
Speaker 6: capitalized by the state. Back by the state, it competes

794
00:44:04,120 --> 00:44:08,040
Speaker 6: in the market, and the Florida Hurricane Catastrophe Funds, which

795
00:44:08,080 --> 00:44:11,520
Speaker 6: is a state backed reinsurer. There's no other state that

796
00:44:11,560 --> 00:44:15,640
Speaker 6: has anything quite like that, So the reinsurer. Every insurance

797
00:44:15,640 --> 00:44:18,400
Speaker 6: company doing business in Florida has to buy their first

798
00:44:18,440 --> 00:44:22,960
Speaker 6: layer of reinsurance from the state itself. And that was

799
00:44:23,640 --> 00:44:29,160
Speaker 6: both because there was concern that reinsurers were taking excess

800
00:44:29,200 --> 00:44:34,560
Speaker 6: profit but also because reinsurance rates can fluctuate wildly, and

801
00:44:34,600 --> 00:44:37,320
Speaker 6: so the idea was to try to make it a

802
00:44:37,360 --> 00:44:38,320
Speaker 6: little bit more stable.

803
00:44:39,000 --> 00:44:41,960
Speaker 2: Two things. A. I like that you mentioned that everyone

804
00:44:42,000 --> 00:44:44,799
Speaker 2: should cover insurance because I think Tracy and I have

805
00:44:44,840 --> 00:44:47,479
Speaker 2: talked about there's like people forgot banks all the time,

806
00:44:47,640 --> 00:44:50,239
Speaker 2: Wall Street banks, et cetera, and like, it is sort

807
00:44:50,280 --> 00:44:55,000
Speaker 2: of remarkable generally how little coverage there is of insurers

808
00:44:55,040 --> 00:44:55,920
Speaker 2: and what they're doing.

809
00:44:56,040 --> 00:45:00,279
Speaker 3: It's also that essence of finance, right, like estimating and

810
00:45:00,320 --> 00:45:01,120
Speaker 3: pricing risk.

811
00:45:01,680 --> 00:45:03,400
Speaker 2: And then the other thing I think that's really important

812
00:45:03,400 --> 00:45:05,640
Speaker 2: that you mentioned here is it's funny that like there's

813
00:45:05,719 --> 00:45:07,239
Speaker 2: I don't know it's funny, but you know, a lot

814
00:45:07,239 --> 00:45:09,439
Speaker 2: of the concern right now is about pricing too high

815
00:45:09,520 --> 00:45:12,960
Speaker 2: and price gouging and promitteering. But pricing too low is

816
00:45:13,000 --> 00:45:16,120
Speaker 2: also very, as you say, problematic, because you don't want

817
00:45:16,120 --> 00:45:18,879
Speaker 2: someone an entity coming in and taking tons of market

818
00:45:18,920 --> 00:45:21,480
Speaker 2: share and then not having the capacity to pay out

819
00:45:21,520 --> 00:45:24,480
Speaker 2: when the hurricane hit. So you know, you mentioned that

820
00:45:24,560 --> 00:45:27,359
Speaker 2: as part of your former job, you would create these

821
00:45:27,640 --> 00:45:31,200
Speaker 2: rankings of each of the state's insurance. What goes into

822
00:45:31,239 --> 00:45:34,000
Speaker 2: that ranking, What makes for a good or a bad

823
00:45:34,120 --> 00:45:36,279
Speaker 2: in your view? And I think maybe you know, our

824
00:45:36,360 --> 00:45:39,560
Speaker 2: Street is sort of a you know, free market bent organization.

825
00:45:39,640 --> 00:45:42,200
Speaker 2: But from your view or when you were creating these rankings,

826
00:45:42,400 --> 00:45:45,120
Speaker 2: what constitutes a good or a bad insurance regime.

827
00:45:45,840 --> 00:45:49,359
Speaker 6: So my perspective was that there were certain tests that

828
00:45:49,400 --> 00:45:54,279
Speaker 6: it was important for a department to perform. It wasn't

829
00:45:54,280 --> 00:45:57,600
Speaker 6: seeking no regulation the most The two most important were solvency,

830
00:45:58,200 --> 00:46:02,799
Speaker 6: doing solvency review and the other's consumer protection. I mean,

831
00:46:03,280 --> 00:46:07,239
Speaker 6: it is certainly true that in the marketplace some consumers

832
00:46:07,360 --> 00:46:10,960
Speaker 6: are abused, some insurers might give you the run arounds

833
00:46:11,000 --> 00:46:15,480
Speaker 6: and not pay claims timely and appropriately, and there's a

834
00:46:15,560 --> 00:46:18,960
Speaker 6: role for a regulator to examine those cases. So we

835
00:46:19,040 --> 00:46:23,480
Speaker 6: try to emphasize in our rankings those states that we

836
00:46:23,480 --> 00:46:26,240
Speaker 6: thought were doing those two tasks in particular very well.

837
00:46:26,680 --> 00:46:31,600
Speaker 6: And we would gain states for mostly price regulation, because

838
00:46:31,920 --> 00:46:35,400
Speaker 6: soligncy regulation is kind of separate regime. Then price regulation.

839
00:46:36,000 --> 00:46:40,000
Speaker 6: If there is a competitive market, then I do think

840
00:46:40,080 --> 00:46:43,920
Speaker 6: the market is the best price regulator and insurance historically,

841
00:46:44,080 --> 00:46:49,520
Speaker 6: In fact, there has long been greater problems of companies

842
00:46:49,560 --> 00:46:53,200
Speaker 6: seeking market share and so underpricing their product. It's a

843
00:46:53,239 --> 00:46:56,560
Speaker 6: gain market share maybe to sell you other products, you know,

844
00:46:56,800 --> 00:47:00,640
Speaker 6: maybe you sell auto and then you also tie in

845
00:47:00,960 --> 00:47:05,120
Speaker 6: homeowners and life and possibly some banking services, and that

846
00:47:05,239 --> 00:47:08,240
Speaker 6: in the long run, you may not be pricing appropriately

847
00:47:08,320 --> 00:47:26,280
Speaker 6: or you may not be taking reserves appropriately to maintain solvency.

848
00:47:28,080 --> 00:47:31,480
Speaker 3: First of all, what information are they working from when

849
00:47:31,520 --> 00:47:35,920
Speaker 3: it comes to figuring out what's a reasonable or acceptable

850
00:47:36,560 --> 00:47:41,440
Speaker 3: price for insurers to actually charge? And then secondly, like

851
00:47:41,520 --> 00:47:44,359
Speaker 3: how do they come to that judgment? Like where does

852
00:47:44,360 --> 00:47:46,839
Speaker 3: the information come from? And then what strikes them as

853
00:47:46,960 --> 00:47:49,280
Speaker 3: a reasonable premium increase?

854
00:47:49,920 --> 00:47:55,040
Speaker 6: It is overwhelmingly past loss data in all states. That's true.

855
00:47:55,360 --> 00:47:59,600
Speaker 6: The states do differ in what factors they will allow

856
00:47:59,640 --> 00:48:03,160
Speaker 6: a com need to consider and in the mix of

857
00:48:03,239 --> 00:48:06,359
Speaker 6: factors how much weight you can place on any single one.

858
00:48:06,920 --> 00:48:09,640
Speaker 6: I mean to give you an example. Race is not

859
00:48:09,760 --> 00:48:13,040
Speaker 6: permitted to be used anywhere. That wasn't always true. There

860
00:48:13,120 --> 00:48:15,080
Speaker 6: was a time when it was an actual factor that

861
00:48:15,120 --> 00:48:18,160
Speaker 6: insurance companies in various kinds of insurance used. You cannot

862
00:48:18,239 --> 00:48:21,640
Speaker 6: use race anywhere. It doesn't matter if it's actually credible

863
00:48:21,760 --> 00:48:26,160
Speaker 6: or not. Certainly, loss costs. Things like the rising costs

864
00:48:26,200 --> 00:48:31,080
Speaker 6: of both labor and replacement parts for auto or materials

865
00:48:31,080 --> 00:48:34,520
Speaker 6: for homes are things that you can reflect in your

866
00:48:34,640 --> 00:48:39,440
Speaker 6: rates and in homeowners in particular. Over the last twenty

867
00:48:39,480 --> 00:48:43,759
Speaker 6: five years or so, many companies have started using off

868
00:48:43,800 --> 00:48:48,840
Speaker 6: the shelf catastrophe models. So a catastrophe model takes information

869
00:48:48,880 --> 00:48:55,040
Speaker 6: about climate and residential patterns and projects forward what the

870
00:48:55,080 --> 00:48:59,400
Speaker 6: maximum probable loss might be. That's different than a pure

871
00:48:59,440 --> 00:49:02,239
Speaker 6: loss cost approach, where you just look at what you

872
00:49:02,239 --> 00:49:06,520
Speaker 6: paid in the past. So in California that's particularly relevant

873
00:49:06,560 --> 00:49:09,360
Speaker 6: because prop One OZH three does not allow you to

874
00:49:09,400 --> 00:49:12,840
Speaker 6: project forward. You can only use what is your average

875
00:49:13,160 --> 00:49:16,160
Speaker 6: that you've paid out over the past twenty years in

876
00:49:16,239 --> 00:49:20,160
Speaker 6: determining what your rates should be. Well, in twenty seventeen

877
00:49:20,400 --> 00:49:25,040
Speaker 6: and twenty eighteen, California had these massive wildfires. So the

878
00:49:25,160 --> 00:49:28,680
Speaker 6: industry from nineteen ninety one to twenty sixteen in the

879
00:49:28,680 --> 00:49:32,800
Speaker 6: state of California had made ten billion dollars total in

880
00:49:33,040 --> 00:49:37,120
Speaker 6: underrating profits over that twenty five year period. In twenty

881
00:49:37,120 --> 00:49:40,920
Speaker 6: seventeen and twenty eighteen, they lost twenty billion dollars, so

882
00:49:40,960 --> 00:49:43,359
Speaker 6: they more than doubled all the money they had made

883
00:49:43,760 --> 00:49:47,240
Speaker 6: in the prior twenty five years. So if the future

884
00:49:47,239 --> 00:49:50,200
Speaker 6: doesn't look like the past, and you know, climate change

885
00:49:50,200 --> 00:49:53,359
Speaker 6: and residential patterns are both reasons that the future might

886
00:49:53,360 --> 00:49:56,240
Speaker 6: not look like the past, not being able to project

887
00:49:56,280 --> 00:49:58,280
Speaker 6: forward is a real problem.

888
00:49:59,080 --> 00:50:02,000
Speaker 2: Is California the ow only state that doesn't allow for

889
00:50:02,160 --> 00:50:05,840
Speaker 2: these sort of more forward looking projections of how damages

890
00:50:05,920 --> 00:50:06,480
Speaker 2: might change.

891
00:50:06,560 --> 00:50:09,200
Speaker 6: California is the only state that bars the use of

892
00:50:09,239 --> 00:50:13,560
Speaker 6: catastrophe models altogether. Other states do have controls on how

893
00:50:13,640 --> 00:50:16,480
Speaker 6: much weight you can place on cat models and crafting

894
00:50:16,520 --> 00:50:20,680
Speaker 6: your underwriting and rate setting. Florida is kind of unique

895
00:50:20,680 --> 00:50:24,520
Speaker 6: in that it actually the state created its own cat model.

896
00:50:24,600 --> 00:50:28,080
Speaker 6: So not only does it have state backed homeowners insure

897
00:50:28,120 --> 00:50:30,080
Speaker 6: and the state back reinsure, it also has a state

898
00:50:30,120 --> 00:50:32,799
Speaker 6: back cat model, and it uses its cat model to

899
00:50:32,920 --> 00:50:35,560
Speaker 6: judge the results of private cat models.

900
00:50:35,680 --> 00:50:37,840
Speaker 2: So did you say that California is the fiftieth or

901
00:50:37,920 --> 00:50:38,400
Speaker 2: was the worst?

902
00:50:38,680 --> 00:50:41,400
Speaker 6: It not always depended on the year, but it was

903
00:50:41,440 --> 00:50:42,439
Speaker 6: sometimes the world.

904
00:50:42,480 --> 00:50:45,919
Speaker 2: So what else? So we have seen these stories over

905
00:50:45,960 --> 00:50:49,239
Speaker 2: the last couple of years about various name brand insurance

906
00:50:49,280 --> 00:50:53,239
Speaker 2: companies saying we're leaving the state. So what is it?

907
00:50:53,320 --> 00:50:55,840
Speaker 2: I mean, is it just talk to us generally, Is

908
00:50:55,840 --> 00:50:59,160
Speaker 2: it just about their inability to sort of use these

909
00:50:59,200 --> 00:51:02,000
Speaker 2: cat models? Like, what is the environment or the situation

910
00:51:02,200 --> 00:51:04,920
Speaker 2: that caused I guess your rankings were legit. If they

911
00:51:05,080 --> 00:51:07,839
Speaker 2: like now they're running out of it, sure, I guess

912
00:51:07,840 --> 00:51:11,400
Speaker 2: you're vindicated. Well overall, what is the situation that caused

913
00:51:11,440 --> 00:51:14,239
Speaker 2: them to be ranked so low in your models or

914
00:51:14,280 --> 00:51:16,880
Speaker 2: in your ranking and that now we see insureds playing

915
00:51:16,880 --> 00:51:17,200
Speaker 2: the stame.

916
00:51:18,040 --> 00:51:20,799
Speaker 6: The reason California is different it does have a prior

917
00:51:20,840 --> 00:51:23,040
Speaker 6: approval system. It's not the only state that has that.

918
00:51:23,640 --> 00:51:27,080
Speaker 6: It doesn't allow catastrophe models to be used. It doesn't

919
00:51:27,080 --> 00:51:31,319
Speaker 6: allow anything to be used that was not specifically enumerated

920
00:51:31,880 --> 00:51:34,440
Speaker 6: in this ballot initiative Prop one ZHO three that was

921
00:51:34,440 --> 00:51:37,880
Speaker 6: past nineteen eighty eight. They're basically were no catastrophe models

922
00:51:37,960 --> 00:51:40,880
Speaker 6: in nineteen eighty eight. They were in their infancy in

923
00:51:40,960 --> 00:51:44,040
Speaker 6: auto people weren't really using credit yet, which is now

924
00:51:44,040 --> 00:51:46,680
Speaker 6: a common thing to use in auto insurance, and so

925
00:51:46,760 --> 00:51:50,080
Speaker 6: you can't use it in California. Also, Prop one oh

926
00:51:50,120 --> 00:51:54,200
Speaker 6: three created this system called the Intervener system, where private

927
00:51:54,320 --> 00:51:58,759
Speaker 6: parties consumer advocates every time an insurer files a rate,

928
00:51:59,280 --> 00:52:03,000
Speaker 6: whether it's an increase or not is actually only somewhat relevant.

929
00:52:03,080 --> 00:52:05,520
Speaker 6: But anytime and ensure files a rate files a form,

930
00:52:06,200 --> 00:52:10,160
Speaker 6: these private parties get to object and you have to

931
00:52:10,200 --> 00:52:14,359
Speaker 6: go through a hearing process to get that rate, which

932
00:52:14,400 --> 00:52:16,640
Speaker 6: even if it's ultimately approved, that can take up to

933
00:52:16,680 --> 00:52:21,279
Speaker 6: two years. So it is very inflexible system, and insurers

934
00:52:21,360 --> 00:52:25,560
Speaker 6: have may do with it because California is one fifth

935
00:52:25,600 --> 00:52:28,320
Speaker 6: of the country, and so you don't want to exit

936
00:52:28,360 --> 00:52:31,960
Speaker 6: the California market unless you know the circumstances are really bad.

937
00:52:32,440 --> 00:52:37,080
Speaker 6: But it is terribly brittle. You cannot change these rules

938
00:52:37,280 --> 00:52:41,240
Speaker 6: without either a new proposition to be passed by the voters,

939
00:52:41,520 --> 00:52:43,480
Speaker 6: and the voters are not going to pass something that

940
00:52:43,560 --> 00:52:48,719
Speaker 6: raises their insurance rates, or the legislature by super majorities

941
00:52:48,719 --> 00:52:52,319
Speaker 6: in both chambers can make adjustments to Prop One O three,

942
00:52:52,360 --> 00:52:54,760
Speaker 6: but only if they, in the view of the Court,

943
00:52:55,360 --> 00:52:58,480
Speaker 6: forward the purpose of Prop One O three. So you

944
00:52:58,520 --> 00:53:02,080
Speaker 6: can't undo anything that's in the statute, but you can

945
00:53:02,640 --> 00:53:06,440
Speaker 6: make tweaks. So there's been some effort in California over

946
00:53:06,440 --> 00:53:10,160
Speaker 6: the last year. The Insurance Commissioner, recognizing that there's a problem,

947
00:53:10,800 --> 00:53:15,520
Speaker 6: a serious problem of not having insurance available, has taken

948
00:53:15,560 --> 00:53:21,520
Speaker 6: some emergency regulatory actions that would permit, in some limited circumstances,

949
00:53:21,560 --> 00:53:24,160
Speaker 6: things like being able to use cat models, being able

950
00:53:24,200 --> 00:53:26,560
Speaker 6: to reflect the cost of reinsurance, which is another thing

951
00:53:26,600 --> 00:53:29,920
Speaker 6: that prop One Zho three doesn't specifically allow. But it's

952
00:53:29,960 --> 00:53:32,680
Speaker 6: going to take the legislature taking action for any of

953
00:53:32,680 --> 00:53:33,760
Speaker 6: those things to be permanent.

954
00:53:35,040 --> 00:53:37,359
Speaker 3: So one of the things I always think about when

955
00:53:37,360 --> 00:53:42,680
Speaker 3: we talk about insurance premiums going up and the regulatory

956
00:53:42,880 --> 00:53:46,600
Speaker 3: regime that sort of limits them in places like California,

957
00:53:46,719 --> 00:53:51,080
Speaker 3: or limits those increases. So the idea of having expensive

958
00:53:51,360 --> 00:53:55,680
Speaker 3: insurance is partly it's supposed to deter you from doing

959
00:53:56,120 --> 00:53:59,480
Speaker 3: stupid things, right, It's supposed to shape your behavior to

960
00:53:59,480 --> 00:54:02,840
Speaker 3: some extent. So when it comes to things like climate change,

961
00:54:03,080 --> 00:54:08,640
Speaker 3: you're disincentivized from building a house in a place that's

962
00:54:08,640 --> 00:54:11,160
Speaker 3: prone to floods or in a place that is now

963
00:54:11,200 --> 00:54:16,680
Speaker 3: prone to wildfires. How do regulators balance that aspect of

964
00:54:16,719 --> 00:54:17,680
Speaker 3: this entire question?

965
00:54:18,239 --> 00:54:24,520
Speaker 6: Awkwardly is the short answer. Regulators are chosen in different

966
00:54:24,520 --> 00:54:27,359
Speaker 6: ways in different states. So as you might imagine, ones

967
00:54:27,360 --> 00:54:30,160
Speaker 6: that are directly elected, and there's about eleven of those,

968
00:54:30,800 --> 00:54:35,920
Speaker 6: are probably most attuned to public sentiments as opposed to

969
00:54:36,760 --> 00:54:40,839
Speaker 6: the nuts and bolts of stay solvency, and so those

970
00:54:40,840 --> 00:54:45,480
Speaker 6: who are appointed will vary. Some are appointed in kind

971
00:54:45,520 --> 00:54:48,080
Speaker 6: of unusual ways. In the state of Florida, we have

972
00:54:48,160 --> 00:54:51,560
Speaker 6: this weird system called the cabinet where the four directly

973
00:54:51,600 --> 00:54:55,799
Speaker 6: elected executive officers have to vote together on who to

974
00:54:55,880 --> 00:54:59,360
Speaker 6: appoint and also who to remove. So the Florida Insurance

975
00:54:59,400 --> 00:55:03,880
Speaker 6: Commissioners actually unusually insulated if he has the vote of

976
00:55:03,920 --> 00:55:09,680
Speaker 6: either the CFO or the governor, basically cannot be removed.

977
00:55:10,200 --> 00:55:15,400
Speaker 6: Flood which isn't actually underwritten very much by private parties,

978
00:55:15,440 --> 00:55:19,640
Speaker 6: it's mostly underwritten by the federal government. There is a

979
00:55:20,560 --> 00:55:25,480
Speaker 6: direct relationship between where and how you build and the

980
00:55:25,480 --> 00:55:29,479
Speaker 6: flood risks that are being generated. Wildfire is a little

981
00:55:29,480 --> 00:55:33,640
Speaker 6: bit stranger because there are various tipping points, like if

982
00:55:33,680 --> 00:55:36,279
Speaker 6: I build more densely in a floodplain, I'm going to

983
00:55:36,360 --> 00:55:38,719
Speaker 6: have more flood risk because there's more people there, there's

984
00:55:38,719 --> 00:55:42,200
Speaker 6: more structures there, You're covering the ground. If you build

985
00:55:42,239 --> 00:55:46,439
Speaker 6: more densely in an area of wildfire, initially you may

986
00:55:46,440 --> 00:55:50,040
Speaker 6: be having more properties exposed to the risk, but after

987
00:55:50,080 --> 00:55:53,520
Speaker 6: a certain point you actually are reducing the risk because

988
00:55:53,560 --> 00:56:00,960
Speaker 6: wildfire is generated in less dense. In essence, it sounds silly,

989
00:56:01,000 --> 00:56:03,040
Speaker 6: but you can choose to get rid of the trees.

990
00:56:03,200 --> 00:56:07,120
Speaker 3: Yeah, if we pave over all of California.

991
00:56:07,440 --> 00:56:10,279
Speaker 2: If everyone moves to a wildfire risky area, then the

992
00:56:10,320 --> 00:56:11,480
Speaker 2: wildfire risky.

993
00:56:11,200 --> 00:56:16,360
Speaker 6: Base it disappears. Yeah, so it's not correlated linearly in

994
00:56:16,400 --> 00:56:18,400
Speaker 6: the same way with that risk as it is with

995
00:56:18,520 --> 00:56:22,040
Speaker 6: flood But obviously there are things that you can do

996
00:56:22,280 --> 00:56:25,680
Speaker 6: in terms of creating defensible space around a property, making

997
00:56:25,680 --> 00:56:29,440
Speaker 6: sure that you don't have wood decks and wood roofs,

998
00:56:30,000 --> 00:56:33,839
Speaker 6: and you know, fire retarded materials, sprinklers, etc. These can

999
00:56:33,880 --> 00:56:37,799
Speaker 6: all contribute, but it's not as simple as saying, you know,

1000
00:56:37,920 --> 00:56:43,120
Speaker 6: charging more yields the more environmentally responsible solution. Not necessarily.

1001
00:56:43,160 --> 00:56:44,360
Speaker 6: It depends on the particulars.

1002
00:56:44,920 --> 00:56:48,239
Speaker 2: That's extremely interesting. So Florida you mentioned that it had

1003
00:56:48,320 --> 00:56:51,760
Speaker 2: over the years climbed up the rankings. That being said,

1004
00:56:52,440 --> 00:56:54,839
Speaker 2: you know, we've all seen these headlines over the last

1005
00:56:54,840 --> 00:56:58,800
Speaker 2: couple of years just about these like eye popping insurance

1006
00:56:58,840 --> 00:57:01,719
Speaker 2: premium increases four homeowners in the state of Florida, and

1007
00:57:01,800 --> 00:57:06,239
Speaker 2: increased dependence on citizens the public option backstop. Why do

1008
00:57:06,320 --> 00:57:09,240
Speaker 2: you explain that? So, what did Florida do to prove

1009
00:57:09,880 --> 00:57:13,239
Speaker 2: its rankings, and yet you know, still it feels like

1010
00:57:13,520 --> 00:57:15,880
Speaker 2: just intuitively and maybe the market justifies it, but it

1011
00:57:15,920 --> 00:57:17,640
Speaker 2: feels like there's a problem still.

1012
00:57:18,480 --> 00:57:21,960
Speaker 6: Take you back to two thousand and six. Florida had

1013
00:57:22,120 --> 00:57:26,520
Speaker 6: just had in two thousand and four four major hurricanes,

1014
00:57:26,880 --> 00:57:30,680
Speaker 6: two category threes, two category fours make landfall in one year.

1015
00:57:31,000 --> 00:57:34,200
Speaker 6: In two thousand and five, they had Hurricane Wilma. That

1016
00:57:34,280 --> 00:57:37,200
Speaker 6: was also the year of Hurricane Katrina, which did massive

1017
00:57:37,320 --> 00:57:42,040
Speaker 6: damage and kind of took the reinsurance markets for loop.

1018
00:57:42,440 --> 00:57:45,760
Speaker 6: Florida was a basket case back then, and essentially any

1019
00:57:45,960 --> 00:57:49,800
Speaker 6: remaining major national homeowners insurers that we're doing business in

1020
00:57:49,800 --> 00:57:53,440
Speaker 6: Florida left. Citizens became the largest, not only the largest

1021
00:57:53,440 --> 00:57:55,960
Speaker 6: insurer in Florida, but one of the top ten in

1022
00:57:56,000 --> 00:58:00,760
Speaker 6: the country. So Charlie crist was elected in two thousand

1023
00:58:00,760 --> 00:58:04,640
Speaker 6: and six than a Republican on an insurance reform platform.

1024
00:58:04,760 --> 00:58:08,240
Speaker 6: The state legislature in early two thousand and seven passed

1025
00:58:08,240 --> 00:58:11,680
Speaker 6: this platform, which included rolling back rates, making it much

1026
00:58:11,680 --> 00:58:15,800
Speaker 6: easier to join Citizens, doubling the size of the hurricane

1027
00:58:15,800 --> 00:58:20,000
Speaker 6: catastrophe fund. And this was basically a bet that in Florida,

1028
00:58:20,200 --> 00:58:24,080
Speaker 6: no realistic assessment of what Florida did in two thousand

1029
00:58:24,080 --> 00:58:25,919
Speaker 6: and seven would say that the state, if it got

1030
00:58:25,920 --> 00:58:30,320
Speaker 6: a major hurricane, could finance those costs because it put

1031
00:58:31,000 --> 00:58:35,280
Speaker 6: enormous costs on potential costs on the state. But Charlie

1032
00:58:35,360 --> 00:58:38,960
Speaker 6: Christ and he said this in congressional testimony, made the

1033
00:58:39,000 --> 00:58:42,800
Speaker 6: bet that the federal government would pass a national Catastrophe

1034
00:58:42,800 --> 00:58:46,440
Speaker 6: fund that would bail out Florida if need be. So

1035
00:58:46,520 --> 00:58:48,600
Speaker 6: what Florida did in the intervening years and why they

1036
00:58:48,640 --> 00:58:54,040
Speaker 6: were improving, was they did allow rates to rise, They

1037
00:58:54,720 --> 00:59:00,680
Speaker 6: shrank the size of citizens significantly. The cat fund was

1038
00:59:00,840 --> 00:59:03,840
Speaker 6: put on better financial footing. But what allowed this to

1039
00:59:03,880 --> 00:59:07,440
Speaker 6: happen was a very lucky streak, which is that between

1040
00:59:07,480 --> 00:59:11,920
Speaker 6: Wilma in two thousand and five and Hurricane Irma in

1041
00:59:11,960 --> 00:59:16,000
Speaker 6: twenty seventeen, Florida had no major hurricanes and the historic

1042
00:59:16,080 --> 00:59:20,000
Speaker 6: record doesn't show that ever happening before. So the markets

1043
00:59:20,000 --> 00:59:23,600
Speaker 6: got much more solid just based on good luck. More

1044
00:59:23,720 --> 00:59:28,360
Speaker 6: or less, there were still problems, notably, the litigation environment

1045
00:59:28,400 --> 00:59:32,880
Speaker 6: in Florida deteriorated significantly. It was a very attractive place

1046
00:59:32,880 --> 00:59:35,280
Speaker 6: for the trial bar as you can see if you

1047
00:59:35,360 --> 00:59:40,560
Speaker 6: drive our hideways and see many billboards advertising the services

1048
00:59:40,600 --> 00:59:43,440
Speaker 6: of our local trial attorneys, and I have no objection

1049
00:59:44,080 --> 00:59:48,479
Speaker 6: to them. But in the last decade and half, nine

1050
00:59:48,560 --> 00:59:51,520
Speaker 6: percent of all homeowners insurance claims originated in the state

1051
00:59:51,560 --> 00:59:54,920
Speaker 6: of Florida. But eighty percent of all homeowners insurance lawsuits.

1052
00:59:55,160 --> 00:59:57,400
Speaker 3: Oh that's funny in Florida. You know what I quoted

1053
00:59:57,440 --> 01:00:02,960
Speaker 3: that exact statistic, Oh, yesterday after we recorded our conversation.

1054
01:00:03,200 --> 01:00:05,520
Speaker 3: But yeah, that is a stunning statistic.

1055
01:00:06,120 --> 01:00:09,280
Speaker 6: It is. It is so we weren't quite as healthy

1056
01:00:09,440 --> 01:00:12,240
Speaker 6: as probably we should have been, given our good luck,

1057
01:00:12,760 --> 01:00:17,600
Speaker 6: But that lucky streak did allow capital to accumulate and

1058
01:00:17,920 --> 01:00:22,240
Speaker 6: for a more robust market to evolve. That market still

1059
01:00:22,280 --> 01:00:26,720
Speaker 6: always had problems because it was reliant heavily on companies

1060
01:00:26,720 --> 01:00:29,440
Speaker 6: that only do business in Florida and only wrote homeowners,

1061
01:00:29,960 --> 01:00:32,840
Speaker 6: so not diversified at all, and they are relatively small,

1062
01:00:32,960 --> 01:00:37,480
Speaker 6: relatively thinly capitalized. Then Irma came in twenty seventeen, We

1063
01:00:37,520 --> 01:00:40,160
Speaker 6: had Michael in twenty eighteen, we had Ian in twenty

1064
01:00:40,160 --> 01:00:42,960
Speaker 6: twenty two, we had a Dalia last year, and those

1065
01:00:42,960 --> 01:00:46,240
Speaker 6: were just the knockout blow for like what was for

1066
01:00:46,320 --> 01:00:49,040
Speaker 6: these thinly We've had a dozen that have gone insolvent

1067
01:00:49,200 --> 01:00:51,560
Speaker 6: in the last couple of years. There are many more

1068
01:00:51,600 --> 01:00:55,960
Speaker 6: that are teetering. There needed to be a significant adjustment,

1069
01:00:56,120 --> 01:00:59,720
Speaker 6: and that's what you've seen is rates have risen significantly. Now.

1070
01:00:59,840 --> 01:01:02,920
Speaker 6: The the average homeowners rate in Florida's asked me to

1071
01:01:03,000 --> 01:01:06,360
Speaker 6: be about six thousand dollars a year, which is probably

1072
01:01:06,440 --> 01:01:09,320
Speaker 6: double the next state. And I'm not even certain what

1073
01:01:09,320 --> 01:01:11,960
Speaker 6: that next date would be. It's been wrenching. I do

1074
01:01:12,080 --> 01:01:15,800
Speaker 6: think we're to a better place, at least in terms

1075
01:01:15,800 --> 01:01:20,600
Speaker 6: of availability that right now. Ensure looking at the Florida

1076
01:01:20,600 --> 01:01:22,960
Speaker 6: market would say those rates are attractive, and if I

1077
01:01:23,000 --> 01:01:25,840
Speaker 6: have a clean balance sheet, maybe I'll start writing business there,

1078
01:01:25,920 --> 01:01:28,440
Speaker 6: even if I haven't in many years. But it's going

1079
01:01:28,520 --> 01:01:30,280
Speaker 6: to be a painful adjustment for sure.

1080
01:01:31,080 --> 01:01:34,840
Speaker 3: Recent steps in Florida aside, and I realize I'm talking

1081
01:01:35,120 --> 01:01:39,120
Speaker 3: very generally about insurance in the US, and it varies

1082
01:01:39,160 --> 01:01:41,400
Speaker 3: state to state, as you point it out. But if

1083
01:01:41,440 --> 01:01:44,760
Speaker 3: we have a situation where insurers are pulling out of

1084
01:01:44,840 --> 01:01:48,360
Speaker 3: markets because they say they can't raise premiums because of

1085
01:01:48,400 --> 01:01:53,320
Speaker 3: these regulatory limits, and meanwhile the risk of catastrophic events

1086
01:01:53,800 --> 01:01:57,040
Speaker 3: is increasing, and then what ends up happening is people

1087
01:01:57,240 --> 01:02:01,240
Speaker 3: lean on either you know, state or federal insurance, whatever

1088
01:02:01,320 --> 01:02:04,840
Speaker 3: backstop might be in place there. Why not cut out

1089
01:02:04,920 --> 01:02:08,400
Speaker 3: the middleman and just have a public insurance entity.

1090
01:02:08,840 --> 01:02:12,880
Speaker 6: Well, as we were sort of alluding to earlier, if

1091
01:02:12,920 --> 01:02:15,080
Speaker 6: you underprice the risk, and that that would be the

1092
01:02:15,080 --> 01:02:18,200
Speaker 6: assumption here, right, is that the reason that private companies

1093
01:02:18,240 --> 01:02:21,840
Speaker 6: would not write this business but the government entity would

1094
01:02:22,280 --> 01:02:25,880
Speaker 6: is because they are underpricing the risk. Then that is

1095
01:02:26,320 --> 01:02:29,560
Speaker 6: just shifting the problem to the taxpayer. And you can

1096
01:02:29,600 --> 01:02:33,280
Speaker 6: make that decision, sure, I mean, that's a policy decision

1097
01:02:33,320 --> 01:02:36,560
Speaker 6: that has been made in many contexts. It's certainly the

1098
01:02:36,560 --> 01:02:39,840
Speaker 6: way the crop insurance program works is that it's a subsidy.

1099
01:02:39,840 --> 01:02:43,920
Speaker 6: It's an explicit subsidy for our farmers. Whether this should

1100
01:02:43,960 --> 01:02:47,720
Speaker 6: be something subsidized, whether building beach homes is something that

1101
01:02:47,760 --> 01:02:51,160
Speaker 6: we want as a matter of public policy to subsidize,

1102
01:02:51,360 --> 01:02:54,720
Speaker 6: I don't, but you know someone can make that case.

1103
01:02:54,760 --> 01:02:59,520
Speaker 6: It's a democracy. There's someone believes that, and so you

1104
01:02:59,560 --> 01:03:00,680
Speaker 6: know that that's where we are.

1105
01:03:01,840 --> 01:03:06,040
Speaker 2: Is the Florida's stayed back reinsure? Is that re reinsured

1106
01:03:06,080 --> 01:03:06,360
Speaker 2: at all?

1107
01:03:07,560 --> 01:03:09,320
Speaker 3: It's all the way down.

1108
01:03:09,520 --> 01:03:13,040
Speaker 2: Reinsurance does exist, right, yes.

1109
01:03:13,080 --> 01:03:17,560
Speaker 6: And a bit is the answer there's largely through catastrophe

1110
01:03:17,560 --> 01:03:21,160
Speaker 6: bonds that the CAT funds issued, and those are a

1111
01:03:21,200 --> 01:03:26,160
Speaker 6: form of reinsurance. There isn't much facultative or treaty, and

1112
01:03:26,200 --> 01:03:28,919
Speaker 6: I'm not aware of any currently with the farther CAT Fund,

1113
01:03:28,920 --> 01:03:30,560
Speaker 6: but I will admit that I haven't looked at their

1114
01:03:30,560 --> 01:03:32,160
Speaker 6: balance sheet in a couple of years.

1115
01:03:32,280 --> 01:03:35,360
Speaker 2: What is your prescription for both states? It would be

1116
01:03:35,360 --> 01:03:38,160
Speaker 2: it sounds like California has to do much more, but

1117
01:03:38,200 --> 01:03:40,400
Speaker 2: it does seem like Florida has issues with the fact

1118
01:03:40,440 --> 01:03:42,640
Speaker 2: that it has to be a solely you know, these

1119
01:03:42,680 --> 01:03:46,720
Speaker 2: sort of undiversified companies. Definitely seems like an issue like

1120
01:03:46,960 --> 01:03:49,400
Speaker 2: what would be the ideal reforms we're looking at.

1121
01:03:49,480 --> 01:03:52,040
Speaker 6: In both cases. I think the ideal reform is to

1122
01:03:52,080 --> 01:03:56,680
Speaker 6: bring down the level of risk, which means shifting investment

1123
01:03:57,320 --> 01:04:00,760
Speaker 6: to the front end to mitigation, and both states do

1124
01:04:00,840 --> 01:04:04,520
Speaker 6: that to some extent. Florida could do much more in

1125
01:04:04,840 --> 01:04:08,480
Speaker 6: helping to raise properties and places where they're at risk

1126
01:04:08,520 --> 01:04:13,720
Speaker 6: of flood, ensure that the building codes are appropriately measured

1127
01:04:13,760 --> 01:04:19,360
Speaker 6: to the size of the risk. California's regulatory environment ultimately

1128
01:04:19,520 --> 01:04:21,600
Speaker 6: will have to be a thing that the people of

1129
01:04:21,600 --> 01:04:27,360
Speaker 6: California are leveled with about what is realistic and possible

1130
01:04:27,440 --> 01:04:31,600
Speaker 6: over the long term. And that's a democracy challenge because

1131
01:04:32,400 --> 01:04:35,960
Speaker 6: no one wants to pay more to be fair. In California,

1132
01:04:36,000 --> 01:04:40,160
Speaker 6: they do actually pay less, although they in Hawaii are

1133
01:04:40,160 --> 01:04:43,400
Speaker 6: the most expensive states, certainly for the cost of housing,

1134
01:04:43,440 --> 01:04:47,320
Speaker 6: they pay less than one would predict. And that is

1135
01:04:47,440 --> 01:04:50,720
Speaker 6: a function of the regulatory environment. In Florida, that's not true.

1136
01:04:51,000 --> 01:04:54,360
Speaker 6: In fact, if anything, it may be current rates there

1137
01:04:54,560 --> 01:04:58,960
Speaker 6: were probably peeking out at a level that will naturally

1138
01:04:59,000 --> 01:05:01,520
Speaker 6: come down with more compat but we'll have to wait

1139
01:05:01,560 --> 01:05:02,280
Speaker 6: and see on that.

1140
01:05:03,200 --> 01:05:03,400
Speaker 5: R J.

1141
01:05:03,560 --> 01:05:06,040
Speaker 2: Lehman, thank you so much for coming on odd Laws.

1142
01:05:06,080 --> 01:05:08,240
Speaker 2: That was great and clarified a bunch of things for us.

1143
01:05:08,240 --> 01:05:23,840
Speaker 2: So really appreciate you taking the time. Absolutely, thank you, Tracy.

1144
01:05:23,960 --> 01:05:26,400
Speaker 2: Those conversations cleared up a lot of things for me.

1145
01:05:26,480 --> 01:05:27,320
Speaker 2: Let's just start there.

1146
01:05:27,880 --> 01:05:30,440
Speaker 3: Yes, I have been wanting to dig a little bit

1147
01:05:30,520 --> 01:05:35,040
Speaker 3: more into the Florida fraudulent roof replacement schemes for a while.

1148
01:05:35,200 --> 01:05:36,040
Speaker 3: That was really fun.

1149
01:05:36,280 --> 01:05:38,680
Speaker 2: That was really fun. There were so many interesting things.

1150
01:05:38,800 --> 01:05:41,120
Speaker 2: First of all, like I think one thing that helps

1151
01:05:41,200 --> 01:05:45,840
Speaker 2: crystallize for me, the huge surgeon insurance premiums is a

1152
01:05:46,320 --> 01:05:49,800
Speaker 2: not only the increase in climate risk, but be just

1153
01:05:49,880 --> 01:05:53,760
Speaker 2: the surge in home values themselves, because it doesn't matter,

1154
01:05:53,800 --> 01:05:55,480
Speaker 2: as we talked about, like you might have bought your

1155
01:05:55,480 --> 01:05:57,520
Speaker 2: home in the nineteen eighties, but to replace it, you

1156
01:05:57,560 --> 01:06:01,080
Speaker 2: have to replace it at twenty twenty four dollars. And

1157
01:06:01,120 --> 01:06:03,320
Speaker 2: so if you are in a boom state, which many

1158
01:06:03,360 --> 01:06:06,160
Speaker 2: people have been, whether particularly if you've been in Florida

1159
01:06:06,200 --> 01:06:09,000
Speaker 2: or California over the last several years, or home prices

1160
01:06:09,000 --> 01:06:11,560
Speaker 2: have gone nuts, it just makes sense, just sort of

1161
01:06:11,600 --> 01:06:14,480
Speaker 2: mathematically right there, that your premiums are going to go up.

1162
01:06:14,560 --> 01:06:18,120
Speaker 3: Absolutely. I also thought the differentiation in the way some

1163
01:06:18,160 --> 01:06:21,520
Speaker 3: of these disasters happen is also interesting. So the idea

1164
01:06:21,560 --> 01:06:24,360
Speaker 3: that forest fires are maybe a little bit different in

1165
01:06:24,520 --> 01:06:28,080
Speaker 3: nature to something like a hurricane. They wipe out a

1166
01:06:28,120 --> 01:06:31,640
Speaker 3: lot more, they can occur sort of unexpectedly. I mean,

1167
01:06:31,680 --> 01:06:35,320
Speaker 3: obviously you can determine how dry the weather is, what

1168
01:06:35,480 --> 01:06:39,000
Speaker 3: the fire risk conditions are at any one time, but

1169
01:06:39,280 --> 01:06:41,720
Speaker 3: you don't necessarily have a good handle on whether a

1170
01:06:41,840 --> 01:06:44,360
Speaker 3: single power line is going to come down or whether

1171
01:06:44,440 --> 01:06:46,840
Speaker 3: I don't know, a crazy person starts a fire on

1172
01:06:46,920 --> 01:06:51,400
Speaker 3: purpose or a camper starts accidentally burning brush that I.

1173
01:06:51,360 --> 01:06:55,080
Speaker 2: Guess factoid about like fire risk, where it's like, if

1174
01:06:55,120 --> 01:06:58,400
Speaker 2: you build in an area in which there's fire risk, like, okay,

1175
01:06:58,440 --> 01:07:01,680
Speaker 2: maybe your insurance premiums go up. But if everyone builds

1176
01:07:01,840 --> 01:07:03,840
Speaker 2: in an area where there's fire risk and you just

1177
01:07:03,920 --> 01:07:07,640
Speaker 2: clear cut all of the trees, then the risk goes down,

1178
01:07:07,720 --> 01:07:10,120
Speaker 2: which is sort of I guess it's funny in some way,

1179
01:07:10,200 --> 01:07:14,000
Speaker 2: not necessarily funny, haha, but funny perverse. I think also,

1180
01:07:14,240 --> 01:07:16,960
Speaker 2: just in you know, talking with RJ, the sort of

1181
01:07:17,280 --> 01:07:20,920
Speaker 2: the diversity of state models and so the fact that

1182
01:07:20,960 --> 01:07:24,040
Speaker 2: we really do have, you know, every state has an

1183
01:07:24,040 --> 01:07:28,000
Speaker 2: insurance commissioner and every state has its own rules about

1184
01:07:28,000 --> 01:07:32,800
Speaker 2: how pricing works, I think contributes to the difficulty understanding

1185
01:07:32,880 --> 01:07:34,120
Speaker 2: this market absolutely.

1186
01:07:34,160 --> 01:07:36,840
Speaker 3: And also just the cyclical nature, the sort of boom

1187
01:07:36,880 --> 01:07:40,240
Speaker 3: bust cycle of insurance it feels like, and the degree

1188
01:07:40,280 --> 01:07:42,640
Speaker 3: to which some of the capital behind the insurers, so

1189
01:07:42,720 --> 01:07:46,240
Speaker 3: the reinsures is kind of cyclical. There's so many moving

1190
01:07:46,320 --> 01:07:46,800
Speaker 3: parts here.

1191
01:07:47,000 --> 01:07:49,520
Speaker 2: I'm really glad that you brought up the reinsurer's part

1192
01:07:49,640 --> 01:07:51,600
Speaker 2: because you know, one of the things and we talked

1193
01:07:51,600 --> 01:07:54,560
Speaker 2: about it a little bit on our recent inflation episode

1194
01:07:54,640 --> 01:07:58,520
Speaker 2: with Omayor and Skanda, is these sort of back door

1195
01:07:58,560 --> 01:08:02,680
Speaker 2: ways in which higher FED rates can contribute to higher inflation,

1196
01:08:03,080 --> 01:08:06,480
Speaker 2: and so hear this sort of amyas as he explained it,

1197
01:08:06,480 --> 01:08:10,720
Speaker 2: it's like the FED hikes rates, the reinsureds take losses

1198
01:08:10,840 --> 01:08:14,600
Speaker 2: on their bond portfolio. The reinsurer then has less money,

1199
01:08:14,880 --> 01:08:18,400
Speaker 2: less capacity to back home insurance, and so then they

1200
01:08:18,600 --> 01:08:20,840
Speaker 2: hike up their rates, and the home insurers hike up

1201
01:08:20,840 --> 01:08:24,240
Speaker 2: their rates, and so this sort of very backdoor way

1202
01:08:24,439 --> 01:08:28,240
Speaker 2: in which higher rates almost linearly flow through right to

1203
01:08:28,320 --> 01:08:29,479
Speaker 2: higher consumer prices.

1204
01:08:29,800 --> 01:08:31,920
Speaker 3: Yeah, and no one ever really talks about it except

1205
01:08:32,040 --> 01:08:34,800
Speaker 3: up all right, and the INSURAN and the and the

1206
01:08:34,840 --> 01:08:37,240
Speaker 3: reinsurance dedicated.

1207
01:08:36,720 --> 01:08:39,280
Speaker 2: Insurance reporters of Priye talked about this, but don't get

1208
01:08:39,360 --> 01:08:39,920
Speaker 2: enough attention.

1209
01:08:40,240 --> 01:08:42,600
Speaker 3: Yes, that is very good point. All right, shall we

1210
01:08:42,640 --> 01:08:43,040
Speaker 3: leave it there.

1211
01:08:43,120 --> 01:08:43,840
Speaker 2: Let's leave it there.

1212
01:08:43,920 --> 01:08:46,479
Speaker 3: This has been another episode of the All Thoughts podcast.

1213
01:08:46,560 --> 01:08:49,920
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.

1214
01:08:49,520 --> 01:08:52,479
Speaker 2: And I'm Joe Wisenthal. You can follow me at the Stalwart.

1215
01:08:52,720 --> 01:08:57,080
Speaker 2: Follow our guests Amias Garrity He's at Amias MG and RJ.

1216
01:08:57,320 --> 01:09:01,720
Speaker 2: Leman He's at Ray Leman. Follow our producers Kerman Rodriguez

1217
01:09:01,800 --> 01:09:05,240
Speaker 2: at Kerman Armann dash O Bennett at Dashbot and Kilbrooks

1218
01:09:05,360 --> 01:09:08,360
Speaker 2: at Kilbrooks. And thank you to our producer Moses ONEm

1219
01:09:08,560 --> 01:09:11,240
Speaker 2: and from our Oddlots content, go to Bloomberg dot com

1220
01:09:11,240 --> 01:09:13,840
Speaker 2: slash od Lots, where you have transcripts, a blog and

1221
01:09:13,920 --> 01:09:17,200
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1222
01:09:17,240 --> 01:09:19,559
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1223
01:09:19,600 --> 01:09:22,759
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1224
01:09:22,640 --> 01:09:25,640
Speaker 3: And don't forget. If you like odd Lots, if you

1225
01:09:25,760 --> 01:09:29,160
Speaker 3: want more insurance content, then please leave us a positive

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01:09:29,160 --> 01:09:32,479
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01:09:32,520 --> 01:09:34,960
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