Moody's Talks - Inside Economics - Fires and Floods with Firas Saleh

Episode Date: March 18, 2025

Firas Saleh, director of product management at Moody's, joins the Inside Economics team to discuss the increasing risk of wildfires and floods. He highlights the growing frequency and intensity of natural disasters and the significant economic losses they cause. The conversation then shifts to the insurance industry, focusing on how rising insurance premiums affect individual property owners and real estate markets. Although markets will adapt to these evolving risks, the transition may be challenging.For Cris and Firas's research on flood risk click here, for their research on wildfire risk click hereTo learn more about Moody's wildfire risk modeling click hereGuest: Firas Saleh – Director of Product Management, Moody'sHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X', BlueSky or LinkedIn @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

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-host, Marissa Dina Talley and Chris Dreeze. 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 that's a podcast new. It's a podcast new. You're chipper. You look chipper. All right. And we got Mr. Collier.

How's it going, everybody? Actually, he talked about chipper. Look at that guy. You got it. You got a great. You got a great. You start quality, man. What the heck.

Oh, yeah. Thanks. I'm not kidding. It's the warm weather, I think, is bringing everybody, uh, lifting everybody up in this part of Pennsylvania. Oh, is it warm up in PA? Yeah. Oh, cool.

60s. So. Mercy, you have anything to say? Nothing. Nothing. Nothing. Nothing. And we have a colleague, Faraz Saleh, Salai.

I'm sorry, Farah, I just pictured your last name, but good to have you on. Thanks, Mark, and team 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 like, I'm like getting the big trouble. We have now invested in, and I want to see what's happened to this, But we invested in, you know, 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 tip. You didn't know that? No. Yeah.

You didn't have to pay an extra fee. Yeah. Yeah, 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. I don't know. Well, that brings up a whole other set of issues. I pay 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, Fraz, you're with our, you are obviously in 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. Is that the way you guys described? 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, you know, what RMS has pioneered, I would say, the catastrophe modeling industry 35 years ago with, with, earthquake models and eventually expanded with other petals such as wind or hurricane and then expanded to flood, earthquake, wildfire with the advances in computation resources and with the

risk landscape continually evolving. Right. And you lead the way on floods and wildfires. Is that correct? Yeah. And 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 the pandemic. Yeah. Actually, they closed on my birthday. I was very excited.

Ah. Is that real? I guess that, yeah, I guess that would be exciting. Yeah. Yeah. And 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, yeah, sure. So move 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. Matasrophic events. Atastrophic events that are shaping my life. 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 20, it was August 20. I'm telling you, it was horrible. We don't remember that stuff for us. Yeah. 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.

October in 2012 the following year. And within a week or so, Hurricane Sandy hit New York. So that's... 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 U.S. in 2013.

A few months after that, you know, worked in New Jersey Institute of Technology. and then Stevens is the 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, understand the, you know, the element of environmental impacts, what mitigation we can do.

And so on. So, you know, at the time when, you know, I was during my vacation complaining about it, and then, you know, eventually it became a, it became what I focused on, right? my background is in We were talking about Stevens But most people, Stevens is a wonderful university In Hoboken just across the Hudson from Manhattan You have these beautiful views

And I was recounting when we 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 Harry Chapin in front of me, cats in the cradle, cats in the cradle, right? Is that right, Matt, cats in the cradle? Yeah, that's right.

Great. For all you young people who know nothing about anything that's important, like Harry Chapin. You know Matt, though. You know Matt. You know Matt. Yeah, I do. Yeah. He's going to And then 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 Hoboken. Yeah, we have a beautiful office on the waterfront. We can see actually the Moody's office from there.

Ah! from the whole book. Well, it's good to have you aboard. And you were also saying you are of Iraqi. It's a rocky background, right? I mean... That's correct. My family, my parents, you know, are from Baghdad originally.

Baghdad. Born in France and Paris. Yeah. Cool. So did you speak Arabic? I speak Arabic. Yeah, yeah. Yeah, yeah.

Speak Arabic 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 a... Oh, so cool. 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 of the French language because different ways you can express.

Yeah. There's the element of, you know, if I know you very well, and then the discussion is very different. and then it's a formal discussion. All these different elements, I would say. Yeah. And you and Chris, 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 other things? 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 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 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 for us, 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 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 were 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 look at, can you see homeowners insurance as well? Is that broken out in the same? CPI? I think it is. I think it is too, but I don't have anything offhand if you give me. Okay. It's with, it's in there with renters insurance. Yeah. Broken out separately. Oh, it's there. Yeah. Okay. Well, we'll come back to that. We'll come back to that. But, you know, Fraz, this is 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, you know, this past summer, previous summer, we had a bunch of pretty bad storms that hit Florida that is having an impact. 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 they more costly? Yeah, it depends on the parallel, 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, Mark and 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 a hockistic 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 U.S. dollars, just to put that in perspective, right? And this was before what we just saw with the L.A. 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 the 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, you know, at least based on our Moody's RMS, insured loss system, it could be up to 30 billion, right?

So this could be the biggest event compared to the campfire on 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, which is only part of the loss, right, because it's not all insured.

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 re-infrastructure, pipes, contamination, that's kind of like, yeah, that's, 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 insured loss. Yeah, right. And with the hurricanes as well, is that more, are they more frequent? and more damaging? Is that the reality?

You know, yeah, I mean, that's a great question. We're seeing an uptake 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 EN. 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 a few, if you remember, we had Ida just after. So we had a lot of flooding in New York and New Jersey, even though it's made landfall in Louisiana. So there's this element of, I would say, they're wet, getting wetter, right? Because, you know, when you have an increase in temperatures, right, it basically means, you know, more water, moisture when it comes to the rainfall, right? So the extremes are becoming more extremes and droughts are becoming also more extreme. So that's sort of a little bit on 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, the losses are great. 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 because they're going up but they may not be going up as fast as they need to to compensate for the risk that the insurers are facing is that is that perception correct and that's correct and there's a lot of regionality to it right so depending on which state the carriers are operating right so for example when you think of california right so california has a Proposition 103 that dates back to 1988, right? And what that means is you cannot, for example, include the cost of reinsurance and the pricing, right? 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 a 300K dwelling, right, you see that California is relatively, I would say,

about maybe 35 to 40% lower than the average, right? Because insurance companies are not able to incorporate all these different elements, right? And they can't increase by a specific threshold, more than 6.99%

without a public hearing. And that has been changing under 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 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, you know, insurance carriers, for example, in California, they basically paid, you know, to some of these latest wildfires, more than 20 to 25% of underwriting profits because of all these extreme events.

So, yeah. And, you know, I'm here in Florida, and, you know, my experience here is that it's roughly the same kind of problem. that we're getting hit, costs are rising, but the insurance industry is struggling to, premiums are definitely going up, and there's a lot of denial of insurance. So, you know, 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 and it's starting to weaken their viability. And the response so far has been to set up these government backed insurance companies. I think here in Florida it's called citizens. I think in California it's called, is it fair? California Fair Plan, correct.

The Fair Plan. So same kind of deal here in Florida too that's going on with California. Maybe not to the same degree, but the same kind of dynamic playing out. 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 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 or growth in the California Fair Plan. So in 2018 or 2019, their exposure was only $50 billion. And now their exposure has grown to almost, I would say, $500 billion or even more.

So it's almost 10x of growth in exposure. And of course, they're accumulating all that exposure. and in high risk areas. So that's the important part of it. But what's important also to note is the state, you know, the California Fair Plan is essentially financially supported by admitted carriers that are licensed to right insurance in California, which what means is if they don't have enough money to cover the losses,

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

They, for the first $1 billion, they can pass 50% of it to the consumers. Right, right. So is it, I mean, when I'm thinking back to this past summer when the, what was the storm that was it was Milton, I think it was Milton that was hit the west coast of Florida. And if 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, 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 markets to that degree? Yeah, I would say it depends, right? Because if you look at the, there's a huge growth, for example, and the citizens of Florida, which is also another national last resort. So it peaked in 2022 at about 1.4 million policies, right? So that could have been, you know, and a lot of that risk is concentrated 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 the market starts to stabilize, you see more and more of these policies going back to the private market. One thing maybe that's important to note here is, you know, 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 E.N. 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 accurate, 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 Oz. 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, you know, on the storms and the fires and the events and everything else. But given the direction we're headed here, you know, that hockey stick you were talking about, is that something that we should be worried about that, you know, 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, you know, when I think about it, right, it's, you know, when you look at the insurance market as a whole, right? Yeah. In sure, you have the carriers, right? Those are the primary carriers that, you know, right, these underwriting the policies.

And then, of course, you have reinsurance, right? So 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 risk, right? And there's 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, right? 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 that with 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, 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 levies, 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. 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 sea walls and flood barriers. In Hoboken, a 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 we're adjusting, you know, All these different mechanisms are, you know, the insurance industry and market are under stress because of the reality of these storms and the cost. So it wouldn't be surprising that, you know, there would be stress, but the industry is adjusting in all these different ways. So you mentioned kind of risk, the reinsurance and the risk sharing through securities markets. You talked about the mitigation efforts to, you know, 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. And I guess if at the end of the day, would you think if we got nailed by, you know, really catastrophic storm of Cat 5 that went, you know, right through Miami? I'm just making that up. But that would be very expensive, obviously. Stress any kind of system. You would think 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.

Yeah, right. They just took a big hit. They estimate that their, you know, 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 salary. Andy, right? So they had to go borrow again from Treasury, right? They just borrowed $2 billion. And now their debt stands at about $22.5 billion dollars, right? So every day, you know, every day they pay around $1.7 million, just an interest to Treasury, right? So it's going to depend

on who gets that hit, right? So it's NFIP, is it citizens? Is it, I mean, the Fair Plan just saw that in California, right? 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, yeah, where can you diversify the risk and spread it to make sure that you're not very exposed when an event like that happens? Did, Fras, 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, did I, did 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. It expires again. NFIP is, can't write any policies. Yeah, right 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 to cover it, to provide support, right? This, this program, It's under FEMA. FEMA is also under the gun when it comes to Doge and whatnot.

So I'm not, I think at the end of the day, probably yes, they would step in. But I don't think there's any guarantee anymore. And I think maybe also an important element to highlight, right, 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 in line, you're talking about take-up rates, which means how much 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, you know, 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, you know, what kind of flooding that property gets hit by, right?

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, right? So if you look at NFIP, they had over the last, you know, 20, 30 years, they had 1.1 million claims, and they paid around 70 billion in losses. You're talking about, you know, 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, you know, everything is basically

gone, right? So the size of the claim is completely different. And that's one thing that, you know, we're, you know, as we build these models, as we talk to the market, there's a big, a huge difference between the peril, 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 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. Undersured. 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, you know, state government, federal. government, you'll see, you know, 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 know, if it's, 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 saying

premium increases 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 of them, not mistaken over the last year. So that's nationwide. Nationwide.

Homeowner's insurance has gone up 14%. Right. Yeah. And that's after, you know, several years of double digit increase. Right. It's a continued rise. And in terms of what, I always get confused, what is that really cover when it comes to weather events, the homeowners insurance? What is it cover exactly?

Generally covers the 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 name, you know, named storms or severe convective storm because that's a big pile, right? Like, severe convictive storm, like this is a high frequency peril, right? And then it's causing, you know, a lot of issues. And if 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, right? 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, right? So it's, right? More insurance, more and premium for less insurance, essentially. So there's another underinsurance piece of it. Yeah. 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, you know, primary balance and then the property tax, insurance. 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 going to happen is for some of these rates to become, you know, aligned with the risk, they could go up by 700, 800%, right? Because what's happening now is, you know, 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, I think it's $960, but that's expected to go up to almost $3,400 on average, right?

Wow. It can go up immediately. They have, you know, it's more than a path, right, at 18%. So it will reach eventually, by 2037, some of these areas would reach their full actualial premium, right? So that's what's going on. And you can... And Chris, I know you've done work. here as well on house prices. You can see it in 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 continue to see house prices rise faster, right? And I attribute that to the low interest rate environment, right if 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 insurance and when it comes to the interest rate now that that's no longer the case i think you're you are starting to see the the homeowners reevaluate you know 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 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 Farah said, it might moderate here, but it's still going to go up as the premiums catch up with the actual risk. Well, I guess, and this sounds a little, I mean, green eye shade perspective, doesn't this have to happen, though. I mean, I mean, we are locating and living in places that are at real risk of getting nailed by climate events.

And I mean, for the, we've got to adjust. And, you know, this is the way it works. The, you know, the cost goes up for living in those areas and it pushes people out of those areas. It's very painful adjustment, but 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-flut-prone areas, right? And this is in North America, this is across the board, right? Which means that we're continuing to see expansion or urbanization in these flood-prone areas. No one would talk about it, you know, in the past because, yeah, it would flood, but there's no exposure there, right? so no one would report it, but eventually now when you're continuing to building it, and now you're going to see it all over the news, all this area flooded.

It never flooded before. So you're seeing that dynamic, right? But at the same time, I think in coastal areas, we're starting to see a little bit of a reverse of that 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, 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 that's, 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? Like if you, I mean, I think I have a really interesting example in New York, right?

So Sandy hits 2012, FEMA, right? Of course, FEMA is, you know, is the agency that is looking after these flood zones or flood boundaries, depending on the terminology. And, you know, they revise these flood zones and, you know, 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 and 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 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, 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, right?

That's how. But if you want to go build something in New York, they tell you you have to look at the 2015 that they, depending, you have to look at which one is more conservative. And you could possibly pick the one. end up picking up the one that they appealed. Right. So there's all that confusion.

If you're taking flood insurance versus if you're trying to... Actually, what you just said, confuse the hell on 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... But the adjacent neighbor, if they want to pull like a permit or do a new reconstruction, they might end up using the 2015 that was appealed. So there's two maps out there.

Yeah. Right. And it's still not unified. Yeah. So this is the dynamics. The consumers dealing with, right? So, yeah, if we're confused, then the consumer is even confused further. Because there's a risk of, you know, 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, you know, the lender is telling them you don't need flood insurance. Like my neighbors in New Jersey. with Aida. 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

in places like Florida, like Lee County. it's going to happen. For NFIP, yeah. There's some areas that will drop, though. Yeah. Some areas will drop? Yeah, because in the past, right, NFIP specifically would look at it from a binary perspective, right?

So you're in a flood zone, right? 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's 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. 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 is more investment in mitigation, right? And that's the mitigation 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, programs that does mechanical thinning, which means, you know, you basically, you know, 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, right, that are caused by their, you know, transmission or distribution lines, right? In terms of flood, we're seeing, you know, more and more investments in levies, more and more investment in enhancing stormwater systems, right?

A lot of these systems were designed, you know, 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, you know, 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. Yes. Right. I mean.

Mitigation has a cost, yeah. It has a cost, right? Like in Miami, I've got sea water coming over every day. I got to put a seawall. That's expensive. That's going to be got, someone's got to bear the cost. It would be presumably the residents of Miami. So, Crystal, I have that right.

Am I thinking about there? Because, you know, Fraz, 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 see our commercial estate and for for property, residential property. Crystal,

I have that right? I mean, is that, yeah, that's right. The only other thing I might throw out there is that, you know, these people have to go somewhere, right?

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's going to, 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? 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, sorry. Yeah, right. Right, right. Well, I want to play the game. We'll end the conversation with that. Although, I, as you were saying, you're at a conference with an insurance

conference in London. Yeah. I want to know, I've got this image of all these British insurance guys that what they do is at 4 o'clock they go out to the pub, drink a beer. Is that just my imagination? Or is that, have you been out drinking already with your buddies? I know, I've been like busy back-to-back meetings. Oh, okay. Yeah, sure.

Sure for us. But I like London. It's fun. I like London too. Yeah. Nice. All right, let's play the game. We each put forward to stat.

The rest of the group tries to figure it out through clues, deductive reasoning 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 is tangential for this topic? It could be a direct. 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. Oh, no.

Related, so but this is going to be a tough game. This is a tough time. Related to insurance? Related to insurance? Probably not. No. Inflation?

No. Prices, no. Okay. Incentially. Tengentially. Third order of magnitude related to inflation. Well, is it a government? statistic?

No, it's not. Is it an FIB 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. Wow. Nice.

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

Wow. From zero to. 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 love in this 6.7% mortgage rate, I guess. Right. Well, I guess you're saying it's tangentially related because when people refy some

take cash out, housing. Okay. Okay. Okay. Okay. Very good. What do you think, Chris? That was right up Chris's out.

He's kind of disappointed that he didn't get it. He probably wanted to pick it. 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, you know, not 90%, but it's up strongly.

But it's up from like very low levels, you know, very low levels. Yes, this is a related statistic to that. Yeah. Interesting. You could use a home equity loan to, you know, mitigate, you know. Rebuild. Rebuild your home that insurance won't pay for? Sure. Exactly.

Yeah. That sea wall. Yeah. Yeah. Yeah. Okay. Matt, you're up. What's your stat?

Okay. Marissa was tangential. This is just risk. In left field. Yeah, left field. Just risk broadly. We could probably. Okay, risk.

Okay. Minus 4%. Minus 4%. Inflation related? Of course. Oh, something's down 4% in the CPI report? Consumer pricing? Year over year?

No. I saw airline fares were down 4%. That's it. That's it. Yeah. Crosse. Do you see how this is done? Yeah, I love it.

Basketball. Yeah. Only when I get it. Okay, you want to explain? Interesting week. Delta's earnings call got a lot of attention. Their CEO reported some pollback in consumer demand. That is a pretty clear indicator of just economic cyclical demand.

Tracking TSA throughput is a government data, 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 decline is very slight, but kind of all pointing in the same direction, corroborating data there that people are pulling back on vacation. maybe it's a little bit of business travel. It's an economic insecurity. Is it economic uncertainty or is it, you know, pretty gruesome plane crash a few months ago are people dialing back their willingness to go to go fly. So find it interesting. Very interesting.

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 a good one. No, that was a good one. Yeah, in the context of all the things that are going on.

Hey, Farage, you want to go next? Yeah, I'll go next. 2%. 2%. 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, 2%. Oh, 2% of losses are from this peril. I would say 100% have it.

Oh, 2% of, oh, okay, form of have 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 one. Earthquake. Oh, earthquake. No, it's not earthquake. Earthquick is a little bit more than 2%. A little bit more. I want to say termites. It's related to climate pedal.

Okay. I was being flip. I was being flipped. What could that be? It's not wildfire. Not earthquake. By the earthquake. Oh, it's got to be something very much.

No, not mudslides. Does insurance get tornadoes? We were just talking about that peril. Oh, okay. We give up. What is it? It's flood. Only 2% of property. Oh, yeah. Oh, yeah. Oh, yeah.

Oh, yeah. Matt, I'm surprised you didn't say flood. What the heck? I thought Marissa covered it, but I might have misheard. Well, I said Florida. It 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 Nina, so I'm glad this is a harmful place. I'm glad you stopped before that. You said flood, so I didn't hear it. Sorry. Focus. Oh, wow. 2% of California households have flood insurance. On NFIP, yes.

Yeah. Oh, NFIP. NFIP. Yeah. Oh, interesting. Only 4% of areas that are vulnerable to wildfire has flood insurance, which is a bit concerning because, you know, generally when an area is impacted by the fire, it becomes more vulnerable to flood.

Right. Right. How interesting. Do you know offhand which state has the highest share of that has? It's Florida, of course. Florida. 35% of the NFIP policies are concentrated in Florida. Right.

Right. Yeah, good. All right. 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 the state, Louisiana. Let's get more narrow. A city. Oh, a city, Baton Rouge. Oh, New Orleans. New Orleans.

That's 5,700. 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? Chris, do you know? Oh, I used to know. It was, uh, 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 that that's a wildfire. Yeah. Yeah. Yeah, anyway. There are many perils. So, but now they do. Even wildfires. Yeah.

Right. Well, very good. Well, uh, I think I don't have a stat. So I, I'm derelict. But, uh, I think that we covered it. Is there anything I missed for us? that you know, that you would like to call out that you think is important? Did we cover all the basis 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, you know, nuisance lawsuit, let's call it. Oh, I see. So I don't know for Oz, 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 now 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 30 minutes away from the wildfires. You have the Super Bowl in 27, 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, you know, social inflation factors that go into the estimates, right? There are, of course, this reconstruction is going to take years, right?

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. I 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, of course, that's favorable, I would say, regulated requirement allowed now, you know, citizens to offload some of these policies to the private market, right? Because, you know, citizens speak that 1.4 million policies in 2022, and now it's set about 800K.

So we're seeing that market stabilize. part of it is because of this reform that allows more carriers to come back to the market. Well, you know, 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. Farage, really appreciate you spending the time. I know it's late in London. 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. 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.