Episode 20 - Wind vs. Earthquake: Who Wins?

this is Lisa Miller and Associates Florida Insurance Roundup your podcast on the people issues and regulations shaping Florida's Insurance market now here's Lisa Miller Welcome Friends the July 4th earthquakes that hit South Central California are a fresh reminder that California's population is the most susceptible in the country to Major earthquakes so why is it that earthquake insurance is no longer required as a condition for a California mortgage especially when wind insurance is required throughout the State of Florida and other areas to protect against hurricane damage while less frequent earthquakes are unique in that the risk is constant and the potential damage can easily exceed those of our hurricanes here wildfires and flooding combined is it time to readjust our public policy and our insurance policy policies to adequately cover all of our 21st century risk we'll ask our guests today we have John Rollins Consulting actuary from mman the global Consulting and Actuarial firm he's a 25 plus year veteran of the business and leads the firm's Tampa Florida Office I've worked with John for many years and we also are privileged to have Jim Wilkinson who is the executive director of the central United States earthquake Consortium or cusc for short I'm sure many of our listeners have not heard of it but you'll get to know more about it today and Jim has worked in the field of Emergency Management for 30 years and I have often said that there's a huge bridge between property insurance and Emergency Management and these two experts are going to help us build that bridge even stronger today so welcome gentlemen pleasure to be here thank you Lisa be here you're welcome John so let's start Jim would you tell the audience about cusc what it is what you do what you're trying to get done um you know as you spend your days trying to make the world a better place I would love to KK is an organization that's been around since 1983 uh we were established uh originally by the seven states that would be most impacted by a new Mader event um which runs along the the Mississippi River um in partnership with the federal mergen management agency and um we're now an eight member State organization Alabama was brought in in early 2000 as the eth state but our primary focus is to look at the earthquake threat in the central us which is considerably different than any other part of the country uh due to the geology and the way the earthquakes occur here and the propagation of seismic waves and so it's it creates a situation in which it becomes a multi-state impact and there really wasn't a mechanism to address that we had individual State Emergency Management agencies we had Federal regions uh female regions but there was no way to look at this is a collective risk to these states and so we were formed um to be that organization to do that so through our members through our primary board of directors which is the state Emergency Management directors um of these states we're able to pull together a vast array of um focus areas to help us address this and one of those uh in the past has been our state insurance Commissioners um something we're working on to resurrect um so we can look at this insurance issue across all of the q6 states but we very involved in GIS uh public information response recovery planning mitigation um so we have various mechanisms in which we use through this organization to address key areas that are specific to addressing this Hazard wonderful well we are just very honored to have you join us and to have our listeners find out more about what you're trying to do in the earthquake Arena and John I would love you to kind of get us kicked off here uh often times we hear you know that earthquake insurance is not mandatory and it hasn't been mandatory for many years in California for those that have mortgages and I'd love you to answer give me your thoughts about what impact that has on damage caused from earthquakes that's not ured well it's a really interesting problem Lisa and it's one we've talked about many times I'm on ourselves now Milan is a bunch of actuaries as you said and we have other profession profs as well but our Beating Heart Is Actuarial science and that makes us serve more in the role of scorekeeper than policy maker uh but as scorekeepers we uh tend to find ourselves close to a lot of assignments and uh Consulting engagements that have to do with policy and in particular the public policy of insurance now contrary to The Stereotype actuaries are actually a very diverse group of people that are creative and like to do a lot of different things so the part of Mill and I work for uh we take a particular interest in disaster exposed property insurance and what we found is that not only do the perils vary across the country as you alluded to the the idea of severe earthquake seismic risk in places like California and less reported but in the central us which is jy's region and then you have floods you have wildfires you have hurricanes all of these things do have an impact on property insurance premiums but uh what's interesting is a couple of factors one is we've done some really interesting work and and one of our clients made some of this work public and some of that Research indicates essentially that all of the catastrophic perils that you think of like earthquakes uh wildfires floods and hurricanes actually contribute pretty significantly a measurable amount to the total amount of what an actual early sound homeowners premium should be for the true risk of these disasters underlying each policy across the US now obviously some areas are dominated by one Peril in California they worry about earthquakes uh in Florida we tend to worry about hurricanes so uh sure in one place you may not have a significant risk from everything but when you kind of average it and mix it all across the nation the takeaway for me is how much parity there is in the overall risk of hurricanes severe storms floods and Quakes that we kind of all share as a nation and when you try and measure how much of that should contribute to the premium of your of your insurance policy and you average it Countrywide everybody really has a stake in this it's each one of those types of disasters I talked about contributes potentially hundreds of dollars to sort of the quote fair or right insurance premium as actuaries would Define it so that runs up against the policy question which is if you've got significant roughly equal risk from hurricanes floods wildfires and earthquakes across the country why aren't the guidelines for determining uh eligibility of mortgages for government sponsored Enterprises like Fanny May and Freddy Mack and why aren't the uh conc competent Insurance servicing uh requirements exactly the same across the country and as you pointed out in Florida everyone has to have hurricane Insurance in most of the US if you live in a particular Zone that's designated ated as medium or high risk you have to have flood insurance in order to get a federally backed mortgage but in California you don't have to have earthquake insurance to get a federally backed mortgage and that's true in the central Us and other regions of moderate to high seismic risk as well so we don't have all the answers as to why that is but we do know that a pure clinical look at the numbers would indicate that there's really no reason to favor one Peril over the other I got it and and Jim that that thr well throw it back to you you lay awake at night because you know that many of the residents in the states that you represent are uninsured for earthquake and try as hard as you do and as hard as Commissioners Insurance Commissioners do and other Realtors and others that try to educate the public it doesn't seem to be real popular for people to have earthquake coverage what is it that cusk would like to do uh to promote that I know you mentioned that FEMA is out there trying to promote and educate about earthquake insurance what are your comments about how we might do that or if the federal government can help or state government should jump in well clearly we've got to figure out a way to get the affordability down for earthquake insurance um just looking at Missouri for instance the six most vulnerable counties in the state U between 2 2018 saw almost a 700% increase in their premium costs um you know so that's definitely going in the wrong direction and we need to figure out how to in our especially in our higher sizing zone areas um to get that cost down and availability of that insurance um whether that's through incentives um you know we got to have the the banking industry needs to be at the table the the real estate industry you know our local developers there's a whole host of folks I think have a a role in figuring out how to make this affordable for people who need it and Rural communities become even more particular um because they don't have a lot of the resources um that we see in larg communities to be able to do some of these things on top of that there are also typically uh communities that have a higher risk from earthquakes because they have a higher percentage of buildings and infrastructure that are vulnerable than a larger City say like Memphis or St Louis which is typically growing at a different pace and and replenishing their older buildings and putting in things that are designed for for earthquakes and so I think it's a collective effort to figure out how do we get to that point where we're all wanting to be that's that we have um Everybody covered or as many people covered as it can be for this particular Peril and I think that of course is one of the principles of insurance is to spread that risk to as many as possible which can lead to more affordable premiums because you spread it among larger groups John back to you when you hear him talking about incentives or ways to get a a premium or the cost down I think about all the resiliency uh themes that are in the marketplace now give us some thoughts John about what you think if you even to conjecture if residents were to make their homes more resilient to earthquake disaster what that might do in theory to a premium well there are a couple of complicating factors in earthquake specifically that represent probably challenging is even beyond what we've seen in uh mature mitigation situations let's call it uh like Florida where you know Floridians have been talking about making their homes safer against hurricanes for nearly 30 years now and and certainly spurred by the sort of the seminal shocking event of Hurricane Andrew uh yes it took years of deliberation after that but we most of us that are uh veterans in the industry know that Florida created a bunch of initia to respond to that and one of them was a mandatory system of insurance premium discounts for highly specific lists of mitigation features which have been demonstrated to reduce Windstorm losses I think some of the trouble with earthquakes is really due to a couple of factors first of all you always have the problem in terms of mitigation incentives of who's going to pay for it and what's the cost consumers simply don't like spending money upfront to reduce a contingent future threat that may or may not materialize uh and in particular if they do spend that money they think less in terms of financing mechanisms and and costs of capital but they think very viscerally in terms of payback period if I spend X dollar today what is going to happen in my financial life that means I get paid back that X and over how many months or years will it take me to recover that X that I spent that's how people tend to think and the the hard reality of most mitigation incentives is that the payback period is too long to get consumers to pay attention unless there's also some Catalyst from outside whether that be low interest loans uh secured by assessments on the property whether it be direct government grants or loans uh that are made by state or federal governments or whether it be some other sort of public private partnership so you look at just the reduction in actuly sound insurance premium it's an incentive for mitigation but it's not enough second problem with earthquakes is that there's far less definitive engineering backed up by recent experience to tell us exactly what sort of construction and retrofits would make a big difference and give us the highest bang for the buck in hurricanes uh we've all seen the news articles most recently with hurricane Michael and the sand Palace was an extreme the sand Palace was this extremely well fortified home that completely listed hurricane Michael on Mexico Beach while uh the rest of the neighborhood around it literally looked like a bomb had been dropped on it and that was uh you you saw those images over and over again those are extreme cases not everybody can afford to build a sand Palace but what mitigation features are demonstrated to have a significant impact after an event we simply have had an empirical answer to that question in in the case of uh the central us almost 200 years actually a little over 200 years since we had the last really major earthquake strike in the Madrid Zone even in California uh we had significant damage from the Lomo prator earthquake the North Bridge earthquake and most recently we've had a little bit of a wakeup call in a relatively unpopulated area with the ridgerest earthquake so there's a little more on the ground experience but still not enough to sort of convince consumers that these these things really really do need to be done and it's not just some scientist spewing the benefits it's something you can actually see in your neighborhood after a disaster and finally and probably the third problem with earthquakes is unfortunately in places like the central us multiple types of disasters compete for your attention uh there are severe storms including tornadoes there are floods there are earthquakes and so you have sort of this Pyon on of mitigation problems and the engineering features that make your home less susceptible to an earthquake are not the same Investments and expenditures you would make to make your home less susceptible to a flood so in the simplest case if you elevate your home against a flood and put it on pilings it may actually make it more vulnerable to an earthquake because it's uh has a higher center of gravity and it's supported by uh different types of loadbearing mechanisms so it's really unfair in some regions of the country to ask consumers to spend a lot of money to mitigate against one Peril and then spend a lot of different money to sort of potentially undo what they did to mitigate against another Peril which is equally valid so um not to use too many puns here in an earthquake podcast but a lot of consumers are caught between a rock and a hard place as to how to spend their money on mitigation and how much they can spend on it I got it I think you know with where we're headed knowing that we have an uninsured population we know that residents in earthquake prone states are exposed to millions of dollars in damage that will not get repaired because the federal government's ability and and willingness obviously to to step in and and replace everything that gets damaged is a problem in fact Jim you know this after and and you can share with the audience after a disaster would you share with the audience what you see in terms of what FEMA is able to quote write checks for uh to help people get back on their feet well it's it's not going to fix everything by any means U even the community itself they're going to put it back to essentially the way it was for a community for an individual you know they helped provide low interest interest loans and that sort of thing but it's not going to be a a check written to just go in and rebuild a person's house um and that's part of especially with communities um when you're looking at mitigation and it's been one of the conflicts in how we build back better safer stronger communities um the program was set up not to build back um to a better higher standard it was built to put it back the way it was um and so we you know they've been working on changes to that so that we're not adding to the problem and that's that's been generally the challenge that we've had is how do you uh make those advances uh in Risk reduction rather than essentially adding to it because you're just putting it back the way it was and as John pointed out some of the things that when you got cross Hazard mitigation very little of that's being done and there are some significant challenges in doing that um and you know part of that challenge is that you've got a business or a homeowner um it's very anxious to get back into their property um and asking them to spend an extra week two weeks um extra th000 $2,000 um on top of what they're already facing to do some of this cross- Hazard mitigation uh risk reduction becomes a real challenge thankfully you know I've never been in a situation where I've been out of my home for two or three months to six months um you know even longer that's difficult and it's um something that you know we fail to really grasp in the process of how we assess these programs and the cost of them you know again is the disasters are going up you know fem is taking a really hard look at that whole process and trying to figure out how to reduce that vulnerability because we can't keep printing money and unfortunately the disaster seem to be increasing in frequency so figuring out a way um to provide the incentives to provide the funding to to support better rebuilding after the fact um is a goal that we're all striving for I think you're absolutely right Jim in fact um bringing this in for a landing Millan particularly with John's expertise has done some amazing research about how we as a private insurance industry uh could do things maybe faster better cheaper John you want to comment on that before we close out today about what we've done in the flood insurance and what arena and what your research has shown well uh certainly my day is full and my my days months and years at mman are full uh doing individual projects for insurance companies for reinsurers for uh startup insure Tex as we call them now or very technology-driven uh Insurance Service firms trying to sort of access the consumer directly and Empower them with more information about their risk so really everybody in the insurance value chain is coming together to put into place private sector solutions to disaster Insurance problems but when we talk about earthquakes versus floods versus Hurricanes and so on the perils as we say in our industry like flood that have received sort of an initial spark from a public policy change are the ones that seem to have attracted the insurance Capital so you look back to uh 40 plus years of the national flood insurance program being essentially the only provider of flood insurance in the US and then uh however it happened whether it was just Serendipity or planning or or some combination of uh luck and Cosmic circumstance US Congress actually got together in a bipartisan way and passed an act the biger waters act that sort of upended all of the assumptions that the private sector had been relying on for 40 plus years about flood and it that act did a number of things one is it it asked the national flood insurance program to answer some hard questions that it had never been asked to answer before like what exactly is your total probable maximum loss exposure in a scientifically plausible flood it's hard to believe for someone like me but no one had ever answered that question before and in fact the computer modeling technology and catastrophe simulation technology to answer that question didn't really exist because no one was forced to invent it because the private sector was not clamoring for an answer to that question because a government program had been in place for 40 plus years so catalyzed by some public policy changes the private sector really started intensely studying the flood insurance problem and what do you know when you put millions of people and billions of dollars of capital all up and down an existing value chain called insurance that goes from the consumer buying their first home all the way to a pension fund in Scotland or a sovereign wealth Fund in Japan investing in disaster risk through today's reinsurance and catastrophe bonds and other Financial mechanisms when you bring everybody that's in that value chain and you ask them to focus their attention on something new and different like us flood insurance a lot of interesting Solutions start to emerge and what we've seen in the past six years has been uh reinsurers developing programs that insurance companies can use on sort of a turnkey basis to add flood endorsements to their homeowners insurance policies so we can get rid of this problem that our consumers have on the ground which is a disaster occurred by home flooded uh perhaps it was due to a hurricane and now I've got insurance companies squabbling over who owns owns the rights to what risk who needs to pay me money first who needs to wait on somebody else whether the federal government is involved uh it's just a mess for consumers to deal with and now you have private sector flood insurance companies saying we're going to to throw all that out and we're going to start again there's a better way to do this which is just to sell you a homeowner insurance policy and tell you yes this also covers floods if you just get this additional page you know this additional endorsement for uh what our research has indicated could be just a couple of hundred dollars a year for 80 plus percent of consumers in these states that we think about that have been recently affected by floods like Texas and Louisiana New Jersey New York and Florida and you know to to use a a phrase that I heard from an insurance agent once the dogs are eating the dog food uh the consumer who's offered a flood insurance policy at point of sale by the private sector even if they can opt out of it is taking that policy up at a pretty high rate even though perhaps they don't live in one of the federal government's high- risk zones and is being told by the government to buy insurance as a condition of their mortgage so you know there are green choots in a market like that that was really stagnant for 40 years now I use that by way of example to say that if we had sort of catalyst policy changes public policy changes like for example um Fanny May and Freddy Mack asking that question you asked right at the top of the podcast which is why doesn't a government-backed mortgage require earthquake insurance if they were to update one page of their servicing guidelines and say by the way when we say insurance we mean earthquake as well it would instantly kind of upend the entire us homeowners insurance Market similar to the way the biger waters act and a few other uh followon regulations upended the uh flood insurance market and resulted in a whole bunch of different business models being considered so that's exciting to me because I've always looked at us uh Insurance risk in terms of what Swiss recalls the protection Gap uh and I've identified three things in the protection Gap I want to fix before I retire one is state-backed wind pools that carry way too much Windstorm risk and I I'm proud to say I I made my small contribution to that at Florida Citizens the second is US flood insurance which is concentrated uh in something backed by the taxpayer which is an actual flood insurance program we're in the midst of making tremendous progress on that and really the third massive pool of underinsured risk in the US is earthquake insurance which is not required at the residential level so I would certainly love it if we got to a place where the same intellects and the same money and the same hard work that's being brought to bear to solve the flood insurance problem was brought to bear to solve the underinsurance problem in earthquake you got it John I think I think Jim Wilkinson is just the guy to do that Jim thank you so much for being here today and John you as well and Jim I think John is giving you um if he were King for a Day wishlist uh and you were on the right track by putting these Insurance Commissioners around the table and I think we'll be having more conversations John and I stand ready to help you do whatever it is you're trying to so we can get earthquake at the top of the hearts and minds and Souls of public policy makers so John thanks for being on the show today thank you L thank thank you Jim Jim and you as well um know that we're here for you okay uh certainly appreciate the insights and look forward to working with you the future great and in our podcast show notes we'll have links to all the good things we've talked about here today and so I want to hear from you you can call us and leave your comment or question uh for our later reply on air right here on the Florida Insurance round up the number to call is 85388 80002 that's 8 50 3888 002 or just drop me an email Lisa Miller Lisa Miller associates.com and that's it for today I just appreciate all of you listening and following our work um I know many of you uh retweet and repost much of our social media work and you've just been great followers and we appreciate all that you do in the field every day so until next time be safe and I'll see you on the trail this has been Lisa Miller and Associates Florida Insurance Roundup your podcast on the people issues and regulations shaping Florida's Insurance market for more information on today's program please visit us on the web at www. 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