Odd Lots - Why Home Insurance in Florida Is a Mess

Episode Date: October 28, 2024

Florida has been struck by two big hurricanes this year, setting off a wave of damage and, of course, new insurance claims. As we all know by now, insurance rates in places like Florida, Louisiana, and California have jumped in recent years thanks to a combination of more natural disasters, higher replacement costs, and other factors. But Florida has become a particularly expensive market, with roofing scams supposedly pushing up rates for everyone, and a string of private insurers exiting the market. So what's the future of this messy market? We speak with Jerry Theodorou, policy director of finance, insurance and trade at R Street Institute, a free market think tank. He's also a veteran of the insurance industry and, in this episode, he walks us through what's been going on in Florida's insurance market and argues that there are some signs that things are getting better. Read More:Why Insurance Rates Have Been Surging in California and FloridaFlorida Home Insurers With Lax Ratings Pose New Property RiskBecome a Bloomberg.com subscriber using our special intro offer at bloomberg.com/podcastoffer. You’ll get episodes of this podcast ad-free and exclusive access to our daily Odd Lots newsletter. Already a subscriber? Connect your account on the Bloomberg channel page in Apple Podcasts to listen ad-free.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hey there, listeners, Bloomberg wants to hear from you. Help make shows like Oddlots even better by taking the Bloomberg audience survey and you can get a coffee on us for doing so. Visit YouTube.com forward slash Bloomberg podcast and click the link in our profile or the community section to take the Bloomberg. survey hosted by our partners material. Go to YouTube.com forward slash Bloomberg podcast today. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthall. Joe, we need to do more on insurance.

Yeah, absolutely. So we are recording this October 18th. In the last several weeks, we've had two extraordinary storms. The second one, Milton, that aimed directly at Florida near Tampa Bay, was not as bad as people thought even a few hours before landfall, which people thought was just going to be tremendously catastrophic potentially. However, it was obviously still quite damaging. And once again, the question of hurricane risk, storm risk, these certain flood-prone markets, who's going to pay for them? All of these things continues to be a source of, I would say, rising anxiety, regardless of what just happened with these storms. Yeah, absolutely. And you've seen estimates flying around for how much this is going to cost the

insurers, but I think there was one that said as much as $55 billion from those two storms. So big numbers here. And obviously, people who live in those areas have been talking for a long time about how their insurance premiums are already going up a lot. And certain areas of the country are perhaps becoming unaffordable or maybe you can't find insurance for a property on the coast of Florida anymore or if you do, you have to go to the state insurance body rather than a private entity. And I think just getting really big picture, I find insurance fascinating because it's basically the original finance. It's like the pricing of risk is essentially the very essence of finance. So I find the idea of how we're going to be pricing the risk of

more and more storms. Who's going to bear those costs? Absolutely fascinating. Totally. And we know there are structural issues going on in the market and they're myriad and we will get into all of them. But yes, there is much to discuss on this topic on this episode and probably many episodes to come. Okay. So in this particular discussion, we're going to be coming at it from a slightly different angle. We're going to focus on Florida what's been happening in the structure of that market and what else could be done. And yes, I promise listeners, there will be. discussion about Florida roof insurance frauds and all of that, because there are some interesting things happening there as well. So I'm very happy to say we do, in fact, have the perfect guest.

We're going to be speaking with Jerry Theodoro. He is the policy director of finance, insurance, and trade over at R Street Institute, which describes itself as a free market think tank. He has written a lot about the Florida insurance market. So Jerry, thank you so much for coming on all thoughts. Thank you, Tracy. Thank you, Joe. It's a pleasure to be here. So maybe give us your background just to start, because you've been in the insurance world for a while. Yeah, thanks. I began my career as a commercial underwriter at Chubb and Sun, and after a couple of years, moved over to AIG. AIG shipped me over to Europe, and I worked in Paris and Frankfurt in the Middle East for about 10 years as an expatriate. And after coming back to the United States,

I joined a company called Conning, worked at Conning for about a dozen years. Conning is an insurance asset manager that has an insurance research arm. I was one of the researchers there, one of the analysts, wrote a lot of books, did a lot of presentations on the insurance industry. And about three and a half years ago, I joined R Street and using my knowledge of the market and economics and products, connections in the industry for public policy purposes to explain to folks in Washington, in state capitals, how insurance. insurance works and recommended policy solutions for areas that are troubling like the one we're

discussing today. You do sound indeed like the perfect guest. You know, let's say 15 years from now, or let's say not 15 years from now, let's say today hour 60. I'm like, all right, I'm ready to retire. I don't want to live in the cold weather anymore. I just want a nice little house in Fort Myers, Florida. But I kind of want to get an insured because it's a big part of my retirement, this asset.

What are my options? What am I going to do? Well, first of all, I agree. It's a lovely prospect to have a place in Fort Myers where you can see the ocean front from your window. But when the ocean, it comes into your bedroom. That's another story. And that's when you should reconsider if you made the right decision. But I made that decision. So now I'm making the insurance decision. Now he has to get insurance for his retirement property. What does he do? What are his options? Yeah. Well, first of all, having homeowners insurance is not only important, but it's required if you have a loan in the property. mortgage loan that's backed by the federal government, one of the GSEs, Fannie Mae, Freddie Meck. So it's required. Some people go bare. They don't carry insurance. And there are three major sources of insurance for future retirees, such as yourself, Joe. One is the national

insurance market. So you're jumbo insurers that operate nationally, all state farm, travelers, Hartford, and the like. And there's also some companies that are the so-called Florida domestics. are companies that were set up following catastrophes about 15 years ago that are focused on Florida. And four of them are publicly traded. And there's also citizens property insurance. Citizens property is a state-run insurer in Florida. So those are the three options.

And agents are the ones that are responsible for guiding you to get the best policy for the best price. So that's the market that you'll confront, Joe, when you get there. So insurers of last resort in Florida, citizens. At what point do you get access to those? Like I've never really understood, is it that no one else will give you insurance or is it that no one else will give you insurance at a price that you like? Yeah, it's at a price that you like. So citizens is, as you say, Tracy, the insurer of last resort. So if you agent can't place it with any of the national or the Florida only domestics, then citizens is required to take that policy. However, if the citizens

policy proves to be more expensive than one on the market, then you're obligated to take one that's in the private market. So people say there is an insurance crisis in Florida due to the storms and due to other structural things. I guess I have a two-part question. A, do you accept that premise that there is something broken about the in Florida insurance market as it stands right now? And B, how would you describe it?

I wouldn't say that it's broken, but I would say like a piece of porcel. that's cracked. It's got cracks to it. And it's more than just the risk of hurricanes and floods because Florida is, after all, mainly a peninsula jutting into warm waters of the Gulf of Mexico and the Atlantic Ocean. So it's prone to catastrophes. There have been storms in Florida for as long as we've got data on that. Let's go back to 2004. In 2004, there were four landfalling storms that hit Florida. Those were Charlie, Francis. Ivan and Gene. And in 2005, we called the KRW, Katrina Rita Wilma. Now, Rita did the most damage to Florida. So there were two back-to-back years of really strong hurricanes. And the

market took a licking, and as they used to say with Timex Watch advertisements, but it kept on ticking. So the market continued. And what is more, fresh capital came in after 2005, because banking on the theory that, to paraphrase, that lightning doesn't strike the same place twice. Indeed, the bet was a good one in 2006 and 2007. There were no hurricanes that made landfall in Florida. The insurance company recouped the amount that it lost. So the market was functioning. And now we're in the wake of Helene and Milton and these questions are being asked. But for a variety of reasons, which I'd like to get into, the market is resilient. It has these walls that protect the balance sheets of these companies because the risk is recognized.

So why is it cracked? The reason it's because that's conventional insurance, insurance companies are in the business. By the way, I just years ago, Tracy, we did an episode. I went through an obsession with Florida history, like an old, old oddlodge days, like 2015. Oh, yeah. And we did episodes about the 1926 hurricane and the 1928 Okeechobee hurricane that caused the Florida land that bubble. You know, Florida's history is not just hurricane. it's also history of bubbles and busts.

Sometimes I feel we've been doing the show too long when it's like, oh yeah, go to our back catalog for the episode on the 1920s Florida property bubble. And the catfish bubble. But I say, but I only say this to appreciate your point that storms in Florida are certainly nothing new and nothing that catches people really by surprise at this point. So anyway, keep going on with what you were saying

about why there's cracks, even if the storm story is nothing new. Right. Other states, also have catastrophe exposure, Texas, California. But Florida was special in a way that's unrelated to the risks and the premium of insurance. And that is because of the activity of the trial bar. In Florida, you have billboards on every highway advertising. If you have a truck accident, call us. We had a $2 million judgment. So a lot of legal advertising, and people are responding to that.

insurance companies are getting sued in Florida more than anywhere else in the country. Let me give you a statistic here. Florida has got about 8% of the country's population, so it's got about 8% of the homes and the homeowner insurance policies in the country, but it has 78% of the homeowners' litigation. So the state of Florida alone has got four-fifths of the entire country's litigation. And what are the lawsuits? A lot of them are related to what's... It's called AOB, assignment of benefits.

So if you have a house that sustains some damage, someone will come to your house and adjuster and ask you to sign a form saying, we'll take care of the insurance for you. We'll put in a claim. So they put in a claim, and the damage was not something that was caused by the storm. It's discovered, for example. And the insurance company denies the claim. And then the attorneys will sue the insurance company for a high five-figure amount. And rather than fight it and spend a lot of money, more.

than the case is worth, they settle. So this has attracted a cottage industry in filing frivolous suits and giving Florida the reputation of being owned and driven by the trial bar. On April 4th, 2023, around two in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16.

What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also, really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart Radio app, Apple podcast, or wherever you get your podcasts. Who did Florida become an environment for this type of litigation to begin with?

Like, why is the trial bar so big in that particular state? Yeah, I don't want to get into politics. No, it's fine. We might have to. We might actually have to get into politics. But politics does play a hand. A lot of the donations, the contributions that are made to local politicians' campaigns comes from the trial bar. This is on a national basis in not just Florida, but in Florida, it's especially the case. And also, there was some bad legislation that was passed in Florida,

which permits these things. So the statutes are unfavorable compared to others where a case that doesn't meet the pleading standard is just not advanced. So you have this situation, the good news is though, but about a year and a half ago, the governor of Florida signed tort reform into law that would stop the process of assignment of benefits and also one-way attorney fees where the insurance company pays the legal fees of the plaintiff. A couple of other measures as well were struck down by the tort reform that was signed into law. But that was sort of a rare event because in order to get that done, it required the president of the Florida Senate and the leader of the House

and the governor pushing in the same direction and with someone in the Florida legislature taking this on to drive it through. So this is a situation that you don't get. I mean, imagine if it happened on a national level, would have the House and the Senate and the White House pushing in the same direction. Not likely, but in Florida, it happened. Something similar happened in Texas about 15 years ago, and the results of tort reform are already being seen

where the number of suits, I mentioned the 78% of the national total of homeowners insurance litigations, Florida, that's coming down. And also there's a formal document that announces the intention to sue. Those numbers are coming down as well. So Florida seems to have turned a corner

in terms of whether the sky is falling and the place is uninsurable. What does Wall Street say? Well, there's four of those Florida-only insurance companies that are publicly traded. And when the news was coming out of NOAA about the approaching hurricanes, people started selling the stock of those companies, about 25% reduction in the stock price. But when, as you say, Joe, it was a disaster averted. It didn't go to Tampa, neither Helene nor Milton, and it skewed north or skewed south. Stocks rebounded and went up by about 15%.

So this was really just another manifestation of what people in the industry used to say about Florida insurance stocks. Sell in May and go away. Wait, can you tell us some of these names? Do you have any names? I actually want to look them up. Well, all state would be one, right? No, no, the Florida-specific insurance. Oh, the Florida-specific ones.

Yeah. The Florida, yeah, who are they? Heritage, H-C-I. Heritage Insurance holding. Someone needs to make a Florida insurance ETF, so we can just split these four-off. So you could just directly get exposure to, oh, yeah, there you go. Okay. It's still down.

Down, but it recovered. It didn't continue to go down. Yeah, that's right. So the rebound when it was a bullet that was dodged because Helene went north of Tampa, It landed in Apalachicola. And then when Milton was coming and headed towards the Tampa Bay, it turned south at the last minute and did damage to Saratota. But Tampa St. Pete spared. An HCI group.

An HCI? That's actually at all-time highs right now. Is it? Yeah. So that's actually a really interesting chart because it did plunge in the middle of October, but now it's currently at all-time highs. Also, if you zoom out on a lot of these, they are up quite a bit over the past year or so. Oh, not quite. By the way, H-C-I, sorry, I misspoke.

HG has not all-time highs. It's at like a new 52-week high. It was higher in 2021 for a while. So, okay. But I like looking at charts. This helps ground me. Joe, stop looking at charts. Let me ask a tort reform question. Okay, tort law. Tort, by the way, for those who don't know, is like a legal framework for addressing compensation for wrongdoing. It's not criminal stuff. It's the civil stuff. And the only reason I know that is because I read a book about the station house fire in Rhode Island. And that was, I don't recommend it. It's a good book, but don't read it because it's one of the most disturbing cases of all time. But anyway, I guess my question is, so tort reform happened in Florida a couple years ago, as you point out, Jerry. But what was the turning point at which the state decided, actually, this is a really big deal and we need to do something about it?

Yeah, that's a great question. It was, I think, when it became evident that the number of lawsuits and the volume of the lawsuits was getting so stratospheric that it was really impacting the balance sheets of the companies that were there and driving some to leave Florida to exit the state because they couldn't make a buck there. Why stay and throw good money after bad? So a couple of years ago I was at a conference of the Florida Chamber of Commerce, and the mood was all gloom and doom. And, you know, the market is broken.

There were strains on the reinsurer that is obligatory, an obligatory reinsurer. These companies, Joe, you looked up in a couple of seconds. I'm very impressed. Well, we have the Bloomberg terminal plug for our core product here at Bloomberg. But yes, it makes it very easy. So those companies, Heritage Universal HCI and the other, they're aware of the risk. In order to protect their capital, they buy a lot of reinsurance, which means that if you hear that, oh, Heritage had $600 million in losses or something, well, most of that, a lot

of that, about 80, maybe 90% of that is reinsured. So the risk is passed on to these reinsurance companies. But the first one that's involved is the Florida Hurricane Catastrophe Fund, FHCF, Florida Hurricane Catastrophe Fund. And one of the reasons why people were in gloom and doom mood a couple years ago prior to Torah reform is because there appeared to be strains on that fund that it was... How is it funded? It gets the premiums from the seedens. A company, a primary insurer like Heritage or any other company will seed reinsurance and they pay a premium for that and that's the revenue of the fund. But because it's a public entity, it was underpricing the reinsurance. Reinsurance is provided mainly

by these mammoth giant reinsurance companies in Europe like Hanover, Re, Swiss Re, Munich Re, Re, Scoree. And there's also the capital market instruments, catastrophe funds, insurance links, securities. So third-party capital coming in. You've got reinsurance available in Bermuda, a big source of Florida reinsurance capacity, and also Lloyds of London and less so in the United States. So these companies are really protected because they're aware of the risk that's there. So the reinsurance picture is one that's very important because when you see that a company had an X amount of loss, well, what's the net loss after reinsurance? It'll be a fraction of the gross loss because of the impact of reinsurance. So these are like walls around the balance sheet.

But presumably if the gross losses for like the domestic insurer, the first layer of insurance keep going up, then the reinsurance premiums go up as well eventually, right? That's right. And here's some other news, which is good news. Prior to Helene and Milton, reinsurance rates started to come down. Reinsurance rates started to come down. The June renewals, the mid-year renewals showed some decreases in the cost of reinsurance. So whereas there are some henny penny, the sky is falling chicken little folks out there saying, oh, insurance is going to just get more and more expensive. It's got nowhere to go but up and we can't buy insurance.

Not necessarily. It's not true because the rate or the premium follows the risk that's there. So if the risk goes down, then the rates go down. If you look at workers' compensation, a different line of insurance, for the last 12 years, the rates for workers' compensation have been coming down because of income. improvements in safety at manufacturing plants, other places, automation. So there we have a good example of rates coming down because the risk has come down. But people like ignore that because it's more fun to talk about bad things happening.

That's true. That's true. If everything's so fundamentally, I guess, structurally sound, you know, Wall Street does its thing. It assesses the risks of a hurricane. It lays off the risks of catastrophes to the catastrophe bonds, et cetera. Why does the citizens even need to exist? And why do so many Florida homeowners either end up with citizens or end up just going bare and not having insurance? In Florida, the impact of the out-of-control lawsuit abuse is what ended up driving up premium. So that was apart from the risk.

And this happens in other states as well where you have some sort of damage to the private market. when the free market is having trouble making a decent return. And the insurance industry is not a rich industry. It's not like other industries. The S&P, I think the average margin is 14%. And the insurance industry is about 6%. So it's not as if these are fat, rich companies. They operated relatively slim margins.

So when there is an exodus of insurance companies from a particular state, then the state will often establish its fund, which is supposed to be a temporary stopgap until, the market, the private market, reattains stability. This happened in California with SCIF, the state-run workers' compensation entity, and other places as well have had this sort of accordion type results where business expands, like citizens expanded a lot. And then you have depopulation, which is the effort to take policies out of citizens.

So depopulation was happening and is still happening. Wait, depopulation efforts to take policies out of citizens. That's right, to put them back into the private market because the private market now is out of the intensive care unit. It's just in a recovery room. What's been the success rate on that? I don't have the numbers, but it started with a trickle and it's continuing. We'll see what happens now in the wake of Milton to see how much depopulation there will be. So one thing I wanted to ask just going back to tort reform is I take the point that,

making it more difficult to file ridiculous lawsuits has made the ease of business for insurers in the state a little bit better. But I guess the downside is if you're a consumer who experiences some sort of damage to your house, maybe it makes having actual conversations, much less litigation with your insurance company a lot more difficult. How do you balance, I guess the balance of power between the consumer and the insurance company here. Yeah, the upper hand was held by the trial bar where the concept of civil litigation, and again, this is civil litigation, not criminal litigation. These are torts, civil wrongs. The emphasis in tort law, or the purpose in tort law, is not to punish, but to compensate. So many of the

large verdicts and settlements that have made it difficult on the commercial side for people to create products, pharmaceuticals, do research, are being hit by these very large outside judgments that have no real place in tort law. So you have the expansion of jury's verdicts and settlements that are exacerbated by misbehavior on the part of the plaintiff bar, new legal theories and aggressive attempts to extract those large amounts, punitive damages that are multiples of actual damages sustained. So this is entering the topic of social inflation, the expansion of the concept of tort. And a lot of states have tried to put an end to that with legislation like Florida did in order

to keep services and businesses at prices that are not unaffordable. because this ends up driving up the costs of things. When you have companies that are paying hundreds of millions of dollars or tens of millions for actions that are not necessarily caused by their activity, it's a distortion of the legal system. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all.

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Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example,

we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your podcast. Going back to insurance for a second, and I take all this point about towards, insurance is a key part of what makes Florida a habitable place, a place where people

are going to invest assets to build. One aspect of insurance or one aspect of risk is flood insurance. And my understanding is that a big part of flood insurance is national and federal funded. What is the role of flood insurance in making parts of Florida safe to build in? And who pays for that flood insurance? And right you are, Joe. Flood insurance is provided mainly through a government program called the National Flood Insurance Program. and the program has been around for several decades, and it covers flood insurance because flood damage is not covered in the conventional homeowners policy,

say the HO3 homeowners insurance policy. So people buy flood insurance policies separately from the National Flood Insurance Program, the NFIP. So in Florida, which is aware of the risk that's there, 18% of homeowners buy flood insurance. insurance, whereas in North Carolina, which got hit really bad, tragically bad, a lot of loss of life as well in Western North Carolina, only 1% of the Tar Heel state homeowners bought flood insurance from the NFIP. Now, there's been pressure because it's a government program. A lot of it is underpriced, it's subsidized, really. It runs at a deficit. There's been pressure to have the

private market come in and provide flood insurance. And here, the good news is, that the private market is finally starting to grow. NFIP has got about $3.1 billion in premiums, whereas the private market is estimated to have about 1.4. So almost half of the federal flood is now provided by the private market, whereas a couple of years ago, the private market was virtually non-existent, because nobody would buy it at the risk-adjusted rates.

So now you have a healthier situation. Problem is, though, that the NFIP is going to bear a lot of the losses from Helene and Milton because we know about the storm surge, one, two feet of water and these torrential, violent rains that brought down mud and flooded homes, really destroying lots of properties. So with the flood and the storm surge, we're not covered by the H.O3 policies,

but are covered by the NFIP. And the gap there, you know, with only 18% of Floridians having the insurance, I think he's going to send a message because the message that we've been contract this end as we educate folks about insurance and how it works, is that you need to spread the risk, you need to have a pool of risk in order to absorb the losses when they happen. To put it bluntly, are taxpayers in less flood prone areas currently subsidizing the construction of homes and more flood prone areas? Yes, they are, and that's a problem. The fact that you have construction in areas that are in harm's way. And when you have a development that's by the coast,

you're going to have impermeable surfaces. When you have asphalt, there's nowhere for the water to go, so it stays inside homes or it backs up. So, well, there's one word which I focus on when I think about catastrophes and in Florida, and that is resilience, resilience, strengthen homes capacities to withstand these kinds of storms. Florida has a record. the issue. So if we look at the track of Helene a few weeks ago, because Michael hit Florida in the Gulf area, in the Big Bend area, the Panhandle side, building codes were strengthened, houses were built to code. But when Helene crossed the border from Florida into Georgia, there was much more destruction in Georgia because Georgia does not have those stringent building

codes that you need to have to really make your house more resilient. So resilient. resilience is key. On a national basis, I turned back to 1953 when the Dutch, Dutch low country, below seawater, flooded lots and lots of times for centuries. In 1953, they had a horrible storm there, and they said, Basta. Well, it's not Dutch, but the Dutch equivalent of enough. Enough. Genuque, I guess. And they had a big project to build levees and other sort of defense systems, and they haven't had a massive flood loss since. And also, if we compare Hurricane Katrina of 2005 to Ida, exactly 16 years later, we remember 2005 when the levees burst in New Orleans.

And after that, the levees were strengthened, and the city survived Ida, which was as powerful a storm for Louisiana. So that demonstrates that resilience works. There's a ratio that's typically used in the industry, that $1 of resilience results in $6 of disaster relief averted. By the way, Tracy, I'm just going to say, if there are any academic economists listening to this episode, do a paper on the Florida versus Georgia damage

and the natural experiment we saw on updated building codes. It sounds like it's there for the taking for someone looking for their master's thesis. That's a good idea. Wait, I had a question. So we talked about reinsurance, but the funny thing about insurance is that, like, there's always another layer it feels like.

So there is reinsurance for reinsurers as well. What's been going on with rates there? That's right. There's reinsurance for reinsurers as well. That's the retro market. And the rates and the retro market typically are similar to what you have on the primary market. So they sort of move hand in glove.

There are going to be renewals of a lot of reinsurance treaties in January 1. The 1-1 renewals is when most global. re-insurance treaties renew. And whereas, as I said earlier, rates have started to come down in some instances for reinsurance. Now in the wake of these hurricanes, they may be stable. People are not looking at increases. The industry is looking at these losses. And that 55 billion, Joe, that you mentioned before, as you said, is at the upper end. Moody's just lowered their estimate. Moody's acquired a modeling firm called RMS recently, and so they have their own modeling

of catastrophes. And they lower their estimate from about $45 billion to about $35 billion. Another modeling source, Karen Clark, who's usually right on the money, I think is estimating $35, $36 billion. And Verisk, a publicly traded company that also has its own modeling, is also landing in the $35 billion area. So this $35 billion is going to be born by the national. carriers and by the Florida domestics and by the reinsurance companies in Lloyd's Bermuda, continental Europe and the United States, and by the Florida Hurricane Catastrophe Fund, and by private investors that are buying catastrophe bonds, those insurance-linked securities, some of them are going to pay out, but it's not going to be an exhaustion of the collateral

that's in there. So the industry is really breathing a sigh of relief, that this could have been the one that is not only an earnings event, but a capital event, that dense the capital of an insurance company. And insurance companies typically like to have fortress balance sheets because they're in existence to take care of things and even, you know, what's the worst that could possibly happen? They think about these things. They model these things. So it's not a surprise that we are able to withstand this as we clean up the mess. I like that distinction between an earnings event for an insurance company in a capital event. And it does sound like...

It seems like an important one. It does seem. I have one last random question. Going back to the... When I think of politics, I think of Republican candidates around the country and they like blame the trial attorneys and they like to use the trial bar as one of their hobby horses to fight against. In Florida specifically, you know, it's a red state by and large.

Is the trial bar is the lawyer industry a little bit more savvy about being on both sides? of this. Is this a, have they, are those lawyers a little bit savvy about understanding that they need to kind of be on both teams? In the days before, Governor DeSantis signing tort reform into law in Florida, in the few days before that, the trial bar industry submitted 100, I think it was to, 180,000 claims. So they got things under the door before the shop was closed. Wow. Got it. And there was a letter that was circulated among one of the major firms that had bellicose sort of terminology there. Like, you know, this is a war. You know, you can't be friendly to the defense.

They are the enemy. Yeah. So I don't think people are holding hands and singing kumbaya in a gathering of defense and plainly. Okay. So summing up this whole conversation, you know, people talk about what needs to happen in Florida to make it a. viable place or an affordable place to live. This is kind of a loaded subject, but there are plenty of people out there who say, well, maybe we just don't build houses on the coast of Florida anymore. I'm sure a lot of Floridians probably have strong opinions about that. But what else could be

done, I guess, to make the state more resilient and to make insurance more affordable for the people who are there? The codes are really important, really important. There was a house, well, it wasn't in Florida, but this is a good illustration. There was a house in Mississippi that was worth $69,000, and it flooded 34 times in 32 years. Wow. Because the owner knew that the NFIP, the National Flood Insurance Program, would pay out. So it was about $700,000 paid out. There have been removals of homes that make sense. Like it happens in Queens in southern New York City, where you had the houses in Breezy Point that were elevated. So economically, sometimes it does make sense to do that.

If you've ever been, anyone that's been to Bermuda will see that the roofs there, they're all the same across the entire island. Well, they're made of limestone. So Bermuda, which is in the middle of the Atlantic, gets these storms. And it's a mandatory thing in Bermuda, in the building code, to have this kind of a limestone roof, not only because it protects the house from being destroyed. Some roofs have been there for 200 years, but also because it collects rainwater. Bermuda is a pretty dry island. So you have this strict code.

So yeah, removals work. About 1% of NFIP policies are responsible for 30% of the losses. Because you have these repetitive loss properties like the one I mentioned in Mississippi. And there's a story of a house in Houston that was rebuilt eight times instead of removing it. somewhere else. So price sends a signal. If you look at classical liberal economics, price is a signal. And if the price goes up, then it tells you that it's something going on here. Why is it more expensive? So sending the right signal is something that these public programs like the National Flood Insurance Program or crop insurance, which is a whole other thing, don't send the right signals. They encourage people to have behavior which is not economically appropriate. They're

passing on, socializing the risk to ordinary taxpayers, Tracy and Joe, like you and me. I don't want to pay that. You know, the only person I know who's spent a lot of time in Bermuda, by the way, as an insurance executive. And our owner. Oh, that's right. That's right. Oh, okay.

Jerry, thank you so much for coming on the show and explaining the latest in Florida insurance and roof frauds to us as well. Thank you very much. It's been a pleasure. Joe, that was really interesting, especially the contrast between, um, Florida. Yeah. No, that does sound really interesting. You know, a natural experiment out in the wild. So someone jump on that. Yeah. I think we could. Maybe we should do it. Yeah. Like someone who's not us, please look into this. No, that's bad. I mean, there are so many things about Florida. And to some extent,

it's kind of, it feels like in the discourse, often people don't like separate its natural propensity to have big hurricanes and storms from the structure of the market. So it was kind of good to kind of zero in a little bit more on structural issues. Totally. And to his point, Florida's history is a history of real estate bubbles and busts and storms. And there have been many cycles of them. And it really, you know, dates back to at least the 1920s. I mean, the history of Florida is essentially the history of air conditioning.

And once air conditioning kind of existed, there is always going to be this massive. people from the other 47 mainland states or maybe 48 states or whatever that will want to go there to live in a warm place by the ocean where they have air conditioning on demand. And Florida has been counted out so many times in the past. And I'm just going to say something further, which is that every time we talk about one of these extreme weather states, whether it's Florida or Arizona with the heat. For North Carolina. Yeah. And there's this sort of like aversion that people have towards the even process of moving there. Like, oh, this is, humans weren't meant to live in this land. And I'm just going to say right here, no, what humans do that other animals don't is we make land habitable that we aren't naturally acclimated. That is what makes us different from all the other animals is we find land that normally

we couldn't survive in under normal conditions and we turn it into something we can live in. And we'll always be going to the most extreme parts of the, the world for that land. Yeah, but the question is how much does that end up costing, right? Like, this is like telling me you haven't spent much time in like mangrove forest without telling me you haven't spent much time in mangrove forest. Like it costs a lot of money. And there's like an environmental debate about whether we should be tearing up the coast to do this. Sure. And I get that. And there are certainly costs. But you know, there's a lot of people in the world right now who can live kind of near a beach in an ocean in Florida, people who

might have probably been, who considered middle class, who can have something that might have been reserved for the ultra elite many times ago. And that is sort of progress. Yeah, okay. I mean, look, I get, well, I get that people want to live on the beach. Yeah. Like, that's basically what you're saying. I think there's still an open question about how that, how desirable that is from a social perspective. Yeah, well, other people, I'm not, you know, I'm just saying, yeah, sure, I get, I get that. I get that. I individually want to live on a beach, but. And I'll say this too, and I'll say this to as someone who I believe there are issues with the flood insurance aspect specifically in which people who don't get to live on the beach or people who aren't living in asphalt-laden areas

are subsidizing the existence of people who do live near the beach on asphalt-laden areas. There are issues there and I feel like maybe the flood insurance system specifically probably needs some sort of better correlation between who benefits from it and who pays it. But I'm not an expert, but that would be my intuition. Nonetheless, I am confident that over time, the march of people towards warm weather, water, and air conditioning will continue and we'll find a way. Okay. Let's leave it there because after this episode, Joe and I are going to go off and argue in private over whether or not Florida Beach Homes are the height of human progress. All right.

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Wisenthall. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez, at Carmen Erman, Dashiel Bennett at Dashbot and Kail Brooks at Kail Brooks. Thank you to our producer, Moses, Andam. For more Oddlots content, go to Bloomberg.com slash oddlots where we have transcripts, a blog, and a newsletter.

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