Fires and Floods with Firas Saleh
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Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by a bunch of colleagues, my two trusty co-hosts, Marissa DiNatelli and Chris Dries. Hi, guys. Hi, Mark. Hi, Mark. You guys look chipper. Have I ever used that word to describe you guys before, chipper? I don't think so. I don't think so. I think that's a podcast new. It's a podcast new. You're chipper. You're chipper. You look chipper. All right. And we got Mr. Collier. Mr. Collier.

How's it going, everybody? Actually, he talked about Chipper. Look at that guy. He got a movie star quality, man. What the hell? Oh, yeah. Thanks. I'm not kidding. It's the warm weather, I think, is bringing everybody, lifting everybody up in this part of Pennsylvania. Oh, is it warm up in PA? Yeah. 60s, so.

Mercy, you have anything to say? Nothing. And we have a colleague, Faraz Saleh. I'm sorry, Faraz, I just butchered your last name, but good to have you on.

Thanks, Mark and Tim for having me on your podcast. Very excited. It's a form of endearment if I mess up your name. Everyone knows that because I get into big trouble. We have now invested in, and I want to see what's happened to this, but we invested in on Zoom or we're now, I think we're on Zoom or Teams,

You can see person's name underneath. You can also get the phonetic pronunciation written for you, but you have to pay an extra fee apparently. Okay. That's good too. You didn't know that? No. Yeah. You didn't have to pay an extra fee. Yeah. We, yeah, we, we pay, didn't we pay extra for it? No. I don't think so. Someone told me we had to pay extra for it. No, it's free.

It's part of the service. Did you pay extra? Oh gosh. Well, that brings up a whole nother set of issues. I pay all for all kinds of stuff. I have like, what the heck is this I'm paying for?

Anyway, I won't go down that path. But Faraz, you are obviously Moody's colleague, but you came to Moody's via RMS, which is obviously the large, I think of you as a large insurance analytics firm.

firm. Is that the way you guys describe? Yeah, we essentially enable insurance, reinsurance companies to make more informed decisions using our models and data and our insights. So that's sort of what RMS has done.

pioneered, I would say, the catastrophe modeling industry 35 years ago with earthquake models and eventually expanded with other panels such as wind or hurricane and then expanded to flood, earthquake, wildfire with the advances in computational resources and with the risk landscape continually evolving.

Right. And you lead the way on floods and wildfires. Is that correct? Yeah. That's correct for the North America region. Yeah. Oh, for North America. Oh, I see. And Moody's purchased RMS, what, was it before the pandemic? No, it was after. It was after the pandemic. Yeah. Actually, they closed on my birthday. I was very excited. Ah, okay.

Is that real? I guess. Yeah, I guess that would be exciting. Yeah. Yeah. And you we were we were talking before we got on the podcast. You've had a pretty interesting story to where you are today. You want to give us a sense of that? Yeah, sure. So, yeah.

Moved to the U.S. in 2013. It was just after Hurricane Sandy. You see how he does it? All his life is based on events. Maturated by catastrophic events. Catastrophic events that are shaping my life. Yeah, you can tell. Yeah, so, well, I came to the U.S. in 2011 on vacation to see my family and Hurricane Irene hit, right? So that was, if you guys remember, August, December.

No, we don't. It was August 27th. It was horrible. We don't remember that stuff, Faraz. We're weird, but we're not that weird. We're not that weird. You are really weird. Yeah, because it coincided with my vacation. That's why I remember. Oh, see? Of course. So anyhow, that was the 2011 vacation. So we decided to come back, I would say, towards the end of the hurricane season. So we came back, I would say, end of October. Uh-huh.

2012, the following year. And within a week or so, Hurricane Sandy hit New York. So yeah, back then my wife said, you must know something I don't know. Like either a hurricane or a flood.

So that's my story a little bit with Sandy and Irene. And then I moved to the US in 2013. A few months after that, you know, worked in the New Jersey Institute of Technology and then Stevens Institute of Technology. And most of my work actually was focused on Irene and Sandy, right? Because there was a lot of funding from these events, right? On trying to better understand the risk, how that evolved, the enhanced forecasts, right?

understand the element of environmental impacts, what mitigation we can do and so on. So at the time when I was during my vacation complaining about it, and then eventually it became what I focus on, right?

My background is in... We were talking about Stevens. Most people... Stevens is a wonderful university in Hoboken, just across the Hudson from Manhattan. You have these beautiful views. I was recounting before we got on. One of my friends from high school went to Stevens and said, hey, come on up and spend the weekend. And we saw...

Harry Chapin speak at this. It was a university venue, very small, kind of like, I don't know, maybe 50, 60 people. And it was just, you can see, I still remember it because I could see people

Harry Chapin in front of me. Cats in the Cradle, right? Is that right, Matt? Cats in the Cradle? Yeah, that's right. For all you young people who know nothing about anything that's important like Harry Chapin. You know Matt, though. You know Matt. Yeah, I do. Off to the right is this beautiful view of Manhattan in the middle of the night. It's just a gorgeous thing. Apparently, I didn't realize this, but RMS has an office, now Moody's RMS has an office in

In Hoboken. Yeah, we have a beautiful office on the waterfront. We can see actually the Moody's office from there. Ah! From the Hoboken office.

- Well, it's good to have you aboard. And you were also saying you are of Iraqi, it's Iraqi background, right? - That's correct. My family, my parents are from Baghdad originally. - Baghdad. - Born in France, in Paris, yeah. - Cool, so do you speak Arabic? - I speak Arabic, yeah, yeah, yeah. I speak Arabic, French, and English. - Oh, I'm so jealous, I'm so jealous.

So we switch like at home, it feels like the United Nations because, you know, my wife, which Arabic, the kids would respond in English. I speak French. They still respond in English. So it's an interesting dynamic. And which of the three languages do you like the best? I'm just curious. I like, you know, I like a lot the French language because...

Different ways you can express. There's the element of if I know you very well, then the discussion is very different than it's a formal discussion. All these different elements, I would say. Yeah. And you and Chris have done a lot of work together, right? I mean, you've been writing a bunch of articles, right? Chris, what do you guys have worked on? Just to give the listener a sense of the kind of things you guys are working on. Because obviously we're going to talk about...

You know, what's going on with regard to climate, what that means for insurance markets, for homeowners insurance, for the economy. That's where we're headed here. But before we do that, you want to describe a couple of the things you guys have been working on, Chris? Sure. So we've written a couple of articles for the Global Association of Risk Professionals, GARP. We have a monthly column there.

that we do with them as part of our economic analysis and kind of focus on risk management. And so in December, we wrote an article on flooding

and some concerns about the National Flood Insurance Program and how that's, you know, underfunded and perhaps not assessing risk properly in terms of the premiums that are being charged. And then more recently, just this month, we released a piece on the wildfires, wildfire risk in general. So we did touch on California's wildfires, but the piece was a bit broader than that. And Faraz kind of opened my eyes to a couple of

really interesting risks related to wildfires or just the extent of wildfire risk. It's not just a California, Western United States issue. The Northeast, for example, has had a number of wildfires. We have wildfire risk in Japan and Russia, Australia. So it's much more widespread than certainly I thought. And so it was interesting

Like I said, a really eye-opening piece and just the impact on individuals can be direct. Of course, if you lose your house to wildfire, but lots of indirect impacts as well in terms of insurance premiums and just the reassessment of the risk that we're seeing across the country.

Yeah, just to quickly link it back to the economy, we got the Consumer Price Index for CPI for the month of February today. We're recording the podcast a bit earlier. This is a Wednesday afternoon Eastern time. We generally do this on a Friday, but just because of travel schedules, we're a little bit early. But with the CPI, Matt, we've been getting some pretty large increases. I know in motor vehicle insurance,

Can you see homeowners insurance as well? Is that broken out in the CPI? I think it is. I think it is too, but I don't have anything offhand if you give me. Okay. It's in there with renters insurance. Yeah. Broken out separately. Oh, it's there. Yeah. Okay. We'll come back to that. We'll come back to that. But, you know, Faraz, this has clearly come to the fore, you know, given...

all the seeming climate events, you know, the most recent obviously being the disastrous wildfires in Southern California. And, uh, you know, this past summer, we've, uh, previous summer, we had a bunch of pretty bad storms and, uh, that hit Florida that is having an impact. Is that, is it just perception that these storms are more frequent, these disasters are more frequent and more costly, or is that really what's going on? Is it, are they more frequent? Are, are, and

and more costly? Yeah, it depends on the peril, right? So what we're seeing is we're seeing, for example, in the context of wildfire, right? So 10 years ago, when we talked to the industry about wildfire, you know, the general feedback is, oh, this is a peril that is manageable. This is a peril that, you know, when we were looking for feedback, how do we need to build a full, you know, blown probabilistic model to understand the risk? We were told, well, this is more of a nutritional peril. So we collected data from,

marketing team over 60 years of insured loss for the industry. Insured loss meaning how much did the insurance companies pay for wildfire as a peril, right? And when you look at the numbers, it's quite interesting. It really looks like an acoustic shape, if you will, right? So from 1964 until all the way to 2010, we had almost only $1 billion in terms of losses, right? And it's stranded, right?

And then the last 12, 13 years, we had 45 major wildfire events. So this essentially cost the industry about 75 billion US dollars, just to put that in perspective, right? And this was before what we just saw with the LA County wildfires, right? So when you stack it up, you basically see that trend, right? So one thing that

the model development team was trying to understand and model is, well, are we seeing a climate change signal? Is this climate variability? What are the different factors that are leading really to this escalation in the hazard and the risk, right? Now, when you put the insured losses for California recent fires, right, you're talking about, at least based on our movements,

Moody's RMS insured loss estimate could be up to 30 billion, right? So this would be the biggest event compared to the campfire and what we had in 2018 and so on. This event in Southern California is close to 30 billion in insured losses. Insured loss only, yeah.

Right. And in terms of which is only part of the loss, right? Because it's not all insurance. That's correct. It's only part of the loss. We look at the residential, commercial, and auto, right? So these are the three, you know, I would say components that we look at. We don't look into, for example, the cost to the infrastructure, pipes, contamination. That's kind of like, yeah, that's, yeah. Yeah.

Do we have a sense of the total loss, including the uninsured loss? I mean, has anyone come up with a reasonable estimate for that? I know that's tricky. We try to do that. It's tricky. We've not seen, you know, we've seen a lot of estimates floating early on, right? But we've been mainly focused, I would say, on the- The insured loss. Yeah. Right. And with the hurricanes as well, are they more frequent and more damaging? Is that-

Yeah, I mean, that's a great question. We're seeing an uptick in the frequency, right? Especially in the area of Gulf of Mexico, right? We had Helene and then following that we had Milton and then two years before that we had Ian. So there's all these like, you know,

extreme, I would say, hurricanes that are happening in some of these regions. In Florida, we had Louisiana, we had, if you remember, we had Ida just after COVID. So we had a lot of flooding in New York and New Jersey, even though it made landfall.

in Louisiana. So there's this element of, I would say, the wet getting wetter, right? Because when you have an increase in temperatures, it basically means more water, moisture when it comes to rainfall. So the extremes are becoming more extremes and droughts are becoming also more extreme. So that's sort of a little bit in terms of how the climate is evolving.

So the storms are and the fires, the natural events seem to be coming more frequently and the damage is more serious. The other perception that at least I have is that this is starting to do real damage to the insurance industry.

In part because the insurance industry first of all, there's losses are greater but also it's getting increasingly difficult for the industry to pass along the higher costs in the form of higher premiums and we'll come back to the premiums but they're because they're going up but they may not be going up as fast as they need to to Compensate for the risks that the insurers are facing. Is that is that perception? Correct? I

That's correct. And there's a lot of regionality to it. So depending on which state the carriers are operating. So, for example, when you think of California. So California has a Proposition 103 that dates back to 1988. And what that means is you cannot, for example, include the cost of reinsurance in the pricing. So that's one element where you cannot. You cannot. You cannot.

You cannot, for example, use catastrophe models to inform your loss cost that could be used for rate making. Right. So that's another one. So, you know, when you look at, for example, if you want to put that in perspective, right, if you look at the average cost of insurance for a residential property, let's say for 300K dwelling, right, you see that California is relatively, I would say,

about maybe 35 to 40% lower than the average, because insurance companies are not able to incorporate all these different elements, and they can't increase by a specific threshold more than 6.99% without a public hearing. That has been changing under the

the new California Department of Insurance Sustainability Act. So they opened up the process to allow for using catastrophe models. So that is something that is new. And, you know, we're starting that process to review our Moody's RMS model there with them as well. So we're expecting things to sort of start to stabilize, but, you know, to put it in perspective,

Insurance carriers, for example, in California, they basically paid to some of these latest wildfires more than 20 to 25% of underwriting profits because of all these extreme events. I'm here in Florida and my experience here is that roughly the same kind of problem that

We're getting hit, costs are rising, but the insurance industry is struggling. Premiums are definitely going up, and there's a lot of denial of insurance. So insurers are becoming more circumspect and cautious about providing actual insurance. But despite that, the insurance industry hasn't been able to kind of keep up

It's starting to weaken their viability is and the response so far has been to set up these government-backed Insurance companies, I think here in Florida is called citizens. I think in California. It's called is it fair they call fair California Fair Plan correct the fair plan so

So same kind of deal here in Florida too, and that's going on with California. Maybe not to the same degree, but the same kind of dynamic playing out. Yeah, yeah, yeah, absolutely. So, you know, one, I would say one important measure, right, to evaluate the health of the insurance market is what we call these, through the lens, I would say, of the insurers of last resort, right, or the residual market, which means if I'm in California today, right, and I'm

my policy is not renewed, right? Or I'm dropped from my carrier. Then I go shop around. I can't find any other carrier that is willing to insure my property. Then I go to the California Fair Plan, which is essentially the last resort, right? Now,

what we've been seeing, for example, in California is a huge growth in the California Fair Plan. So in 2018 or 2019, their exposure was only 50 billion US dollars. And now their exposure has grown to almost, I would say, 500 billion dollars or even more. So it's almost 10x of growth in exposure. And of course,

they're accumulating all that exposure in high-risk areas. So that's the important part of it. But what's important also to note is the California Fair Plan is essentially financially supported by admitted carriers that are licensed to write insurance in California, which means if they don't have enough money to cover the losses, they would assess the market, right? Mm-hmm.

When they assess the market, the carriers that are admitted in the market would have to go pay based on their market share. So they just assessed the market two weeks ago by $1 billion. And now they send the bill and the carriers that are admitted would have to pay within 30 days. And do they pass that along to...

For the first $1 billion, they can pass 50% of it to the consumers. Right. I'm thinking back to this past summer. What was the storm that was in Milton? I think it was Milton that hit the west coast of Florida yesterday.

There was some discussion if it kind of went up Tampa Bay and hit downtown Tampa, the losses would have been so catastrophic that, who knows, but the worry was that it would be so catastrophic that it would undermine Florida's insurance market. You'd see failure, that there would be failures. Is that overstating the case? Is the industry...

that fragile that if we get a major storm, you know hit Tampa Bay that it could destabilize the insurance? Yeah, I would say it depends right because There's a huge growth for example in the citizens and like the citizens of Florida, which is also another last resort so it peaked and

it peaked in 2022 at about 1.4 million policies right so that could have been you know and and a lot of that risk is concentrated in the in these regions right vulnerable to hurricanes but now we're seeing some sort of a drop right because they're having all these programs essentially to offload these policies to the private market so the way it works right as as the market starts to stabilize you see more and more of these policies going back to the to the to the private market

One thing maybe that's important to note here is the flood insurance, right? Because even with citizens, right? With citizens, you're essentially getting a wind insurance policy, right? But now recently, they have some recent requirements following Hurricane Ian in 2022. And the requirement says if you want to maintain your citizens policy, you have to also get a flood insurance policy, which is completely different, right?

And it doesn't matter if you're in a flood zone or not. You have to obtain a flood insurance policy. So that's another one, right? So we're starting to see that dynamic of more flood penetration or more flood, I would say, uptake. And we're starting to also see that

certain, I would say, consumers are starting to shop out to look for other providers where they don't need to get a flood insurance policy, given there's no lender requirement. I guess I'm looking to you to give me a warm, fuzzy feeling for us. I mean, should I feel warm and fuzzy? I mean, push comes to shove. Is the insurance market going to hang together? Or should we be worried that there could be some kind of

What's the word? Crisis in these insurance markets. I mean, I know it depends on the storms and the fires and the events and everything else, but given the direction we're headed here, that hockey stick you were talking about,

Is that something that we should be worried about? The viability of the insurance markets and the insurance industry? Is that something that you worry about? Are you going to give me a warm, fuzzy feeling about that? No, I think when I think about it, it's...

When you look at the insurance market as a whole, you have the carriers, those are the primary carriers that are underwriting the policies. And then, of course, you have reinsurance, global reinsurance companies.

And then, of course, you have the element of the ILS or insured link security. So there's all these mechanisms, I would say, that allow the insurance market to continue, I would say, to operate in these markets. Insurance is all about taking risks, right? Right. It is really...

no bad risk. There's really bad pricing of that risk. Bad pricing. That's the important aspect because in many of these regions, the rates are not aligned with the risk. So what we're seeing here is we're starting to see that shift. I was reading a report that came out from the Budget Senate Committee. They reached out to all the carriers in the U.S.,

and collected information about, okay, where are we seeing non-renewals, right? And they collected information for about, I would say, 65% of the market share.

And you start seeing like, yeah, the non-renewals are essentially happening in these areas that are very, you know, very vulnerable to risk from wildfire, from storm surge, from flood, right? So carriers are understanding the risk much better now, right? They can understand that, okay, this is an area that is at very high risk. What should I do about it? Or this is an area at very high risk.

but they're investing in mitigation, right? Because remember, one of the biggest challenges is the aging infrastructure, right? You have aging levees, you have aging dams,

You have, for example, aging utility infrastructure that could potentially, you know, create some ignitions that could create wildfires. So these are elements where insurance companies are better understanding the risk through the lens of, you know, enhanced data or models. And they're now they can understand, well, yeah, this is an area that was vulnerable before.

But now I see that, for example, the federal government or the state invested in a levy. You see downtown Manhattan, you know, they're investing billions of dollars in seawalls and flood barriers, in Hoboken, portable flood barriers, right? Yeah, so the risk, the hazard is there, but we're also starting to build differently, right? And they're factoring in all that information when they look at the risk, right? Okay, so my interpretation of what you're saying is, right,

we're adjusting, you know, all these different mechanisms or, you know, the insurance industry and market are under stress because of the reality of these storms and the costs.

So it wouldn't be surprising that there'd be stress, but the industry is adjusting in all these different ways. You mentioned kind of the reinsurance and the risk sharing through securities markets. You talked about the mitigation efforts to control

to make sure that communities that are more at risk for being hit by these things are in a better spot, improving the infrastructure, that kind of thing. That's what you're saying to me. - Yeah, exactly. - Yeah. - Yeah. - And I guess if at the end of the day,

Would you think if we got nailed by a really catastrophic storm, a cat five that went right through Miami, I'm just making that up, that would be very expensive, obviously, stress any kind of system. You would think the federal, the government would step in at that point and help out, you would think.

Yeah, it depends. For example, when you think of, I mean, NFIP, right? The National Financial Program. They just took a big hit. They estimate that their losses from Helene and Milton could reach $10 billion, right? So that is really, that puts it very high. That puts it equivalent to their losses with Harvey or Sandy, right? So they had to go borrow again from Treasury, right? They just borrowed $2 billion. Right.

And now their debt stands at about 22.5 billion US dollars. So every day they pay around $1.7 million just in interest to treasury. So it's going to depend on who gets that hit. So if it's NFIP, is it citizens? The fair plan just saw that in California. So it's just going to depend. But one thing, you know,

that insurance companies look at is really diversification, right? Because really diversification is the name of the game, right? It's where can you diversify the risk and spread it to make sure that you're not very exposed when an event like that happens. Faraz, did you notice your co-author, he gave that kind of a skeptical look when I said the government would step in and help out here. Did I misread you, Chris? I mean, that was a pretty, you look skeptical. I am skeptical. You know what happens Friday midnight?

What? If nothing, the government shut down? The NFIP expires again. The NFIP can't write any policies. Can't write any policies. So it's been this way for forever now, right? It's always touch and go. Yeah. So I don't know if we get hit by a big storm, right? Will the government, will there be sufficient interest in

to cover it, to provide support. This program is under FEMA. FEMA is also under the gun when it comes to DOGE and whatnot. I think at the end of the day, probably yes, they would step in, but I don't think there's any guarantee anymore. I think maybe also an important element to highlight is the element of

insurance gap, right? Not everyone, for example, has flood insurance, right? Even if you, like Mark, you mentioned Tampa, right? If you go maybe two miles inland, you're talking about take-up rates, which means, you know, how much, you know, policies are within a zip code of less than 5%, right? So which means 100 homes, you have maybe 5% that have flood insurance.

When you look at Asheville, North Carolina, that area that got hit really bad, it's less than 1% of properties had flood insurance in that area, which really means they're on their own, right?

Now, flood, possibly, it depends on what kind of flooding that property gets hit by. If it's fluvial versus coastal storm surge, it's a completely different story. But generally, flood, what we see is more of content damage. So if you look at NFIP, they had

Over the last 20, 30 years, they had 1.1 million claims and they paid around $70 billion in losses. You're talking about $65K to $70K on average for a claim. But when you talk about wildfire, you're talking about a full destruction, right? The whole property is gone. Content is gone.

everything is basically gone. The size of the claim is completely different. That's one thing that as we build these models, as we talk to the market, there's a huge difference between the parallel

the type of destruction and so on. So, but you know, with flood, we know there's a big insurance gap. But one thing I would say the California or the LA wildfires highlighted was also an insurance gap when it comes to fire, right? Because historically, really, who doesn't have a wildfire insurance, right? And now when you look into,

you know, these areas in LA County, you know, you see there was a lot of non-renewals and you also see that there were many properties that went uninsured, which, you know, because if you don't have a mortgage,

there's no requirement for you to get insurance, right? Essentially, I've been living in this house for 30 years. I go to another carrier or to the fair plan. It's very expensive. I can't afford it. And I'm just going to go uninsured. So there's a category or go underinsured. Yeah. Yeah. Yeah. Well, it does feel like at some point, who knows when we're going to get nailed by a bad event.

where it's going to test government, state government, federal government, whether you'll see whether they stand up or not. I suspect ultimately they would, but it'll be a real test. So that gets to the other way to adjust to all this, and that is to raise, first, you deny service. You don't think you can charge a premium if you're an insurance company that would cover the risk, but you also raise premium, and we're seeing premium increases rapidly.

to a very significant degree. I know, Chris, you follow that data pretty carefully, particularly on the homeowner's insurance side. I know vehicle insurance is up too, and for lots of different reasons, also including, I think, climate damage, weather damage. But do you know, Chris, do you have any sense of the numbers in terms of the homeowner's insurance premium increases?

Yeah. You know, the data is a little bit hard to get, but I think one of the better data sources I've seen looking at actual mortgage records. So the fact that people have to escrow for insurance, I think it showed about a 14% increase if I'm not mistaken over the last year. So that's- 14, that's nationwide. Nationwide. Homeowner's insurance has gone up 14%.

Right. And that's after several years of double digit increase. It continues to rise. In terms of weather, I always get confused. What does that really cover when it comes to weather events, the homeowners insurance? What does it cover exactly?

It generally covers named storms. I was just looking at my policy last week and I think I'm underinsured. Oh, no. That's not a good sign. I don't think we can rebuild. Yeah. So it covers named storms or severe convective storm because that's a big parallel, right? Severe convective storm, this is a high frequency parallel, right? And then it's causing a lot of issues.

And it doesn't cover flood, right? And then after that, it depends on, you know, how much, what coverage do you have? Is it standard content? For example, how much of additional living expenses?

is covered in that policy, what's your deductible for a roof, there's all these different elements of it I would say. That's a great point as well. This number doesn't reflect the fact that you also have people who have, or homeowners in general, have been increasing their deductibles. So it's paying more insurance, more premium for less insurance essentially. So there's another under insurance piece of it. Yeah. But I think when you look at the

When you look at the four major subcomponents, right, which is the mortgage interest, the mortgage primary balance, and then the property tax, insurance on average has been going up significantly higher than the other three components, right? Yeah. Well, I think that this is fuzzy in my mind, but there's a growing, not inconsequential, and growing share of homes where the

property tax plus the insurance is now more than the mortgage payment on the home, which is...

- Crazy. - Crazy. - I mean, even with NFIP, right? So NFIP, what they did, right? They went and revised their rates two years ago, right? And now what's gonna happen is for some of these rates to become aligned with the risk, they could go up by 700, 800%, right? Because what's happening now is if I'm in a flood zone, I'm subsidizing someone else if my property is not vulnerable to flood. I'll give you an example.

Lee County in Florida, right? Now the average premium is 900 and I think it's $960, but that's expected to go up to almost 3,400 on average, right? But of course, it can go up immediately. They have, you know, it's more of a trade path, right? At 18%. So some of it will reach eventually by 2037, some of these areas would reach their full actuarial premium, right? So that's what's going on.

And you can say that, Pete. And Chris, I know you've done work here as well on house prices. You can see it in house prices, right? Particularly, I mean, Lee County is a pretty good example because Southwest Florida, I believe house prices are actually falling. Yeah. Yeah, you're starting. You know, it was a bit of a mystery during the pandemic years, right? Despite the fact that insurance had been going up and continued to go up, we hadn't seen a house price. We actually continued to see house prices rise faster, right?

And I attribute that to the low interest rate environment, right? You were able to kind of play off the fact that, okay, I have to pay more insurance, but I'm paying, I've got this great deal when it comes to the interest rate. Now that that's no longer the case, I think you are starting to see the homeowners reevaluate. Some folks on a fixed income are retiring in Florida, right? It just is not feasible anymore. So they're having to

having to sell and move. And I think you'll continue to see this reveal itself in more and more markets as people realize the full cost of ownership, not just the mortgage rate itself, but the insurance premium. And as Faraz said, it might moderate here, but it's still going to go up as the premiums catch up with the actual risk. Yeah. Well, I guess...

This sounds a little, I mean, green eye shade perspective. Doesn't this have to happen, though? I mean, we are locating and living in places that are at real risk of getting nailed by climate events and

I mean, we've got to adjust, and this is the way it works. The cost goes up for living in those areas, and it pushes people out of those areas. It's a very painful adjustment, particularly for the families that are involved, but how else would it happen? I mean, I think, am I wrong? Is there any other way? I mean...

There's other ways, but that seems like the most efficient way of doing it. Yeah, we've been looking a lot on these trends, right? So what we've, and we looked at it also globally, like a recent paper that the team published was looking at

in terms of the growth of exposure in flood risk areas. And what we saw is really the population growth in flood prone areas has been, I would say, non-linearly exceeding the growth in non-flood prone areas. And this is in North America, this is across the board, which means that we're continuing to see expansion or urbanization in these flood prone areas.

No one would talk about it in the past because, yeah, it would flood, but there's no exposure there. So no one would report it. But eventually now when you're continuing to build in it and now, yeah, now you're going to see it all over the news, how this area flooded. It never flooded before. And so you're seeing that dynamic. But at the same time, I think in coastal areas, we're starting to see a little bit of a reverse of that trend.

shift in that dynamic. The reason we're seeing that is when some of these properties are being impacted, when they rebuild, for example, they elevate, right? They have a higher first floor height, right? Or they build differently, right? And that is, you know, the element of, I would say,

Resilience is, yeah, how can I rebuild and bounce back, but bounce back better to make sure I don't get impacted by some of these events that happened in the past or could possibly happen into the future, right? So the hazard is still there, but we're starting to see building code that is different, right?

But there's a lot of confusion. There's a lot of confusion in terms of, yeah, am I in a flood zone? Am I outside of a flood zone? I mean, I think I have a really interesting example in New York, right? So

Sandy Hits, 2012, FEMA, right? Of course, FEMA is the agency that is looking after these flood zones or flood boundaries, depending on the terminology. And they revised these flood zones and went back to New York City and said, okay, these are the updated FEMA flood zones.

But now these updated FEMA flood zones are going to put hundreds of thousands of residents in now flood zones, which means now they have to get flood insurance. It's going to impact the ability, right? It's going to impact potentially the valuation of the properties. The city appealed it, right? And they cited the issues with the methodology. And yeah, there are uncertainties in the methodology. They won the appeal, I think, in 2015 or 2016. And it's still there. Like there is today...

If I want to underwrite a policy in New York, the official FEMA flood zone map or the flood insurance rate map is based on 2007, which really dates back to the 70s, if you will. But if you want to go build something in New York, they tell you you have to look at the 2015. You have to look at which one is more conservative, right?

and you could possibly pick the one, end up picking up the one that they appealed. So there's all that confusion if you're taking flood insurance versus if you're trying to- Actually, what you just said confused the hell out of me. Yeah, exactly. You could have two neighbors. One of them is using the flood insurance rate map that goes back to 2007 or even prior to that. But the adjacent neighbor, they want to pull a permit

or do a new reconstruction, they might end up using the 2015 that was appealed. So there's two maps out there. And it's still not unified. But this is the dynamics

the consumer is dealing with, right? So yeah, if we're confused, then the consumer is even confused further because there's someone saying, oh, I'm not in a flood zone. And they would go and pay if they know that their property was vulnerable to flood, but it's giving them that full sense of security, right? Because the lender is telling them you don't need flood insurance. Like my neighbors in New Jersey with Ida, a lot of them flooded

And the perception was, oh, we didn't know we needed flood insurance or we're outside of a flood zone. So, yeah, why would we flood, right? There's all that confusion. Right. But just to make sure, we would expect to see premiums continue to rise. That's almost...

written in stone now because in places like Florida, like Lee County, that's going to happen. For NFIP, yeah. There's some areas that will drop though. Some areas will drop? Yeah, because in the past, NFIP specifically would look at it from a binary perspective. So you're in a flood zone. Oh, I see. But now...

You know, you could be in a flood zone, but you're relatively elevated. So topography plays a very big role. Earth floor height plays a big role, right? But in the past, yeah, it's more of a peanut butter approach, right? Now it's different. I see. But generally we'll see higher premium that'll put pressure on prices. You'll see more self-insurance. You'll see adaptation in terms of how people build and building codes going higher, for example. Yeah.

But ultimately, that sounds like populations are going to be incented to move away from areas that are prone to natural disasters or not.

Yeah, I mean, unless there's more investment in mitigation, right? And that is really the big one here, right? Because that's the variable that can change everything, right? Because a lot of this risk can be mitigated, right? The way, you know, when I think about it from a, because I'm a hydrologist, I think of the upstream and I think of the downstream, right? Downstream is essentially

we're always reacting to, okay, an event happened here. We're reacting in terms of event response, rebuilding, right? And so on. But if we move a little bit upstream and try to see, okay, what can I do to prevent an event from, you know, if an event happens, how can I build better to make sure that these properties are not impacted, right? And that's really now the dynamic we're seeing in California. There's all this, you know, prohibition

programs that does mechanical thinning, which means you basically do vegetation management to make sure that the fuel is not burning. You're doing utility companies and is investing a lot in hardening their infrastructure to make sure there's no ignitions that are caused by their transmission or distribution lines.

In terms of flood, we're seeing more and more investments in levees, more and more investment in enhancing stormwater systems. A lot of these systems were designed to absorb a limited, let's say, one or two inches of rainfall per hour, and we're seeing more than that. So we're seeing a lot of that investment in terms of how can I retrofit the built environment to allow me to become more resilient when I have an event like that.

But even that, the mitigation has a cost and presumably that means my property tax is going to go up, right? Because- Yes. Right? I mean- Mitigation has a cost, yeah. It has a cost, right? Like in Miami, I've got seawater coming over every day. I got to put a seawall that's expensive. That's going to be, someone's got to bear the cost. It would be presumably the residents of Miami. Right.

So, Chris, do I have that right? Am I thinking about that? Because, you know, for us, we kind of look at it from the perspective, what does it mean for an economy where people live and what does it mean for house prices and commercial real estate values? And our thinking is that, you know, this is going to put downward pressure on prices for commercial real estate and for residential property. Chris, do I have that right? I mean, is that? Yeah.

Yeah, that's right. The only other thing I might throw out there is that, you know, these people have to go somewhere, right? They have to go somewhere. That's a good point. We also have the issue of supply in other locations. And if zoning continues to restrict that supply, right, that may actually force some people to continue to live in more riskier areas and just, you know, they don't have another choice, so they're just going to roll the dice, right? Yeah.

and see what happens because they don't have another option or it's not a feasible option. So that's another consideration. It always comes back to zoning. Right, right. Well, I want to play the game. We'll end the conversation with that. Although, Faraz, you were saying you're in London. You're at a conference with an insurance conference in London. Yeah. I want to know, I've got this image of all these people

British insurance guys that what they do is at four o'clock they go out to the pub drink a beer is that just

my imagination or is, is that, are you, have you been out drinking already with your, with your buddies? No, I've been like busy back to back meetings. Oh, okay. Yeah, sure. Sure for us. But I, I like London. It's fun. I like London too. Yeah. Yeah. Nice. All right, let's play the game. We each put forward a stat. The rest of the group tries to figure it out through clues, deductive reasoning, uh,

questions. The best one is not so easy. We get it immediately. One that's not so hard, we never get it. And if it's apropos to the topic at hand, which is pretty clear, all the better. And we always begin with Marissa. Marissa, you're up. Okay. This is kind of a tangential topic.

Okay, just throwing that out there. It's not directly related to what we're talking about here, but it's tangential. Tangential. Why do you think it's tangential for this topic? It could be directly related, but it's not. All right, this is a statistic that came out this week, and it's 89.7%, 90%. 90%. An economic statistic? I'm rounding, yep. Is it survey-based? No. No.

Oh, no. Related. So really, but this is going to be a tough game. It's a tough time. Related to insurance and related to insurance. Probably not. No, no. Inflation. No. Prices. No. Okay. Tangentially. Tangentially. Third order of magnitude related to inflation.

Well, is it a government statistic? No, it's not. Is it an NFIB survey? No. Related? No. Which is a small business trade group. No. 90%, you kind of rounded up 89.7 to 90%. Can you want to give us another hint? This is a year over year growth rate in an index that came out this week. Oh, goodness gracious. Oh. Refinancing applications? Yes.

Yes. Wow. Nice. Ah. Yes. Yeah. As soon as I stopped thinking about insurance, that's the only chance I had. All right. So go ahead. Tell us. It's from the Mortgage Bankers Association. They came out this week on the number of mortgage applications, and they break it down into purchase applications and refis. And the number of refi applications is up 90% over the year. Wow. Yeah.

From zero to something, but okay. But I actually wasn't even going to pick that. I was just going to pick the total composite indexes up a third over the year. People really loving this 6.7% mortgage rate, I guess. Right. Well, I guess you're saying it's tangentially related because when people refi, some take cash out. Housing. Okay. Okay. Okay. Very good. Yeah.

What do you think, Chris? Anything to say? That was right up Chris's alley. He's kind of disappointed that he didn't get it. He probably wanted to pick it. A little bit. A little bit. It's off a low base, right? Yeah, yeah. In the doldrums. It's like home equity borrowing, right? Home equity borrowing is up a lot. Not 90%, but up strongly. But it's up from like

very low levels you know very low levels um yes this is a related statistic to that yeah interesting well you could use a home equity loan to you know mitigate you know yeah rebuild your home that insurance won't pay for sure right exactly yeah that seawall yeah let's build that seawall yeah okay matt you're up what's your stat okay uh marissa was tangential this is um

Left field. Yeah, left field. Just risk broadly, we could probably throw a risk. Minus 4%. Minus 4%. Inflation related? Of course. Oh, something's down 4% in the CPI report? Consumer pricing? Year over year?

I saw, I saw airline fares were down 4%. That's it. That's it. Yeah. Prize prize. Do you see how this is done? Yeah. I love it. Only when I get it. Yes. Uh, okay. You want to explain? Uh,

uh interesting week delta's earnings call got a lot of attention their ceo reported some pullback in consumer demand that is a pretty clear indicator of just you know economic cyclical demand um

Tracking TSA throughput is a government daily data point that's released that we track in bank. I look at that, you compare it today to this time last year, there's starting to be a little bit of a deviation, a pullback after tracking pretty closely through 2024. This year, tracking closely with 2024, I'm seeing some pullback. Also, some international flight data came out. We've seen the first year-over-year decline in February.

since the pandemic. The kind is very slight, but kind of all pointing in the same direction, corroborating data there that people are pulling back on vacations. Maybe it's a little bit of business travel. Is it economic insecurity? Is it economic uncertainty? Or is it

you know pretty gruesome plane crash a few months ago or people dialing back uh their willingness to go to go fly uh so find it interesting uh very interesting indicator yeah watch that very carefully yeah risk as i said so you might be waiting for the tie-in but there is none coming that was that was a good one no that was a good one yeah in the context of all the things that are going on hey faraj you want to go next yeah i'll go next uh two percent

Two percent. Insurance related? Insurance related, yeah. For a specific peril. For a specific peril. So it's an increase in insurance premiums for a certain peril? It's not an increase. It's what, you know, it's... Oh, two percent. Oh, two percent of losses are from this peril. I would say two percent have it. Oh, two percent have it.

Oh, okay. A form of insurance. 2% of households have this form of insurance for this. Yes. In a specific state. Florida flood insurance? California. It's in California. California wildfire? Is that even a thing? You're close, but it's not wildfire. Earthquake insurance. Oh, earthquake. No, it's not earthquake. Earthquake is a little bit more than 2%. A little bit more. Okay.

I want to say termites. It's related to climate, Petal. Okay. I was being flip. I was being flip. What could that be? It's not wildfire. Not earthquake. Not fire. Earthquake. Oh, it's got to be something very mudslides. No, not mudslides. Does insurance get tornadoes?

We were just talking about that parallel. Oh, okay. We give up. What is it? It's flood. Only 2% of property. Oh, yeah. Oh, yeah. Yes.

Matt, I'm surprised you didn't say flood. What the heck? I thought Marissa covered it, but I might have misheard. Flood was the first thing I said. Oh, you said flood, so I couldn't hear it then. Yeah, sorry about that. I'm glad somebody... I was about to say El Nino, so I'm glad this was a horrible guess. I'm glad you stopped before that. You said flood, so I didn't hear it. Sorry. Oh, wow. 2% of California households have flood insurance. On NFIP, yes. Oh, NFIP. Okay. Yeah.

And only 4% of the areas that are vulnerable to wildfire has flood insurance, which is a bit concerning because, you know, generally when an area is impacted by wildfire, it becomes more vulnerable to flood, right? Right.

Right. How interesting. Do you know offhand which state has the highest share of that? It's Florida, of course. Florida. 35% of the NFIP policies are concentrated in Florida. In Florida. Right. Right. Yeah. Good. All right. Well, let's do one more. Chris, you're up. Okay. $6,200. Some form of insurance premium? Yep. That's the insurance cost, homeowners insurance cost in a state, Louisiana? Yeah.

uh let's get more narrow a city oh a city baton rouge oh new orleans new orleans new orleans that's that's 5700 that's second miami miami is number one that's the average really miami's that high i didn't know that wow that's a good stat where's the lowest uh chris do you know

Oh, I used to know. It was, I think it was Hawaii. I wonder if that's the case. But I think that's changed now. Yeah, it must be. That seems counterintuitive. Because of that wildfire. Yeah. Yeah. Anyway. They don't have many perils, but now they do. Even wildfires. Yeah. Even wildfires.

Right. Well, very good. Well, I think I don't have a stat, so I'm derelict, but I think that we covered it. Is there anything I missed for us that, you know, that you would like to call out that I, that you think is important? Did we cover all the bases here? Chris, anything that you think I missed?

I don't know if you wanted to talk at all about the so-called social inflation. I think part of the reason why the premiums may actually stabilize a bit or not grow as quickly is that you do have measures to deal with litigation. Litigation had been a big driver of a lot of the insurance premium increase. And I think in Florida now there are laws that are preventing or reducing some of that nuisance lawsuit, let's call it.

Oh, I see. So I don't know, Faraz, if you have looked at that at all or what fraction of the increase do you think has been due to kind of social inflation versus... Yeah, it's relatively high, right? The cost of reconstruction is always a big driver, right? And when we look at it from an insured loss estimate, we factor that into our estimates, right? For example, when we looked at...

California wildfires, right? We looked into, for example, what would happen if California potentially decides to accelerate, let's say, the reconstruction because now you have some major international events happening. You have the FIFA soccer or World Cup happening next year. Eight games are being played close to that date.

30 minutes away from the wildfires, you have the Super Bowl in 2027, you have the Olympics in 2028. So those are elements we call them, you know, demand surge, which means like, is there going to be more demand that could increase the reconstruction prices, right? So that is one important element.

We look into historical information to trend some of our social inflation factors that go into the estimates. But there are, of course, this reconstruction is going to take years. So we don't know what could happen potentially with the lumber prices, if there are tariffs and so on. So that's another important element to keep in mind. Okay. But if we do expect to see fewer lawsuits...

Right, because of some of the… In Florida. Yeah. Might expect that will help to keep premiums from rising at a… Exactly. And in Florida specifically, right, because the element of assignment of benefits and lawsuits now has, you know, there's legislation that, you know, protects insurance companies from that. Then that, of course, that's favorable, I would say, regulator requirement allows

allowed now citizens to offload some of these policies to the private market, right? Because citizens speak that 1.4 million policies in 2022, and now it's set about 800K. So we're seeing that market stabilize. And part of it is because of this reform that allows more carriers to come back to the market. Well, we're adjusting. It's not fun. And hopefully we just fast

because it feels like we need to, but we're in the process and you're doing all this great work to help with that adjustment. So thank you for that. And I want to thank you for joining us for us. Really appreciate you spending the time. I know it's late in London and go enjoy a, I was going to say, go enjoy a beer, but at this point maybe you need a cocktail. I don't know, but yeah. Yeah. Yeah. I'll find something. You'll find something very good.

And with that, dear listener, we're going to call it a podcast. Take care now.