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Hello and welcome to another episode of the Audlots Podcast. I'm Tracy Allaway.
And I'm Jill Whysenthal.
Joe, we need to do more on insurance.
Yeah, absolutely so. We are recording this October eighteenth. 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 it's just going to
be tremendously catastrophic potentially. However, it was obviously still quoite 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 fifty five 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 coming 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 a big picture, I find insurance fascinating because it's basically the original finance y. 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 their myriad and we will get into all them. But yes, there is much to discuss on this topic on this episode in PRIT 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 Flora 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 Our 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 lots.
Thank you, Tracy, thank you. Joe'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 Son, 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 ten 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 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 our 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 and state capitals how 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 fifteen years from now, or let's say not fifteen years from now, let's say today I was sixteen, I'm like, all right, I'm ready to retire. I don't want to live in the cold weather anymore. I just wanted a nice little house in Fort Myers, Florida. But I kind of want to get 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 front from your window. But when the ocean 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, all right, 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, mortgage loan that's backed by the federal government one of the GSS Fanny May Freddie Mech, so it's required. Some people go bare, they don't carry insurance. And there are three major sources of insurance for future retire research as yourself, Joe.
One is the national insurance market, so you're jumbo insurers that operate nationally all state state farm Travelers, Hardford, and the like, And there's also some companies that are the so called Florida Domestics is your companies that were set up following catastrophes about fifteen years ago that are focused on flow and four of them are publicly traded. And there's also Citizens Property Insurance. Citizens Property is a state
run ensure 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 like Citizens, At what point do you get access to those? Like I've never really understood 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, 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 uninsurance 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 a 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 porcelain that's cracked, it's got a bit of a 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. Yeah,
let's go back to two thousand and four. In two thousand and four, there were four landfalling storms that hit Florida. Those were Charlie, Francis, Ivan, and Gene. And in two thousand and five there was we call the KRW Katrina. Ilma. 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 two thousand and five 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 two thousand and six and two thousand and seven, there were no hurricanes that made landfall in Florida. The insurance company recouped the amount that had 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. Yeah, 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 odd loss days like twenty fifteen. Oh, we've did episodes about the nineteen twenty six hurricane and the nineteen twenty eight ok Choby hurricane that caused the Florida land that bubble. You know, Florida's history is not just hurricanes, 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 nineteen twenties Florida property bubble, but just a catfish bubble. But I say too.
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 now 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 two million dollar judgment, so a lot of legal advertising and people are responding to that. So 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 eight percent of the country's population, so it's got about eight percent of the homes and the homeowner insurance policies in the country, but it has seventy eight percent of the homeowner's 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 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.
How 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, but.
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 and 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 Floridas 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 Torot 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 what if it happened on a national level, would have the House and the Senate and the White House
in the same pushing in the same direction. Not likely, But in Florida it happened. Something similar happened in Texas about fifteen years ago, and the results of Torot reform are already being seen where the number of suits I mentioned the seventy eight percent 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 the you know, 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. They give us a ticker that are that are publicly traded. And when the news was coming out of Noah about the approaching hurricanes, people started selling the stock of those companies, about twenty five percent
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 fifteen percent. 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 name? I actually wouldn't want to look them up?
All State would.
No, No, the Florida specific.
The Florida Pacific one, Yeah.
Florida, Yeah, who are they? Heritage HCI, Heritage Insurance Holding.
Someone needs to make a Florida insurance ETF so we can.
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 Appalachicola, and then when Milton was coming and headed towards the Tampa Bay, it turned south at the last minute and did damage to Sarasota. But in Tampa Saint Pete spared.
An HCI group. And that's actually at all time highs right now, is it. Yeah, So that's and 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, HgI, sorry I miss booked. HG has not al time highs. It's it like an fifty two weeks high. It was higher in twenty twenty one 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 of 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 stratispheric 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 you know, throw good money after bad. So a couple of years ago, it 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 reinsure that is obligatory. An obligatory reinsure these companies that Joe, you looked up in a couple of seconds, I'm very impressed.
Well, then we have the Bloomberg terminal, oh plug for our core product here at Bloomberg. But yeah, it makes it very easy.
So those companies, Heritage, Universal, HgI 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 six hundred million dollars in losses or something, well most of that, a lot of that, about eighty may ninety percent 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 FHC Florida Hurricane Catastrophe Fund. And one of the reasons why people were in gloom and doom mood a couple of years ago, prior to tour reform is because there appeared to be strains on that fund that it was How is it funded? It gets the premiums from the seedents, 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 underprising the reinsurance. Reinsurance is provided mainly by these mammoth giant reinsurance companies in Europe like Hanover Reswiss, Remunich, re score Re, And there's also the capital market instruments, catastrophe funds, insurance link securities, so third party capital coming in. You've got reinsurance available in Bermuda, a big of Florida reinsurance capacity, and also Lloyd's 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 some Henny Penny the sky is falling chicken little folks out there saying, oh, it's just 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 twelve years, the rates for workers compensation have been coming down because of 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.
And 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 a part from the risk. And this happens in another 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, it's not a rich industry. It's not like other industries. The S and P. I think the average margin is fourteen percent and the insurance industry is about six percent.
So it's not as if those 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 stop gap until the market, the private
market reattains stability. This happened in California with Skiff, the state run Workers' Compensation entity, and 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 it 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 how much depopulation there'll 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 you know, 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 ye, 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 play in tort law. So you have the expansion of juries, 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.
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?
Man? 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 home owner's policy, say the H three 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, eighteen percent of homeowners by flood insurance, whereas in North Carolina, which hit really bad, tragically bad, a lot of loss of life as well. In western North Carolina, only one percent 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, 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 three point one billion dollars in premiums, whereas the private market is estimated to have about one point four 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 nonexistent 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 property. So over the flood and the storm surge, we're not covered by the h R three policies, but are covered by the NFIP and the gap there with only eighteen percent of fluirdines having the insurance, I think it's going to send a message because the message that we've been trying to send 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 focused on when I think about catastrophes and then Florida, and that is resilience. Resilience strengthen homes
capacities to withstand these kinds of storms. Florida has recognized 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 to 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 resilience is key on a national basis. I turned back to nineteen fifty three when the Dutch Dutch low country below seawater flooded lots and lots of times for centuries. Nineteen fifty three they had a horrible storm there and they said, basta, well, it's not Dutch, but the Dutch equivalent enough, I guess Kanuck 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 we compare Hurricane Katrine of two thousand and five to Ida exactly sixteen years later. We remember two thousand and five when the levees burst in New Orleans. Then after that the levees were strengthened and the city survived Ida, which was as power full of storm for Louisiana. So that demonstrates that resilience works. There's a ratio that's typically used in the industry that one dollar of resilience results in six dollars of disaster relief averted.
By the way, Tracy, I'm just gonna say, if there are any academic economists listening to this episode, do a paper on the Florida verg Georgia damage and the natural experiment we saw on updated building code. It sounds like it's there for the taking for someone looking for their master's thesis.
That's a good idea. Wall I had a question, so we talked about reinsurance. But the funny thing about insurance is that 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 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 glow. There are going to be renewals of a lot of reinsurance treaties in January one, the one to one renewals
is when most global reinsurance 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 fifty five billion Joe that you mentioned before, as you said, is at the upper end. Moody's just lowered their estimate.
Moodies acquired a modeling firm called RMS recently and so they have their own modeling of catastrophes, and they lower their estimate from about forty five billion to about thirty five billion. Another modeling source, Karen Clark, who's usually right on the money, I think, is estimating thirty five thirty six billion and Verisk, a publicly traded company that also has its own modeling, is also landing in the thirty
five billion area. So this thirty five billion is going to be borne 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 dents 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 and a capital event, and it does sound seems like an important Yeah, 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 blamed 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 Is the lawyer industry a little bit more savvy about being on both sides of this? Is this a have they 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 rot reform into law in Florida, in the few days before that, the trial bar industry submitted one hundred and I think it was one hundred and eighty thousand claims. So they got things under the door before or the shop was closed. Wow, got it so and they there was a letter that was circulated among one of the major firms that had Bellico's 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. So I don't think people are holding hands and singing Kumbaya and a gathering of defense and planning council.
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 sixty nine thousand dollars and it flooded thirty four times in thirty two years. Wow. Because the owner knew that the NFIP, the flood in National Food Insurance Program would pay out. So it was about seven hundred thousand dollars paid out.
There have been removals of homes that makes 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 doesn't make sense to do that. If you've ever met 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 and 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 two hundred years, but also because it collect the rain water. Bermuda is a pretty dry island, so you have this strict code. So yeah,
removals work. About one percent of NFIP policies are responsible for thirty percent of the losses because you have these repetitive loss properties like the one I mentioned in Mississippi, and there's the 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 these 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 Joel, like you and me, I don't want.
To pay that think you know the only person I know who's spent a lot of time in Bermuda, by the way, as an insurance.
Executive and are our owner.
Oh that's right, that's right.
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 Florida and.
Yeah, no, that does some really interesting you know, a natural experiment out in the wild, So someone jump on that.
Yeah, maybe we should say 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 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 nineteen twenties. 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 mass of people from the other forty seven mainland states or maybe forty eight 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 heage.
In North Carolina.
Yeah, and there's this sort of like a version that people have towards the even process of moving there, like 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 it will always be going to the most extreme parts of the world for that land.
Yeah, But the question is how much does that end up costing? Right Like this is like much time in like mangrove forests 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 sure.
But 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 consider middle class, who can have something that might have been reserved for the alter elite many times ago. And that is sort of progress.
Okay. I mean, look, I get well, I get that people want to live on the beach, 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, yes, sure, I get that, I get that in and I'll say this too, is someone who I believe there are issues with the flood insurance aspects 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 we'll 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 Audlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and.
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