Why Insurers Are Pulling Out of High-Risk Areas

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1:01at 4imprint.com. 4 Imprint, for certain.

1:15Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, do you like watching the weather? I can hear the pain in your voice as soon as I ask that. It's so funny. I was wondering how you're going to start this one. I hate rain. I hate rain so much. Other than that, I don't know. It's not a big thing for me. What about you up in Connecticut? Is it a bigger deal up there? I love weather. I am sort of an armchair meteorologist, by which I mean I have several weather apps. I get very excited about thunderstorms and other types of storms. My husband, however, does not.

1:56He gets extremely anxious whenever there's a forecast of a severe thunderstorm because inevitably it ends up dumping like two inches of rain where we are and our basement starts to flood. I've lived in a house that had flood damage. It is extremely stressful experience to I mean, there's just like the direct issue of like cleaning up all of the lost damage and then like compensation and damage to the house. is probably one of the more like sort of like stressful things a homeowner can deal with. Well, you know, one of the stressful things happening right now, and we're recording this on, let's see, September 8th, there's a major hurricane brewing in the Atlantic right now, Hurricane Lee.

2:38It exploded from a tropical storm, I think just two days ago into a Category 4 hurricane. Now it's Category 5. And there's a lot of deliberation about whether or not it's going to sort of run up the Atlantic coast might even get into New England. So an interesting one to watch. Yes. And I guess by the time people listen to this, it'll be resolved, but I'm glad you mentioned that. But it's also coming in the context of a time when there is a lot of anxiety about the property market and insurance. And this came up on a recent episode that we did with Howard Hughes, holding CEO, where we talked about this huge surge in the cost that the company is paying for insurance.

3:19And there have been so many stories about natural disaster prone areas, and homeowners are either just getting staggering sticker shock when it comes to the cost of homeowners insurance and other property insurance, or there's no one at all, or companies abandoning markets like Florida, like California, et cetera. Absolutely. And it's not just hurricanes and floods, of course. We've seen wildfire risk becoming a more major thing, particularly in Hawaii and Maui recently. There have been a number of headlines, as you just mentioned, of certain insurance companies pulling out of markets altogether because they're no longer profitable.

3:56Or in some cases, like Florida, they haven't actually been profitable for a very, very long time. And insurance premiums are going up all over the United States. But it's really interesting if you look at them on a regional basis. I think in Miami, the average cost of insurance is something like$5 ,000 versus less than$2 ,000 for the rest of the U.S. So that gives you some idea of how this risk is starting to get repriced. But it opens up all these interesting questions about what is going to happen to cities, to houses, to other buildings that are in these natural disaster prone areas. You know, the thinking of things like flood insurance, which is already sort of socialized or that it's publicly funded, there doesn't seem to be a lot of appetite politically to let property owners sort of completely be without insurance.

4:50In other words, right? So it's like if the private market leaves an area, you don't really see politicians like, okay, well, I guess we can't like build here anymore. There's usually the government steps in in some way. Maybe there's like a state insurer, a national insurer in the case of floods. But of course, this creates its own issues and that it's sort of another one of these financial services that's like sort of post-market, kind of like banking in some respects. And so there is a lot going on with this market. And, you know, obviously it comes in the time of other tightening financial conditions, comes at so much attention played to climate risk.

5:23And I think we need to understand more of this area. Absolutely. It's a complex market. It seems to be getting more complex by the day. So let's dig into it. I'm very pleased to say that we really do have the perfect guest. We are going to be speaking with Melanie Gall. She's the co-director of the Center for Emergency Management and Homeland Security at Arizona State University. She also manages the Spatial Hazard Events and Losses Database for the United States, something known as SHELDUS. We're going to dig into exactly what that is in a few minutes. But Melanie, thank you so much for coming on All Thoughts.

5:56Thank you so much for having me. So maybe just to begin with, can you explain what the co-director of the Center for Emergency Management and Homeland Security at Arizona State actually does? What does that entail? So I may be the kind of person that you don't necessarily directly associate with that kind of, you know, leadership position, because by training, I am a geographer. I started out making maps, digital maps, and I came into the field of emergency management through a stint that I did in Africa. I was actually in Mozambique and I did training on, you know, how do you collect data in the field with a GPS, this kind of information.

6:38And it was after a massive flood event. And then I realized, oh, there's a great connection between what I was doing, geographic information system and emergency management, because you need a lot of logistic support. You need to know where your stuff is, where you should set up shelters and alike. And that was my route into emergency management. And so what I do here now at Arizona State University, I teach, obviously, we have a master's degree and an undergrad program in emergency management and homeland security. And I do numerous research projects. I work with our nonprofit organizations here in Arizona.

7:11So it's really a broad variety of things. So it's very exciting as a job, I have to say. You mentioned data collection. And of course, you have this database. And it strikes me that collecting natural disaster data seems extremely difficult for all kinds of reasons. I mean, even something as simple as like tallying up the dollar amount spent on recovery strikes difficult and what these trends are. And I could imagine that you could have an increase in dollar amounts for an area and because there's more disasters, or maybe because there's just more building and more people there that could also cause that.

7:46And so like disambiguating some of these effects. Talk to us a little bit about just the challenge of measurement, because if we're going to get into insurance and know like how much risk is in a given area that you have to start with like, well, how much dollar what is the dollar value of the property in an area? So talk to us about the challenges of measuring these types of things. So let me start with telling you a little bit about where we get our data from and then into the measurement, because we are a secondary user of disaster loss information. So we get the vast majority of our data from the National Weather Service or better, you know, the National Weather Service feeds the information to the National Centers for Environmental Information, NCEI.

8:31And that is where we get the majority of the data from. So it is actually your local forecast office, your local meteorologist that collects that information. So it is not an economist or an assessor or anything like this. So it's the local forecast office that collects that information. So I came into this arena of collecting disaster losses way back in the days when I was a PhD student, where my professor had this idea that as a geographer, it should be fairly easy to develop profiles for the country. You know, how does County A suffer more from hurricane damage than flood damage than County B?

9:11And lo and behold, there was not really an easily accessible database where you can get this information. And that was the really the starting point for setting up this database. So now we're in the business of compiling data that is already assessed from different federal agencies. So NCI is one of our main data sources. And then we also use data from the U.S. Geological Survey, especially related to geological hazards, earthquake damage, volcanic eruption damage, tsunamis, and the like. Because the Weather Service obviously only collects data related to meteorological and hydrological events.

9:51But we are interested in compiling a database that covers all natural hazards. So we are vastly using data, and there's only a tiny fraction where we compile our own data, and that is landslide data. So landslide data is really not or has not been easily accessible. There was a landslide act passed a few years ago. So that now triggered the U.S. Geological Survey to get more serious about collecting that data. And so we decided that we want to include landslide data in our database. And that's where we then started like scouring newspapers, websites, and we're applying the same sort of assessment methodology that the weather service is employing.

10:35Because the main users of our data are local planners, hazard mitigation planners. And hazard mitigation planners sit in the emergency management division of your county or of your state. And they are actually charged by law. They are not required to compile what is called hazard mitigation plans, but they are incentivized to compile these hazard mitigation plans. And in these plans, you have to do risk assessments. And these risk assessments need to include a history of past losses. And that's then when people tend to come to us. So measuring losses and assessing them goes exactly, you know, Joe, you already mentioned, it's a question of, you know, how much property do we have in an area?

11:21And what's the property worth? So there are two types of losses. There's what's called direct losses and indirect losses. So direct loss is when you see, you know, the destruction of a storm or a hurricane, like a loss directly tied to the event. That is what we include in our database. We only include direct property damage, direct crop damage, injuries, and fatalities. So that would be, for instance, a person who got injured or drowned in a flood or something like that. And the indirect losses is, for instance, when a business has to shut down for a given time because they can't operate, their power is down or something like that.

12:01And the indirect losses we do not include in our database. So what I'm trying to say is even what we have in our database is way underestimating really the burden of losses that we have in the country from natural hazards. So I was going to ask, what happens when you see, I mean, you just gave us a great summary of how tricky it can be to measure some of these costs. But what is happening if you get a wildly different estimate of the cost of a certain disaster? And for instance, one thing I read was that I think the NCDC estimates that the damages from Hurricane Katrina were something like$125 billion versus what Sheldon says at$80 billion.

12:43What's happening there when you get a discrepancy like that? And does it matter in the real world in terms of contingency planning? So it does to some degree. So it matters when you as a community have to justify why you need money and why you want to invest to reduce the losses. So communities have to do cost benefit analyses to justify why it makes sense to invest, maybe, you know, building a new retention pond or, you know, changing their building codes. And anything that has a price tag associated with it, you know, these communities have to run benefit cost analyses and say what we're investing is reducing losses in the long run.

13:25And that's where it matters what you can document in terms of past hazards. So the discrepancy in estimates that you just mentioned is really that's our standard business because it is so tricky to estimate these losses. There's the direct, there's the indirect losses. There's also insured and uninsured losses. So it's always a question of sort of what slice of the pie and how much of the pie people looking at when they estimate losses. And that's also where you see, you've probably seen it many times. NOAA, the National Oceanic and Atmospheric Administration, they have what is called billion dollar events.

14:00They get cited all over and their estimates are always vastly higher than what we have in our database because they rely heavily on insured data. And so insured data is, again, different from direct losses we document. And this is where all these discrepancies come from. So in my line of business, when it comes to direct losses, we tend to be conservative. So if we have competing estimates, we use the lower estimate just to be on the safe side of not overestimating losses. But that really just might aggravate the problem because we already have an underestimation problem and then we are conservative.

14:40But that is the approach we've taken at the start of developing this database. Well, I want to get into, obviously, we want to get into what's happening right now and what we're seeing in insurance markets. But I think just to like before we get to that, are the costs of natural disasters going up? And maybe that's a naive question, but I always have these things. Oh, is it just that we're getting more attention to natural disasters in the media? And is it just a sort of like, is it just a narrative that there are more, that there are more wildfires, et cetera? Or is it like, what are we actually seeing big picture in the data?

15:17Are things, are we, you know, is it getting worse? It is getting worse. So our risk is going up. We have more severe events. We have more events. The question is, why do we see higher losses? So higher losses could be a function of simply having, you know, more events, more extreme events. and or it could also be a function of what you mentioned earlier, Joe, more people living in high risk areas, more property or simply more value being accumulated in high risk areas. It could also be that maybe as a society, we don't do enough to mitigate these losses so that we get outpaced by the risk that we're experiencing.

16:00Or it could also be that we have not as resilient of a society, resilient infrastructure, resilient residential homes, and or it could also be an increase in what we call social vulnerability, meaning you have more people that lack the capacity to prepare for, respond to, or recover from an event.

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17:50Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. Let's pivot to insurance and talk about what's going on there. And maybe just to begin with, could you sort of walk us through the landscape of this type of insurance as it exists now.

18:28So let's say, you know, a hurricane happens in Florida. What's the sort of process by which a homeowner would expect to get reimbursed? Because my understanding is there's different layers of private insurance, and then there's sort of federal support potentially as well. And of course, there are also the reinsurers who are sort of backing the upfront insurers. Can you walk us through how all that would work in a typical case. Yes. So, you know, just let me state again, I'm a geographer in training, I'm not an insurance or economist expert. But I can tell you that a it's very complex, because it varies, like you said, from state to state.

19:11And I think what a lot of people don't realize is you might have to purchase different insurance policies to be covered. So I think most people assume all this is covered in my homeowner's insurance. And it is not. And it depends on where you live. Like, for instance, landslide risk not covered in any policy in any state in the US. So landslide risk is something that you cannot file an insurance claim on because you can't get insurance for it. So let's go to Florida. So if you live in Florida, So you would, let's say, ideal scenario as a homeowner, you have homeowners insurance. You also have flood insurance from the federal government.

19:56Also, many people don't realize that that's a federal program because it's administered by your local insurance agent. So you buy your flood insurance policy from your local agent. But actually, you know, the company that insures you is the federal government. And then depending on what state you're in and exactly how the policy works, you also have to buy wind insurance. And states have different sort of thresholds. You know, when is a storm actually a hurricane? Does it have to reach a certain wind speed then for the wind insurance to pay out over the homeowner's insurance? So for you as an individual, A, you have to navigate.

20:38What do I want to insure? What do I, what can I afford to insure? What kind of different policies do I need to buy? And then when you actually have damage from an event, and we've seen this, for instance, after Hurricane Katrina, you very often might face a situation where you then have to argue with the insurance company if the damage that you have was caused by wind or caused by flooding. And we see discrepancies where, you know, one neighbor, their wind insurance paid out because their insurance company said, yes, we recognize this is wind damage. And the other neighbor didn't get anything from their policy because there the insurer said, oh, this is flood damage that you have.

21:20So having insurance does not necessarily mean that policy is also going to kick in because there might be disputes with regard to what type of hazard caused that damage. Wow. Why are insurance rates up so much? I mean, I know this is like the whole question. It's big. But if someone asks you that, me, why? Like in Florida, you know, I saw there's a stat 42 percent higher for homeowner home insurance premiums. I mean, I get that like, OK, generally speaking, maybe natural disasters, they're trending higher. But that is like a staggering amount. And, you know, I'll add to that. You see when you see companies desert estate.

22:01Why? I mean, why can't why don't they just charge more? And what's happened in the last couple of years that's so different than in the past? So let's maybe start with the statements that these insurance companies released, why they are showing out of the markets, especially like in Florida. So they cited a higher risk in California was higher wildfire risk, which, yes, check, we see higher risk of that. They had higher building costs. So, you know, spending, paying for the cost of somebody rebuilding a home, that has gone up as well. And then they also cited an increase in their own insurance policies, meaning insurance companies insuring with what is called a reinsurance company.

22:45That rate has also gone up for them. So they had to make a decision, you know, are we going to or can we pass on these higher costs that we have and create an insurance product that is competitive in the market? So can they then offer a insurance premium that people would be willing to pay? And obviously, they made the decision that they're going to pause writing policies. And I think, you know, calling this a pause is important because this is not the first time that we've seen this happen. Insurance companies have retreated for a certain time period and then have come back into the market. So we've seen this, for instance, in the state of Louisiana, where this happened before.

23:26Same happened in Florida. You could also what you didn't see in the statement, you could also interpret this. This is what I personally interpret. This approach as well is sort of a signal to a state government saying maybe we need to rethink our partnership or maybe we need to engage in a partnership. And maybe there needs to be legislation that incentivizes us to come back, because, as you mentioned earlier, we do not want people to be without insurance because we know research shows that. people recover much, much slower from a disaster if they do not have insurance. And it's obvious because you don't have the financial resources.

24:07Unless you have massive savings, then maybe you don't need insurance. But if you're a person like me who doesn't have massive savings, I need insurance if I need to recover and rebuild my home. And so we want people to be insured. So the fewer people we have that have insurance, we are really foregoing what we know is a key factor to disaster recovery. Tracy, Melanie said something. There's a lot there. But one thing that I just want to sort of pull out is that point about higher construction costs, because we talk about this all the time with inflation and labor costs and materials, et cetera.

24:42I mean, if it's like significantly more expensive in 2023 to rebuild a home than in 2019, then just everything else Plus, aside, like mathematically, you'd expect, yeah, of course, like insurance got to be, you know, compensated for that. Absolutely. Melanie, I want to go back to something you just said about, well, maybe the insurers are sort of angling for legislative assistance and no one wants people to go uninsured. I mean, another way of looking at it is maybe we should be incentivizing people to move out of these risk prone areas by not providing them insurance and saying like, hey, if you want to live here, you're on your own.

25:24And if something happens, that's on you. I mean, is that a legitimate thought to have about this? And is there any evidence that people not having insurance actually does encourage them to move elsewhere? So what really encourages people to have insurance is having gone through a disaster. Like we know a key driving force for people to become proactive, for instance, with regard to maybe thinking about elevating their home, purchasing insurance, maybe even moving. Sort of really bracing for a future event and preparing to have less impacts in the future. The key driver for that is having gone through a disaster before.

26:05So experience is a key factor. So no one will change their behavior until they've actually been flooded out of their house? Very much. For a lot of people, yes, that's the case. Because you see it all the time. Like you turn on the, you know, turn on the TV, you will see people say all the time, oh, I've never thought this is going to happen. And this I never thought is going to happen factors into the decision to not buy insurance. Because, you know, if you think it's likely to happen, and it's a good investment for you to make? Like, you know, you only have a limited amount of resources, so you have to make trade-off decisions.