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Speaker 1: Hello and welcome to another episode of the Audlots Podcast.
Speaker 1: I'm Tracy Allaway.
Speaker 3: And I'm Jill Whysenthal.
Speaker 1: Joe, we need to do more on insurance.
Speaker 3: Yeah, absolutely so. We are recording this October eighteenth. In
Speaker 3: the last several weeks, we've had two extraordinary storms. The
Speaker 3: second one, Milton, that aimed directly at Florida near Tampa Bay,
Speaker 3: was not as bad as people thought even a few
Speaker 3: hours before landfall, which people thought it's just going to
Speaker 3: be tremendously catastrophic potentially. However, it was obviously still quoite damaging,
Speaker 3: and once again the question of hurricane risk, storm risk
Speaker 3: these certain flood prone markets, Who's going to pay for them.
Speaker 3: All of these things continues to be a source of
Speaker 3: I would say, rising anxiety regardless of what just happened
Speaker 3: with these storms.
Speaker 1: Yeah. Absolutely, And you've seen estimates flying around for how
Speaker 1: much this is going to cost the insurers, but I
Speaker 1: think there was one that said as much as fifty
Speaker 1: five billion from those two storms, So big numbers here.
Speaker 1: And obviously people who live in those areas have been
Speaker 1: talking for a long time about how their insurance premiums
Speaker 1: are already going up a lot, and certain areas of
Speaker 1: the country are perhaps coming unaffordable, or maybe you can't
Speaker 1: find insurance for a property on the coast of Florida anymore,
Speaker 1: or if you do, you have to go to the
Speaker 1: state insurance body rather than a private entity. And I
Speaker 1: think just getting really a big picture, I find insurance
Speaker 1: fascinating because it's basically the original finance y. It's like
Speaker 1: the pricing of risk is essentially the very essence of finance.
Speaker 1: So I find the idea of how we're going to
Speaker 1: be pricing the risk of more and more storms, who's
Speaker 1: going to bear those costs absolutely fascinating totally.
Speaker 3: And we know there are structural issues going on in
Speaker 3: the market and their myriad and we will get into
Speaker 3: all them. But yes, there is much to discuss on
Speaker 3: this topic on this episode in PRIT many episodes to come.
Speaker 1: Okay, So in this particular discussion, we're going to be
Speaker 1: coming at it from a slightly different angle. We're going
Speaker 1: to focus on Florida, what's been happening in the structure
Speaker 1: of that market and what else could be done. And yes,
Speaker 1: I promise listeners there will be discussion about Flora roof
Speaker 1: insurance frauds and all of that, because there are some
Speaker 1: interesting things happening there as well. So I'm very happy
Speaker 1: to say we do, in fact have the perfect guest.
Speaker 1: We're going to be speaking with Jerry Theodoro. He is
Speaker 1: the policy director of Finance, Insurance and Trade over at
Speaker 1: Our Street Institute, which describes itself as a free market
Speaker 1: think tank. He has written a lot about the Florida
Speaker 1: insurance market. So Jerry, thank you so much for coming
Speaker 1: on all lots.
Speaker 4: Thank you, Tracy, thank you. Joe's a pleasure to be here.
Speaker 1: So maybe give us your background just to start, because
Speaker 1: you've been in the insurance world for a while.
Speaker 4: Yeah. Thanks. I began my career as a commercial underwriter
Speaker 4: at Chubb and Son, and after a couple of years,
Speaker 4: moved over to AIG. AIG shipped me over to Europe
Speaker 4: and I worked in Paris and Frankfurt in the Middle
Speaker 4: East for about ten years as an expatriate, and after
Speaker 4: coming back to the United States, I joined a company
Speaker 4: called Conning. Worked at Conning for about a dozen years.
Speaker 4: Conning is an insurance manager that has an insurance research arm.
Speaker 4: I was one of the researchers there. One of the analysts,
Speaker 4: wrote a lot of books, did a lot of presentations
Speaker 4: on the insurance industry, and about three and a half
Speaker 4: years ago I joined our Street and using my knowledge
Speaker 4: of the market and economics and products connections in the
Speaker 4: industry for public policy purposes to explain to folks in
Speaker 4: Washington and state capitals how insurance works and recommended policy
Speaker 4: solutions for areas that are troubling, like the one we're
Speaker 4: discussing today.
Speaker 3: You do sound, indeed like the perfect guest. You know,
Speaker 3: let's say fifteen years from now, or let's say not
Speaker 3: fifteen years from now, let's say today I was sixteen,
Speaker 3: I'm like, all right, I'm ready to retire. I don't
Speaker 3: want to live in the cold weather anymore. I just
Speaker 3: wanted a nice little house in Fort Myers, Florida. But
Speaker 3: I kind of want to get insured because it's a
Speaker 3: big part of my retirement, this asset. What are my options?
Speaker 4: What am I going to do? Well? First of all,
Speaker 4: I agree, it's a lovely prospect to have a place
Speaker 4: in Fort Myers where you can see the front from
Speaker 4: your window. But when the ocean comes into your bedroom,
Speaker 4: that's another story, and that's when you should reconsider if
Speaker 4: you made the right decision.
Speaker 3: But I made that decision, all right, So now I'm
Speaker 3: making the insurance decision.
Speaker 1: Now he has to get insurance for his retirement property.
Speaker 1: What does he do? What are his options?
Speaker 4: Yeah? Well, first of all, having homeowners insurance is not
Speaker 4: only important, but it's required if you have a loan,
Speaker 4: mortgage loan that's backed by the federal government one of
Speaker 4: the GSS Fanny May Freddie Mech, so it's required. Some
Speaker 4: people go bare, they don't carry insurance. And there are
Speaker 4: three major sources of insurance for future retire research as yourself, Joe.
Speaker 4: One is the national insurance market, so you're jumbo insurers
Speaker 4: that operate nationally all state state farm Travelers, Hardford, and
Speaker 4: the like, And there's also some companies that are the
Speaker 4: so called Florida Domestics is your companies that were set
Speaker 4: up following catastrophes about fifteen years ago that are focused
Speaker 4: on flow and four of them are publicly traded. And
Speaker 4: there's also Citizens Property Insurance. Citizens Property is a state
Speaker 4: run ensure in Florida. So those are the three options,
Speaker 4: and agents are the ones that are responsible for guiding
Speaker 4: you to get the best policy for the best price.
Speaker 4: So that's the market that you'll confront Joe when you
Speaker 4: get there.
Speaker 1: So insurers of last resort in Florida like Citizens, At
Speaker 1: what point do you get access to those? Like I've
Speaker 1: never really understood that no one else will give you
Speaker 1: insurance or is it that no one else will give
Speaker 1: you insurance at a price that you like?
Speaker 4: Yeah, it's at a price that you like. So Citizens,
Speaker 4: as you say, Tracy the insurer of last resort. So
Speaker 4: if you agent can't place it with any of the
Speaker 4: national or the Florida only domestics, then Citizens is required
Speaker 4: to take that policy. However, if the Citizens policy proves
Speaker 4: to be more expensive than one on the market, then
Speaker 4: you're obligated to take one that's in the private market.
Speaker 3: So people say there is an uninsurance crisis in Florida
Speaker 3: due to the storms and due to other structural things.
Speaker 3: I guess I have a two part question. A. Do
Speaker 3: you accept a premise that there is something broken about
Speaker 3: the in Florida insurance market as it stands right now?
Speaker 3: And B how would you describe it.
Speaker 4: I wouldn't say that it's broken, but I would say,
Speaker 4: like a piece of porcelain that's cracked, it's got a
Speaker 4: bit of a it's got cracks to it. And it's
Speaker 4: more than just the risk of hurricanes and floods, because
Speaker 4: Florida is, after all, mainly a peninsula jutting into warm
Speaker 4: waters of the Gulf of Mexico and the Atlantic Ocean,
Speaker 4: so it's prone to catastrophes. There have been storms in
Speaker 4: Florida for as long as we've got data on that. Yeah,
Speaker 4: let's go back to two thousand and four. In two
Speaker 4: thousand and four, there were four landfalling storms that hit Florida.
Speaker 4: Those were Charlie, Francis, Ivan, and Gene. And in two
Speaker 4: thousand and five there was we call the KRW Katrina. Ilma.
Speaker 4: Now Rita did the most damage to Florida. So there
Speaker 4: were two back to back years of really strong hurricanes,
Speaker 4: and the market took a licking and as they used
Speaker 4: to say with TIMEX watch advertisements, but it kept on ticking.
Speaker 4: So the market continued and what is more, fresh capital
Speaker 4: came in after two thousand and five because banking on
Speaker 4: the theory that, to paraphrase, that lightning doesn't strike the
Speaker 4: same place twice. Indeed, the bet was a good one.
Speaker 4: In two thousand and six and two thousand and seven,
Speaker 4: there were no hurricanes that made landfall in Florida. The
Speaker 4: insurance company recouped the amount that had lost, So the
Speaker 4: market was functioning. And now we're in the wake of
Speaker 4: Helene and Milton, and these questions are being asked, but
Speaker 4: for a variety of reasons which I'd like to get into. Yeah,
Speaker 4: the market is resilient. It has these walls that protect
Speaker 4: the balance sheets of these companies because the risk is recognized.
Speaker 4: So why is it cracked? The reason it's because that's
Speaker 4: conventional insurance. Insurance companies are in the business.
Speaker 3: By the way, I just years ago, Tracy, we did
Speaker 3: an episode I went through an obsession with Florida history,
Speaker 3: like an old old odd loss days like twenty fifteen. Oh,
Speaker 3: we've did episodes about the nineteen twenty six hurricane and
Speaker 3: the nineteen twenty eight ok Choby hurricane that caused the
Speaker 3: Florida land that bubble. You know, Florida's history is not
Speaker 3: just hurricanes, It's also history of bubbles and busts.
Speaker 1: Sometimes I feel we've been doing the show too long
Speaker 1: when it's like, oh, yeah, go to our back catalog
Speaker 1: for the episode on the nineteen twenties Florida property bubble,
Speaker 1: but just a catfish bubble. But I say too.
Speaker 3: But I only say this to appreciate your point that
Speaker 3: storms in Florida are certainly nothing new and nothing that
Speaker 3: catches people really by surprise at this point. So anyway,
Speaker 3: keep going on with what you were saying about why
Speaker 3: there's cracks even if the storm story is nothing now right.
Speaker 4: Other states also have catastrophe exposure Texas, California. But Florida
Speaker 4: was special in a way that's unrelated to the risks
Speaker 4: and the premium of insurance, and that is because of
Speaker 4: the activity of the trial bar. In Florida. You have
Speaker 4: billboards on every highway advertising if you have a truck accident,
Speaker 4: call us. We had a two million dollar judgment, so
Speaker 4: a lot of legal advertising and people are responding to that.
Speaker 4: So insurance companies are getting sued in Florida more than
Speaker 4: anywhere else in the country. Let me give you a
Speaker 4: statistic here. Florida has got about eight percent of the
Speaker 4: country's population, so it's got about eight percent of the
Speaker 4: homes and the homeowner insurance policies in the country, but
Speaker 4: it has seventy eight percent of the homeowner's litigation. So
Speaker 4: the state of Florida alone has got four fifths of
Speaker 4: the entire country's litigation. And what are the lawsuits. A
Speaker 4: lot of them are related to what's called aob assignment
Speaker 4: of benefits. So if you have a house that sustains
Speaker 4: some damage, someone will come to your house and adjuster
Speaker 4: and ask you to sign a form saying we'll take
Speaker 4: care of the insurance for you. We'll put in a claim.
Speaker 4: So they put in a claim and the damage was
Speaker 4: not something that was caused by the storm. It's discovered,
Speaker 4: for example, and the insurance company denies the claim, and
Speaker 4: then the attorneys will sue the insurance company for a
Speaker 4: high five figure amount and rather than fight it and
Speaker 4: spend a lot of money more than the case is worth,
Speaker 4: they settle. So this has attracted a cottage industry in
Speaker 4: filing frivolous suits and giving Florida the reputation of being
Speaker 4: owned and driven by the trial bar.
Speaker 1: How did Florida become an environment for this type of
Speaker 1: litigation to begin with? Like why is the trial bar
Speaker 1: so big in that particular state.
Speaker 4: Yeah, I don't want to get into politics, but.
Speaker 3: We might actually have to get into politics.
Speaker 4: But politics does play a hand. A lot of the donations,
Speaker 4: the contributions that are made to local politicians campaigns comes
Speaker 4: from the trial bar. This is on a national basis
Speaker 4: and not just Florida, but in Florida it's especially the case.
Speaker 4: And also there was some bad legislation that was passed
Speaker 4: in Florida which permits these things. So the statutes are
Speaker 4: unfavorable compared to others where a case that doesn't meet
Speaker 4: the pleading standard is just not advanced. So you have
Speaker 4: this situation. The good news is though, but about a
Speaker 4: year and a half ago, the governor of Floridas signed
Speaker 4: tort reform into law that would stop the process of
Speaker 4: assignment of benefits and also one way attorney fees where
Speaker 4: the insurance company pays the legal fees of the plaintiff.
Speaker 4: A couple of other measures as well were struck down
Speaker 4: by the Torot reform that was signed into law. But
Speaker 4: that was sort of a rare event because in order
Speaker 4: to get that done, it required the President of the
Speaker 4: Florida Senate and the leader of the House and the
Speaker 4: governor pushing in the same direction, and with someone in
Speaker 4: the Florida legislature taking this on to drive it through.
Speaker 4: So this is a situation that you don't get. I mean,
Speaker 4: imagine what if it happened on a national level, would
Speaker 4: have the House and the Senate and the White House
Speaker 4: in the same pushing in the same direction. Not likely,
Speaker 4: But in Florida it happened. Something similar happened in Texas
Speaker 4: about fifteen years ago, and the results of Torot reform
Speaker 4: are already being seen where the number of suits I
Speaker 4: mentioned the seventy eight percent of the national total of
Speaker 4: homeowners insurance litigations Florida, that's coming down, and also there's
Speaker 4: a formal document that announces the intention to sue. Those
Speaker 4: numbers are coming down as well. So Florida seems to
Speaker 4: have turned a corner in terms of the you know,
Speaker 4: whether the sky is falling and the place is uninsurable.
Speaker 4: What does Wall Street say, Well, there's four of those
Speaker 4: Florida only insurance companies. They give us a ticker that
Speaker 4: are that are publicly traded. And when the news was
Speaker 4: coming out of Noah about the approaching hurricanes, people started
Speaker 4: selling the stock of those companies, about twenty five percent
Speaker 4: reduction in the stock price. But when, as you say, Joe,
Speaker 4: it was a disaster averted. It didn't go to Tampa,
Speaker 4: neither Helene nor Milton, and it skewed North or skewed South.
Speaker 4: Stocks rebounded and went up by about fifteen percent. So
Speaker 4: this was really just another manifestation of what people in
Speaker 4: the industry used to say about Florida insurance stocks sell
Speaker 4: in May and go away.
Speaker 3: Wait, can you tell us some of these names? Do
Speaker 3: you have any name? I actually wouldn't want to look
Speaker 3: them up?
Speaker 1: All State would.
Speaker 3: No, No, the Florida specific.
Speaker 1: The Florida Pacific one, Yeah.
Speaker 3: Florida, Yeah, who are they? Heritage HCI, Heritage Insurance Holding.
Speaker 1: Someone needs to make a Florida insurance ETF so we can.
Speaker 3: Just directly get exposure to Oh yeah, there you go. Okay,
Speaker 3: it's still down.
Speaker 4: Down, but it recovered, it didn't continue to go down.
Speaker 3: Yeah, that's right.
Speaker 4: So the rebound when it was a bullet that was
Speaker 4: dodged because Helene went north of Tampa, it landed in Appalachicola,
Speaker 4: and then when Milton was coming and headed towards the
Speaker 4: Tampa Bay, it turned south at the last minute and
Speaker 4: did damage to Sarasota. But in Tampa Saint Pete spared.
Speaker 3: An HCI group. And that's actually at all time highs
Speaker 3: right now, is it. Yeah, So that's and that's actually
Speaker 3: a really interesting chart because it did plunge in the
Speaker 3: middle of October, but now it's currently at all time highs.
Speaker 1: Also, if you zoom out on a lot of these,
Speaker 1: they are up quite a bit over the past year
Speaker 1: or so.
Speaker 3: Oh not quite, by the way, HgI, sorry I miss booked.
Speaker 3: HG has not al time highs. It's it like an
Speaker 3: fifty two weeks high. It was higher in twenty twenty
Speaker 3: one for a while. So okay, But I like looking
Speaker 3: at charts. This helps ground me.
Speaker 1: Joe, stop looking at charts. Let me ask a tort
Speaker 1: reform question. Okay. Tort law. Tort, by the way, for
Speaker 1: those who don't know, is like a legal framework for
Speaker 1: addressing compensation for wrongdoing. It's not criminal stuff, it's the
Speaker 1: civil stuff. And the only reason I know that is
Speaker 1: because I read a book about the station house fire
Speaker 1: in Rhode Island, and that was I don't recommend it.
Speaker 1: It's a good book, but don't read it because it's
Speaker 1: one of the most disturbing cases of all time. But anyway,
Speaker 1: I guess my question is, so tort reform happened in
Speaker 1: Florida a couple of years ago, as you point out, Jerry,
Speaker 1: But what was the turning point at which the state decided, actually,
Speaker 1: this is a really big deal and we need to
Speaker 1: do something about it.
Speaker 4: Yeah, that's a great question. It was, I think when
Speaker 4: it became evident that the number of lawsuits and the
Speaker 4: volume of the lawsuits was getting so stratispheric that it
Speaker 4: was really impacting the balance sheets of the companies that
Speaker 4: were there and driving some to leave Florida, to exit
Speaker 4: the state because they couldn't make a buck there. Why
Speaker 4: stay and you know, throw good money after bad. So
Speaker 4: a couple of years ago, it was at a conference
Speaker 4: of the Florida Chamber of Commerce, and the mood was
Speaker 4: all gloom and doom, and you know, the market is broken.
Speaker 4: There were strains on the reinsure that is obligatory. An
Speaker 4: obligatory reinsure these companies that Joe, you looked up in
Speaker 4: a couple of seconds, I'm very impressed.
Speaker 3: Well, then we have the Bloomberg terminal, oh plug for
Speaker 3: our core product here at Bloomberg. But yeah, it makes
Speaker 3: it very easy.
Speaker 4: So those companies, Heritage, Universal, HgI and the other they're
Speaker 4: aware of the risk. In order to protect their capital,
Speaker 4: they buy a lot of reinsurance, which means that if
Speaker 4: you hear that, oh, Heritage had six hundred million dollars
Speaker 4: in losses or something, well most of that, a lot
Speaker 4: of that, about eighty may ninety percent of that is reinsured.
Speaker 4: So the risk is passed on to these reinsurance companies.
Speaker 4: But the first one that's involved is the Florida Hurricane
Speaker 4: Catastrophe Fund FHC Florida Hurricane Catastrophe Fund. And one of
Speaker 4: the reasons why people were in gloom and doom mood
Speaker 4: a couple of years ago, prior to tour reform is
Speaker 4: because there appeared to be strains on that fund that
Speaker 4: it was How is it funded? It gets the premiums
Speaker 4: from the seedents, a company, a primary insurer like Heritage
Speaker 4: or any other company will seed reinsurance and they pay
Speaker 4: a premium for that and that's the revenue of the fund.
Speaker 4: But because it's a public entity, it was underprising the reinsurance.
Speaker 4: Reinsurance is provided mainly by these mammoth giant reinsurance companies
Speaker 4: in Europe like Hanover Reswiss, Remunich, re score Re, And
Speaker 4: there's also the capital market instruments, catastrophe funds, insurance link securities,
Speaker 4: so third party capital coming in. You've got reinsurance available
Speaker 4: in Bermuda, a big of Florida reinsurance capacity, and also
Speaker 4: Lloyd's of London and less so in the United States.
Speaker 4: So these companies are really protected because they're aware of
Speaker 4: the risk that's there. So the reinsurance picture is one
Speaker 4: that's very important because when you see that a company
Speaker 4: had an X amount of loss, well, what's the net
Speaker 4: loss after reinsurance? It'll be a fraction of the gross
Speaker 4: loss because of the impact of reinsurance. So these are
Speaker 4: like walls around the balance sheet.
Speaker 1: But presumably if the gross losses for like the domestic insurer,
Speaker 1: the first layer of insurance keep going up, then the
Speaker 1: reinsurance premiums go up as well eventually.
Speaker 4: Right, that's right. And here's some other news, which is
Speaker 4: good news. Prior to Helene and Milton, reinsurance rates started
Speaker 4: to come down. Reinsurance rates started to come down. The
Speaker 4: June renewals, the mid year renewals showed some decreases in
Speaker 4: the cost of reinsurance. So whereas there some Henny Penny
Speaker 4: the sky is falling chicken little folks out there saying, oh,
Speaker 4: it's just going to just get more and more expensive.
Speaker 4: It's got nowhere to go but up, and we can't
Speaker 4: buy insurance. Not necessarily, it's not true, because the rate
Speaker 4: or the premium follows the risk that's there. So if
Speaker 4: the risk goes down, then the rates go down. If
Speaker 4: you look at workers compensation, a different line of insurance,
Speaker 4: for the last twelve years, the rates for workers compensation
Speaker 4: have been coming down because of improvements in safety at
Speaker 4: manufacturing plants, other places, automation. So there we have a
Speaker 4: good example of rates coming down because the risk has
Speaker 4: come down. But people like ignore that because it's more
Speaker 4: fun to talk about bad things happening.
Speaker 3: And that's true, that's true. If everything's so fundamentally, I
Speaker 3: guess structurally sound. You know, Wall Street does its thing.
Speaker 3: It assesses the risks of a hurricane, it lays off
Speaker 3: the risks of catastrophes to the catastrophe bonds, et cetera.
Speaker 3: Why does the citizens even need to exist and why
Speaker 3: do so many Florida homeowners either end up with citizens
Speaker 3: or end up just going bare and not having insurance.
Speaker 4: In Florida, the impact of the out of control lawsuit
Speaker 4: abuse is what ended up driving up premium. So that
Speaker 4: was a part from the risk. And this happens in
Speaker 4: another states as well, where you have some sort of
Speaker 4: damage to the private market when the free market is
Speaker 4: having trouble making a decent return, and the insurance industry,
Speaker 4: it's not a rich industry. It's not like other industries.
Speaker 4: The S and P. I think the average margin is
Speaker 4: fourteen percent and the insurance industry is about six percent.
Speaker 4: So it's not as if those are fat rich companies.
Speaker 4: They operated relatively slim margins. So when there is an
Speaker 4: exodus of insurance companies from a particular state, then the
Speaker 4: state will often establish its fund, which is supposed to
Speaker 4: be a temporary stop gap until the market, the private
Speaker 4: market reattains stability. This happened in California with Skiff, the
Speaker 4: state run Workers' Compensation entity, and and other places as
Speaker 4: well have had this sort of accordion type results where
Speaker 4: business expands like citizens expanded a lot, and then you
Speaker 4: have depopulation, which is the effort to take policies out
Speaker 4: of citizens. So depopulation was happening and it is still happening.
Speaker 1: Wait, depopulation efforts to take policies out of citizens.
Speaker 4: That's right to put them back into the private market.
Speaker 4: Because the private market now is out of the intensive
Speaker 4: care unit. It's just in a recovery room.
Speaker 1: What's been the success rate on that.
Speaker 4: I don't have the numbers, but it started with a
Speaker 4: trickle and it's continuing. We'll see what happens now in
Speaker 4: the wake of Milton, to see how how much depopulation
Speaker 4: there'll be.
Speaker 1: So one thing I wanted to ask, just going back
Speaker 1: to tort reform, is I take the point that making
Speaker 1: it more difficult to file ridiculous lawsuits has made the
Speaker 1: ease of business for insurers in the state a little
Speaker 1: bit better. But I guess the downside is if you're
Speaker 1: a consumer who experiences some sort of damage to your house,
Speaker 1: maybe it makes you know, having actual conversations much less
Speaker 1: litigation with your insurance company a lot more difficult. How
Speaker 1: do you balance I guess the balance of power between
Speaker 1: the consumer and the insurance company.
Speaker 4: Here ye, the upper hand was held by the trial bar.
Speaker 4: Where the concept of civil litigation, and again this is
Speaker 4: civil litigation, not criminal litigation. These are torts, civil wrongs.
Speaker 4: The emphasis in tort law, or the purpose in tort law,
Speaker 4: is not to punish but to compensate. So many of
Speaker 4: the large verdicts and settlements that have made it difficult
Speaker 4: on the commercial side for people to create products, pharmaceuticals,
Speaker 4: do research are being hit by these very large outside
Speaker 4: judgments that have no real play in tort law. So
Speaker 4: you have the expansion of juries, verdicts, and settlements that
Speaker 4: are exacerbated by misbehavior on the part of the plaintiff, bar,
Speaker 4: new legal theories, and aggressive attempts to extract those large
Speaker 4: amounts punitive damages that are multiples of actual damages sustained.
Speaker 4: So this is entering the topic of social inflation, the
Speaker 4: expansion of the concept of tort, and a lot of
Speaker 4: states have tried to put an end to that with
Speaker 4: legislation like Florida, did in order to keep services and
Speaker 4: businesses at prices that are not unaffordable, because this ends
Speaker 4: up driving up the costs of things. When you have
Speaker 4: companies that are paying hundreds of millions of dollars or
Speaker 4: tens of millions for actions that are not necessarily caused
Speaker 4: by their activity, it's a distortion of the legal system.
Speaker 3: Going back to insurance for a second, and I take
Speaker 3: all this point about towards. Insurance is a key part
Speaker 3: of what makes Florida a habitable place, a place where
Speaker 3: people are going to invest assets to build. One aspect
Speaker 3: of insurance or one aspect of risk is flood insurance.
Speaker 3: And my understanding is that a big part of flood
Speaker 3: insurance is national and federal funded. What is the role
Speaker 3: of flood insurance in making parts of Florida safe to
Speaker 3: build in? And who pays for that flood insurance?
Speaker 4: Man? Right you are, Joe. Flood insurance is provided mainly
Speaker 4: through a government program called the National Flood Insurance Program,
Speaker 4: and the program has been around for several decades, and
Speaker 4: it covers flood insurance because flood damage is not covered
Speaker 4: in the conventional home owner's policy, say the H three
Speaker 4: homeowners insurance policy so people buy flood insurance policies separately
Speaker 4: from the National Flood Insurance Program the NFIP. So in Florida,
Speaker 4: which is aware of the risk that's there, eighteen percent
Speaker 4: of homeowners by flood insurance, whereas in North Carolina, which
Speaker 4: hit really bad, tragically bad, a lot of loss of
Speaker 4: life as well. In western North Carolina, only one percent
Speaker 4: of the tar Heel state homeowners bought flood insurance from
Speaker 4: the NFIP. Now there's been pressure because it's a government program,
Speaker 4: a lot of it is underpriced, subsidized. Really it runs
Speaker 4: at a deficit. There's been pressure to have the private
Speaker 4: market come in and provide flood insurance. And here the
Speaker 4: good news is that the private market is finally starting
Speaker 4: to grow. NFIP has got about three point one billion
Speaker 4: dollars in premiums, whereas the private market is estimated to
Speaker 4: have about one point four So almost half of the
Speaker 4: federal flood is now provided by the private market, whereas
Speaker 4: a couple of years ago, the private market was virtually
Speaker 4: nonexistent because nobody would buy it at the risk adjusted rates.
Speaker 4: So now you have a healthier situation. Problem is though,
Speaker 4: that the NFIP is going to bear a lot of
Speaker 4: the losses from Helene and Milton because we know about
Speaker 4: the storm surge one two feet of water and these torrential,
Speaker 4: violent rains that brought down mud and flooded homes, really
Speaker 4: destroying lots of property. So over the flood and the
Speaker 4: storm surge, we're not covered by the h R three policies,
Speaker 4: but are covered by the NFIP and the gap there
Speaker 4: with only eighteen percent of fluirdines having the insurance, I
Speaker 4: think it's going to send a message because the message
Speaker 4: that we've been trying to send as we educate folks
Speaker 4: about insurance and how it works, is that you need
Speaker 4: to spread the risk. You need to have a pool
Speaker 4: of risk in order to absorb the losses when they happen.
Speaker 3: To put it bluntly, are taxpayers in less flood prone
Speaker 3: areas currently subsidizing the construction of homes and more flood
Speaker 3: prone areas.
Speaker 4: Yes, they are, and that's a problem. The fact that
Speaker 4: you have construction in areas that are in harm's way,
Speaker 4: and when you have a development that's by the coast,
Speaker 4: you're going to have impermeable surfaces. When you have asphalt,
Speaker 4: there's nowhere for the water to go so it stays
Speaker 4: inside homes or it backs up. So well, there's one
Speaker 4: word which I focused on when I think about catastrophes
Speaker 4: and then Florida, and that is resilience. Resilience strengthen homes
Speaker 4: capacities to withstand these kinds of storms. Florida has recognized
Speaker 4: the issue. So if we look at the track of
Speaker 4: Helene a few weeks ago, because Michael hit Florida in
Speaker 4: the Gulf area, in the Big Bend area, the Panhandle side,
Speaker 4: building codes were strengthened, houses were built to code. But
Speaker 4: when Helene crossed the border from Florida to Georgia, there
Speaker 4: was much more destruction in Georgia because Georgia does not
Speaker 4: have those stringent building codes that you need to have
Speaker 4: to really make your house more resilient. So resilience is
Speaker 4: key on a national basis. I turned back to nineteen
Speaker 4: fifty three when the Dutch Dutch low country below seawater
Speaker 4: flooded lots and lots of times for centuries. Nineteen fifty
Speaker 4: three they had a horrible storm there and they said, basta, well,
Speaker 4: it's not Dutch, but the Dutch equivalent enough, I guess
Speaker 4: Kanuck and they had a big project to build levees
Speaker 4: and other sort of defense systems, and they haven't had
Speaker 4: a massive flood loss since. And also we compare Hurricane
Speaker 4: Katrine of two thousand and five to Ida exactly sixteen
Speaker 4: years later. We remember two thousand and five when the
Speaker 4: levees burst in New Orleans. Then after that the levees
Speaker 4: were strengthened and the city survived Ida, which was as
Speaker 4: power full of storm for Louisiana. So that demonstrates that
Speaker 4: resilience works. There's a ratio that's typically used in the
Speaker 4: industry that one dollar of resilience results in six dollars
Speaker 4: of disaster relief averted.
Speaker 3: By the way, Tracy, I'm just gonna say, if there
Speaker 3: are any academic economists listening to this episode, do a
Speaker 3: paper on the Florida verg Georgia damage and the natural
Speaker 3: experiment we saw on updated building code. It sounds like
Speaker 3: it's there for the taking for someone looking for their
Speaker 3: master's thesis.
Speaker 1: That's a good idea. Wall I had a question, so
Speaker 1: we talked about reinsurance. But the funny thing about insurance
Speaker 1: is that there's always another layer, it feels like, so
Speaker 1: there is reinsurance for reinsurers as well, what's been going
Speaker 1: on with rates there?
Speaker 4: That's right, there's reinsurance for reinsurers as well. That's the
Speaker 4: retro the retro market, and the rates and the retro
Speaker 4: market typically are similar to what you have on the
Speaker 4: primary market, so they sort of move hand in glow.
Speaker 4: There are going to be renewals of a lot of
Speaker 4: reinsurance treaties in January one, the one to one renewals
Speaker 4: is when most global reinsurance treaties renew. And whereas as
Speaker 4: I said earlier, rates have started to come down in
Speaker 4: some instances for reinsurance now in the wake of these hurricanes,
Speaker 4: they may be stable. People are not looking at increases.
Speaker 4: The industry is looking at these losses. And that fifty
Speaker 4: five billion Joe that you mentioned before, as you said,
Speaker 4: is at the upper end. Moody's just lowered their estimate.
Speaker 4: Moodies acquired a modeling firm called RMS recently and so
Speaker 4: they have their own modeling of catastrophes, and they lower
Speaker 4: their estimate from about forty five billion to about thirty
Speaker 4: five billion. Another modeling source, Karen Clark, who's usually right
Speaker 4: on the money, I think, is estimating thirty five thirty
Speaker 4: six billion and Verisk, a publicly traded company that also
Speaker 4: has its own modeling, is also landing in the thirty
Speaker 4: five billion area. So this thirty five billion is going
Speaker 4: to be borne by the national carriers, and by the
Speaker 4: Florida domestics, and by the reinsurance companies in Lloyd's Bermuda
Speaker 4: Continental Europe and the United States, and by the Florida
Speaker 4: Hurricane Catastrophe Fund, and by private investors that are buying
Speaker 4: catastrophe bonds those insurance linked securities. Some of them are
Speaker 4: going to pay out, but it's not going to be
Speaker 4: an exhaustion of the collateral that's in there. So the
Speaker 4: industry is really breathing a sigh of relief that this
Speaker 4: could have been the one that is not only an
Speaker 4: earnings event, but a capital event that dents the capital
Speaker 4: of an insurance company. And insurance companies typically like to
Speaker 4: have fortress balance sheets because they're in existence to take
Speaker 4: care of things, and even you know, what's the worst
Speaker 4: that could possibly happen, they think about these things, they
Speaker 4: model these things, so it's not a surprise that we
Speaker 4: are able to withstand this as we clean up the mess.
Speaker 3: I like that distinction between an earnings event for an
Speaker 3: insurance company and a capital event, and it does sound
Speaker 3: seems like an important Yeah, it does seem I have
Speaker 3: one last random question going back to the When I
Speaker 3: think of politics, I think of Republican candidates around the country,
Speaker 3: and they like blamed the trial attorneys, and they like
Speaker 3: to use the trial bar as one of their hobby
Speaker 3: horses to fight against in Florida specifically. You know it's
Speaker 3: a red state by and large. Is the trial bar
Speaker 3: is the Is the lawyer industry a little bit more
Speaker 3: savvy about being on both sides of this? Is this
Speaker 3: a have they those lawyers a little bit savvy about
Speaker 3: understanding that they need to kind of be on both teams.
Speaker 4: In the days before Governor DeSantis signing rot reform into
Speaker 4: law in Florida, in the few days before that, the
Speaker 4: trial bar industry submitted one hundred and I think it
Speaker 4: was one hundred and eighty thousand claims. So they got
Speaker 4: things under the door before or the shop was closed. Wow,
Speaker 4: got it so and they there was a letter that
Speaker 4: was circulated among one of the major firms that had
Speaker 4: Bellico's sort of terminology there, like you know, this is
Speaker 4: a war. You know, you can't be friendly to the defense.
Speaker 4: They are the enemy. So I don't think people are
Speaker 4: holding hands and singing Kumbaya and a gathering of defense
Speaker 4: and planning council.
Speaker 1: So summing up this whole conversation, you know, people talk
Speaker 1: about what needs to happen in Florida to make it
Speaker 1: a viable place or an affordable place to live. This
Speaker 1: is kind of a loaded subject. But there are plenty
Speaker 1: of people out there who say, well, maybe we just
Speaker 1: don't build houses on the coast of Florida anymore. I'm
Speaker 1: sure a lot of Floridians probably have strong opinions about that.
Speaker 1: But what else could be done? I guess to make
Speaker 1: the state more resilient and to make insurance more affordable
Speaker 1: for the people who are there.
Speaker 4: The codes are really important, really important. There was a house, well,
Speaker 4: it wasn't in Florida, but this is a good illustration.
Speaker 4: There was a house in Mississippi that was worth sixty
Speaker 4: nine thousand dollars and it flooded thirty four times in
Speaker 4: thirty two years. Wow. Because the owner knew that the NFIP,
Speaker 4: the flood in National Food Insurance Program would pay out.
Speaker 4: So it was about seven hundred thousand dollars paid out.
Speaker 4: There have been removals of homes that makes sense, like
Speaker 4: it happens in Queens in southern New York City where
Speaker 4: you had the houses in Breezy Point that were elevated,
Speaker 4: so economically, sometimes it doesn't make sense to do that.
Speaker 4: If you've ever met anyone that's been to Bermuda, will
Speaker 4: see that the roofs there, they're all the same across
Speaker 4: the entire island. Well, they're made of limestone. So Bermuda,
Speaker 4: which is in the middle of the Atlantic, gets these
Speaker 4: storms and it's a mandatory thing in Bermuda and the
Speaker 4: building code to have this kind of a limestone roof,
Speaker 4: not only because it protects the house from being destroyed.
Speaker 4: Some roofs have been there for two hundred years, but
Speaker 4: also because it collect the rain water. Bermuda is a
Speaker 4: pretty dry island, so you have this strict code. So yeah,
Speaker 4: removals work. About one percent of NFIP policies are responsible
Speaker 4: for thirty percent of the losses because you have these
Speaker 4: repetitive loss properties like the one I mentioned in Mississippi,
Speaker 4: and there's the story of a house in Houston that
Speaker 4: was rebuilt eight times instead of removing it somewhere else.
Speaker 4: So price sends a signal. If you look at classical
Speaker 4: liberal economics, price is a signal, and if the price
Speaker 4: goes up, then it tells you that it's something going
Speaker 4: on here, why is it more expensive? So these sending
Speaker 4: the right signal is something that these public programs like
Speaker 4: the National Flood Insurance Program or crop insurance, which is
Speaker 4: a whole other thing, don't send the right signals. They
Speaker 4: encourage people to have behavior which is not economically appropriate.
Speaker 4: They're passing on socializing the risk to ordinary taxpayers. Tracy
Speaker 4: and Joel, like you and me, I don't want.
Speaker 3: To pay that think you know the only person I
Speaker 3: know who's spent a lot of time in Bermuda, by
Speaker 3: the way, as an insurance.
Speaker 1: Executive and are our owner.
Speaker 3: Oh that's right, that's right.
Speaker 1: Okay, Jerry, thank you so much for coming on the
Speaker 1: show and explaining the latest in Florida insurance and roof
Speaker 1: frauds to us as well.
Speaker 4: Thank you very much. It's been a pleasure.
Speaker 1: Joe. That was really interesting, especially the contrast between Florida and.
Speaker 3: Yeah, no, that does some really interesting you know, a
Speaker 3: natural experiment out in the wild, So someone jump on that.
Speaker 1: Yeah, maybe we should say someone who's not us please
Speaker 1: look into this. No, that's bad. I mean, there are
Speaker 1: so many things about Florida, and to some extent it's
Speaker 1: kind of it feels like in the discourse often people
Speaker 1: don't like separate its natural propensity to have hurricanes and
Speaker 1: storms from the structure of the market. So it was
Speaker 1: kind of good to kind of zero in a little
Speaker 1: bit more on structural issues totally.
Speaker 3: And to his point, Florida's history is a history of
Speaker 3: real estate bubbles and busts and storms, and there have
Speaker 3: been many cycles of them, and it really, you know,
Speaker 3: dates back to at least the nineteen twenties. I mean,
Speaker 3: the history of Florida is essentially the history of air conditioning.
Speaker 3: And once air conditioning kind of existed, there is always
Speaker 3: going to be this mass of people from the other
Speaker 3: forty seven mainland states or maybe forty eight states or
Speaker 3: whatever that will want to go there to live in
Speaker 3: a warm place by the ocean where they have air
Speaker 3: conditioning on demand. And Florida has been counted out so
Speaker 3: many times in the past. And I'm just going to
Speaker 3: say something further, which is that every time we talk
Speaker 3: about one of these extreme weather states, whether it's Florida
Speaker 3: or Arizona with the heage.
Speaker 1: In North Carolina.
Speaker 3: Yeah, and there's this sort of like a version that
Speaker 3: people have towards the even process of moving there, like
Speaker 3: this is humans weren't meant to live in this land.
Speaker 3: And I'm just going to say right here, no, what
Speaker 3: humans do that other animals don't is we make land
Speaker 3: habitable that we aren't naturally acclimated. That is what makes
Speaker 3: us different from all the other animals. Is we find
Speaker 3: land that normally we couldn't survive in under normal conditions,
Speaker 3: and we turn it into something we can live in,
Speaker 3: and it will always be going to the most extreme
Speaker 3: parts of the world for that land.
Speaker 1: Yeah, But the question is how much does that end
Speaker 1: up costing? Right Like this is like much time in
Speaker 1: like mangrove forests without telling me you haven't spent much
Speaker 1: time in mangrove forest, Like it costs a lot of money.
Speaker 1: And there's like an environmental debate about whether we should
Speaker 1: be sure.
Speaker 3: But sure, and I get that, and there are certainly costs.
Speaker 3: But you know, there's a lot of people in the
Speaker 3: world right now who can live kind of near a
Speaker 3: beach in an ocean in Florida. People who might have
Speaker 3: probably been who consider middle class, who can have something
Speaker 3: that might have been reserved for the alter elite many
Speaker 3: times ago. And that is sort of progress.
Speaker 1: Okay. I mean, look, I get well, I get that
Speaker 1: people want to live on the beach, Like that's basically
Speaker 1: what you're saying. I think there's still an open question
Speaker 1: about how that how desirable that is from a social perspective.
Speaker 3: Yeah, well, other people, I'm not you know, I'm just saying, yes, sure,
Speaker 3: I get that, I get that in and I'll say
Speaker 3: this too, is someone who I believe there are issues
Speaker 3: with the flood insurance aspects specifically in which people who
Speaker 3: don't get to live on the beach or people who
Speaker 3: aren't living in asphalt laden areas are subsidizing the existence
Speaker 3: of people who do live near the beach on asphalt
Speaker 3: laden areas. There are issues there, and I feel like
Speaker 3: maybe the flood insurance system specifically probably needs some sort
Speaker 3: of better correlation between who benefits from it and who
Speaker 3: pays it. But I'm not an expert, but that would
Speaker 3: be my intuition. Nonetheless, I am confident that over time,
Speaker 3: the march of people towards warm weather, water and air
Speaker 3: conditioning we'll continue and we'll.
Speaker 1: Find a way. Okay, let's leave it there, because after
Speaker 1: this episode, Joe and I are going to go off
Speaker 1: and argue in private over whether or not Florida beach
Speaker 1: homes are the height of human progress. All right, this
Speaker 1: has been another episode of the Audlots podcast. I'm Tracy Alloway.
Speaker 1: You can follow me at Tracy Alloway and.
Speaker 3: I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 3: Follow our producers Carmen Rodriguez at Carmen erman Dashel Bennett
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