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