Firas Saleh, director of product management at Moody's, joins the Inside Economics team to discuss the increasing risk of wildfires and floods. He highlights the growing frequency and intensity of natural disasters and the significant economic losses they cause. The conversation then shifts to the insurance industry, focusing on how rising insurance premiums affect individual property owners and real estate markets. Although markets will adapt to these evolving risks, the transition may be challenging.
Firas Saleh, director of product management at Moody's, joins the Inside Economics team to discuss the increasing risk of wildfires and floods. He highlights the growing frequency and intensity of natural disasters and the significant economic losses they cause. The conversation then shifts to the insurance industry, focusing on how rising insurance premiums affect individual property owners and real estate markets. Although markets will adapt to these evolving risks, the transition may be challenging.
For Cris and Firas's research on flood risk click here, for their research on wildfire risk click here
To learn more about Moody's wildfire risk modeling click here
Guest: Firas Saleh – Director of Product Management, Moody's
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X', BlueSky or LinkedIn @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a bunch of colleagues. My two trustee co-hosts, Marisa DiNatale, and Cris deRitis. Hi, guys.
Cris deRitis: Hi, Mark.
Marisa DiNatale: Hi, Mark.
Mark Zandi: You guys look chipper. Have I ever used that word to describe you guys before, chipper? I don't think so.
Cris deRitis: That's a podcast new.
Mark Zandi: It's a podcast new. You're chipper. You're chipper. You look chipper. All right. And we got Mr. Collier.
Matt Colyar: How's it going, everybody?
Mark Zandi: Actually, talk about chipper, look at that guy.
Marisa DiNatale: He got a [inaudible 00:00:46]
Cris deRitis: Movie star quality, man. What the heck?
Matt Colyar: Oh yeah, thanks.
Mark Zandi: No, I'm not kidding.
Matt Colyar: The warm weather, I think, is bringing everybody, lifting everybody up in this part of Pennsylvania.
Mark Zandi: Oh, is it warm up in PA?
Matt Colyar: Yeah.
Mark Zandi: Oh cool.
Matt Colyar: Sixties.
Mark Zandi: Marisa, you have anything to say?
Marisa DiNatale: Nothing. Not anything.
Mark Zandi: And we have a colleague, Firas Saleh. I'm sorry, Firas, I just butchered your last name, but it's good to have you on.
Firas Saleh: Thanks, Mark and team for having me on your podcast. Very excited.
Mark Zandi: It's a form of endearment if I mess up your name. Everyone knows that. I get into big trouble. We have now invested in, and I want to see what's happened with this, but we invested on Zoom or we're now I think we're on Zoom or Teams. You can see a person's name underneath. You can also get the phonetic pronunciation written for you, but you have to pay an extra fee, apparently.
Firas Saleh: Okay, that's good to-
Mark Zandi: You didn't know that?
Firas Saleh: No.
Marisa DiNatale: You didn't have to pay an extra fee.
Mark Zandi: Yeah. Didn't we pay extra for it?
Marisa DiNatale: No.
Mark Zandi: I thought we did.
Marisa DiNatale: I don't think so.
Mark Zandi: Someone told me we had to pay extra for it. No? It's free?
Marisa DiNatale: It's free.
Mark Zandi: It's part of the service?
Cris deRitis: Did you pay extra?
Mark Zandi: Oh gosh, I don't know. Well, that brings up a whole nother set of issues. I pay for all kinds of stuff. I have like, what the heck is this I'm paying for? Anyway, I won't go down that path. Firas, you are obviously a Moody's colleague, but you came to Moody's via RMS, which is obviously the large... I think of you as a large insurance analytics firm. Is that the way you guys describe?
Firas Saleh: Yeah, we essentially enable insurance, reinsurance companies to make more informed decisions using our models and data and our insights. So that's sort of know what RMS has pioneered, I would say. The catastrophe modeling industry, 35 years ago, with earthquake models and eventually expanded with other perils such as wind or hurricane, and then expanded to flood, earthquake, wildfire with the advances in computational resources and with the risk and landscape continually evolving.
Mark Zandi: Right. And you lead the way on floods and wildfires, is that correct?
Firas Saleh: Yeah. And that's correct for the North America region.
Mark Zandi: Yeah. Oh, for North America. Oh, I see. And Moody's purchased RMS, what, was it before the pandemic? No, it was after.
Firas Saleh: It was after the pandemic. Actually they closed on my birthday. I was very excited.
Mark Zandi: Ah, yeah, I guess that would be exciting. Yeah.
Firas Saleh: Yeah.
Mark Zandi: We were talking before we got on the podcast, you've had a pretty interesting story to where you are today. You want to give us a sense of that?
Firas Saleh: Yeah, yeah, sure. So moved to the U.S. in 2013. It was just after Hurricane Sandy.
Mark Zandi: You see how he does it, all his life is based on events.
Marisa DiNatale: Situated by [inaudible 00:04:11]
Firas Saleh: Catastrophic events that are shaping my life.
Mark Zandi: You can tell.
Firas Saleh: Yeah, so, well, I came to the U.S. in 2011 on vacation to see my family and Hurricane Irene hit, so that was, if you guys remember, August 20 [inaudible 00:04:28] It was horrible.
Mark Zandi: We don't remember that stuff, Firas.
Firas Saleh: Yeah.
Mark Zandi: We're weird, but we're not that weird. We're not that weird. You are really weird, but go ahead.
Firas Saleh: Yeah, because it coincided with my vacation, that's why I remember it.
Mark Zandi: Oh see, of course.
Firas Saleh: So anyhow, that was the 2011 vacation. So we decided to come back, I would say, towards the end of the hurricane season. So we came back, I would say end of October in 2012, the following year. And within a week or so, Hurricane Sandy hit New York. So yeah. Back then my wife said, you must know something I don't know. Go somewhere that was either a hurricane or a flood. So that's my story a little bit with Sandy and Irene. And then I moved to the U.S. in 2013, a few months after that. Worked in the New Jersey Institute of Technology and then Stevens Institute of Technology. And most of my work, actually, was focused on Irene and Sandy because there was a lot of funding from these events on trying to better understand the risk, how that evolved, the enhanced forecasts, understand the element of environmental impacts, what mitigation we can do and so on. So at the time during my vacation complaining about it, and then eventually it became what I focus on. My background is in-
Mark Zandi: We were talking about Stevens. Stevens is a wonderful university in Hoboken, just across the Hudson from Manhattan. And you have these beautiful views. And I was recounting, before we got on, one of my friends from high school went to Stevens and said, hey, come on up and spend the weekend. And we saw Harry Chapin speak at this, it was a university venue, very small, kind of like, I don't know, maybe 50, 60 people. And you can see I still remember it because I could see Harry Chapin in front of me. Cats in the Cradle. Cats in the Cradle, right? Is that right, Matt? Cats in the Cradle?
Matt Colyar: Yeah, that's right.
Mark Zandi: Yeah, right. For all you young people who know nothing about anything that's important, like Harry Chapin. You know, Matt, though. You know, Matt?
Matt Colyar: Yeah, I do.
Mark Zandi: Yeah.
Matt Colyar: He's good.
Mark Zandi: And off to the right is this beautiful view of Manhattan in the middle of the night. It's just a gorgeous thing. Apparently, I didn't realize this, but RMS, now Moody's RMS, has an office in Hoboken looking at-
Firas Saleh: Yeah, we have a beautiful office on the waterfront. We can see actually the Moody's office from there, [inaudible 00:07:18] from Hoboken.
Mark Zandi: Well, it's good to have you aboard. And you were also saying you are of Iraqi background, right?
Firas Saleh: That's correct. My family, my parents are from Baghdad originally.
Mark Zandi: Baghdad.
Firas Saleh: Born in France, in Paris, yeah.
Mark Zandi: Cool. So did you speak Arabic?
Firas Saleh: I speak Arabic, yeah. Yeah, yeah. I speak Arabic, French, and English.
Mark Zandi: Oh, I'm so jealous. I'm so jealous.
Firas Saleh: So we switch. At home, it feels like the United Nations because my wife, which Arabic, the kids would respond in English. I speak French, they still respond in English so it's-
Mark Zandi: Oh, so cool.
Firas Saleh: ... an interesting dynamic.
Mark Zandi: And which of the three languages do you like the best? I'm just curious.
Firas Saleh: I like a lot the French language because-
Mark Zandi: French, yeah.
Firas Saleh: ... the French ways you can express. And there's the element of if I know you very well, and then the discussion is very different then it's a formal discussion. So all these different elements, I would say.
Mark Zandi: Yeah. And you and Cris have done a lot of work together, right? You've been writing a bunch of articles. Right, Cris? What do you guys have worked on? Just to give the listener a sense of the kind of things you guys are working on. Because obviously, we're going to talk about what's going on with regard to climate, what that means for insurance markets, for homeowners insurance, for the economy. That's where we're headed here. But before we do that, you want to describe a couple of the things you guys have been working on, Cris?
Cris deRitis: Sure. So we've written a couple of articles for the Global Association of Risk Professionals, GARP. We have a monthly column that we do with them as part of our economic analysis and focus on risk management. And so in December, we wrote an article on flooding and some concerns about the National Flood Insurance Program and how that's underfunded and perhaps not assessing risk properly in terms of the premiums that are being charged. And then more recently, just this month, we released a piece on the wildfires, wildfire risk in general. So we did touch on California's wildfires, but the piece was a bit broader than that.
And Firas kind of opened my eyes to a couple of really interesting risks related to wildfires or just the extent of wildfire risk. It's not just a California, Western United States issue. The Northeast, for example, has had a number of wildfires and we have wildfire risk in Japan and Russia, Australia. So it's much more widespread than certainly I thought. And so, like I said, a really eye-opening piece and just the impact on individuals can be direct, of course, if you lose your house to wildfire, but lots of indirect impacts as well in terms of insurance premiums and just the reassessment of the risk that we're seeing across the country.
Mark Zandi: Just to quickly link it back to the economy, we got the consumer price index, CPI, for the month of February today. We're recording a podcast a bit earlier. This is a Wednesday afternoon Eastern time. We generally do this on a Friday, but just because of travel schedules, we're a little bit early, but we have the CPI.
Matt, we've been getting some pretty large increases, I know, in motor vehicle insurance. Can you see homeowners insurance as well? Is that broken out in the CPI? I think it is.
Matt Colyar: I think too, but I don't have anything off-hand. If you give me-
Mark Zandi: Okay.
Marisa DiNatale: It's in there with renters insurance. Yeah, broken out separately.
Mark Zandi: Oh, it's there. Okay. We'll come back to that. We'll come back to that. But Firas, this has clearly come to the fore, given all the seeming climate events, the most recent obviously being the disastrous wildfires in Southern California. And this past summer, previous summer, we had a bunch of pretty bad storms that hit Florida that's having an impact. Is it just perception that these storms are more frequent, these disasters are more frequent and more costly? Or is that really what's going on? Are they more frequent? Are they more costly?
Firas Saleh: Yeah, it depends on the peril. So what we are seeing is, we're seeing, for example, in the context of wildfire, so 10 years ago when we talked to the industry about wildfire, the general feedback is, oh, this is a peril that is manageable. This is a peril that when we were looking for feedback, how do we need to build a full-blown probabilistic model to understand the risk. We were told, well, this is more of a nutritional peril. So we collected data, model development team, over 60 years of insured loss for the industry. Insured loss, meaning how much did the insurance companies pay for wildfires a peril? And when you look at the numbers, it's quite interesting. It really looks like a [inaudible 00:12:19] shape, if you will. So from 1964 until all the way to 2010, we had almost only $1 billion in terms of losses. And this is trended.
And then the last 12, 13 years, we had 45 major wildfire events. So this essentially cost the industry about 75 billion U.S. dollars, just to put that in perspective. And this was more what we just saw with the LA County wildfires. So when you stack it up, you basically see that trend. So one thing that the model development team was trying to understand and model is, well, are we seeing a climate change signal? Is this climate variability? What are the different factors that are leading, really, to this escalation in the hazard and the risk? Now when you put the insured losses for California's recent fires, you're talking about, at least based on our Moody's RMS insured loss system, it could be up to 30 billion. So this would be the biggest event compared to the Campfire and what we had in 2018 and so on.
Mark Zandi: This event in Southern California is close to 30 billion in insured losses?
Firas Saleh: Insured loss only.
Mark Zandi: Right. Which is only part of the loss, right, because it's not all insured?
Firas Saleh: That's correct. It's only part of the loss. We look at the residential, commercial, and auto. So these are the three, I would say, components that we look at. We don't look into, for example, the cost to the infrastructure, pipes, contamination.
Mark Zandi: Do we have a sense of the total loss including the uninsured loss? Has anyone come up with a reasonable estimate for that? I know that's tricky. We try to do that.
Firas Saleh: Yeah, it's tricky. We've seen a lot of estimates floating early on, but we've been mainly focused, I would say, on the-
Mark Zandi: The insured loss, right?
Firas Saleh: Yeah.
Mark Zandi: And with the hurricanes, as well, are they more frequent and more damaging? Is that the reality?
Firas Saleh: Yeah, that's a great question. We're seeing an uptick in the frequency, especially in the area of Gulf of Mexico. We had Helene, and then following that, we had Milton. And then two years before that, we had Ian. So there's all these extreme, I would say, hurricanes that are happening in some of these regions in Florida. We had Louisiana. If you remember, we had Ida just after COVID. So we had a lot of flooding in New York and New Jersey, even though it's made landfall in Louisiana. So there's this element of, I would say, the wet getting wetter because when you have an increase in temperatures, it basically means more water moisture when it comes to rainfall. So the extremes are becoming more extreme and droughts are becoming also more extreme. So that's sort of a little bit in terms of how the climate is evolving.
Mark Zandi: So the storms and the fires, the natural events, seem to be coming more frequently and the damage is more serious. The other perception that, at least I have, is that this is starting to do real damage to the insurance industry. In part because the insurance industry, first of all, the losses are greater, but also, it's getting increasingly difficult for the industry to pass along the higher costs in the form of higher premiums. And we'll come back to the premiums, because they're going up, but they may not be going up as fast as they need to, to compensate for the risks that the insurers are facing. Is that perception correct?
Firas Saleh: That's correct. And there's a lot of regionality to it, so depending on which state the carriers are operating. So for example, when you think of California, so California has a Proposition 103 that dates back to 1988. And what that means is you cannot, for example, include the cost of reinsurance in the pricing. So that's one element where-
Mark Zandi: You cannot?
Firas Saleh: You cannot. You cannot, for example, use catastrophe models to inform your loss cost that could be used for rate-making. So that's another one. So if you want to put that in perspective, if you look at the average cost of insurance for residential property, let's say for a 300K dwelling, you see that California is relatively, I would say about maybe 35 to 40% lower than the average, because insurance companies are not able to incorporate all these different elements, and they can't increase by a specific threshold more than 6.99% without a public hearing. So that has been changing under the new California Department of Insurance Sustainability Act. So they opened up the process to allow for using catastrophe models. So that is something that is new, and we're starting that process to review our Moody's RMS model there with them as well. So we're expecting things to start to stabilize. But to put it in perspective, insurance carriers, for example, in California, they basically paid to some of these latest wildfires, more than 20 to 25% of underwriting profits because of all these extreme events.
Mark Zandi: I'm here in Florida, and my experience here is that roughly the same kind of problem that we're getting hit, costs are rising, but the insurance industry is struggling, premiums are definitely going up, and there's a lot of denial of insurance. So insurers are becoming more circumspect and cautious about providing actual insurance. But despite that, the insurance industry hasn't been able to keep up, and it's starting to weaken their viability. And the response so far has been to set up these government-backed insurance companies. I think here in Florida it's called Citizens, I think in California it's called, is it FAIR, called FAIR?
Firas Saleh: California FAIR Plan, correct.
Mark Zandi: The FAIR plan. So same kind of deal here in Florida, too, that's going on with California, maybe not to the same degree, but the same kind of dynamic playing out.
Firas Saleh: Yeah, yeah, yeah, absolutely. So I would say one important measure to evaluate the health of the insurance market is what we call, through the lens, I would say, of the insurers of last resort or the residual market, which means if I'm in California today and my policy is not renewed or I'm dropped from my carrier, then I go shop around, I can't find any other carrier that is willing to insure my property. Then I go to the California FAIR Plan, which is essentially the last resort.
Now, what we've been seeing, for example, in California is a huge growth in the California FAIR Plan. So in around 2018 or 2019, their exposure was only 50 billion U.S. dollars and now their exposure has grown to almost, I would say, $500 billion or even more. So it's almost 10x of growth in exposure. And of course, they're accumulating all that exposure in high risk areas. So that's the important part of it. But what's important also to note is the California FAIR Plan is essentially financially supported by admitted carriers that are licensed to write insurance in California, which what that means is if they don't have enough money to cover the losses, they would assess the market. When they assess the market, the carriers that are admitted in the market would have to go pay based on their market share. So they just assessed the market two weeks ago by 1 billion, and now they send the bill and the carriers that are admitted would have to pay within 30 days.
Mark Zandi: And do they pass that along to homeowners?
Firas Saleh: For the first 1 billion, they can pass 50% of it to the consumers.
Mark Zandi: Right. Right. I'm thinking back to this past summer. What was the storm that was... Was it Milton? I think it was Milton that hit the west coast of Florida. And there was some discussion, if it kind of went up Tampa Bay and hit downtown Tampa, the losses would've been so catastrophic that who knows. But the worry was it would be so catastrophic that it would undermine Florida's insurance market. You'd see failure, that there would be failures. Is that overstating the case? Is the industry that fragile that if we get a major storm hit Tampa Bay, that it could destabilize the insurance market to that degree?
Firas Saleh: Yeah, I would say it depends because there's a huge growth, for example, in the Citizens of Florida, which is also another insurance of last resort. So it peaked in 2022 at about 1.4 million policies. And a lot of that risk is concentrated in these regions that are vulnerable to hurricanes. But now we're seeing some sort of a drop because they're having all these programs essentially to offload these policies to the private market. So the way it works, as the market starts to stabilize, you see more and more of these policies going back to the private market.
One thing maybe that's important to note here is the flood insurance. Because even with Citizens, with Citizens, you're essentially getting a wind insurance policy. But now recently, they have some recent requirements following Hurricane Ian in 2022, and the requirement says if you want to maintain your Citizen's policy, you have to also get a flood insurance policy, which is completely separate. And it doesn't matter if you're in a flood zone or not, you have to obtain a flood insurance policy. That's another one. So we're starting to see that dynamic of more flood penetration or more flood, I would say, uptick. And we're starting to also see that certain, I would say, consumers are starting to shop out to look for other providers where they don't need to get a flood insurance policy given there's no lender requirement.
Mark Zandi: I guess I'm looking to you to give me a warm, fuzzy feeling, Firas. Should I feel warm and fuzzy? Push comes to shove, is the insurance market going to hang together or should we be worried that there could be some kind of, what's the word, crisis in these insurance markets? I know it depends on the storms and the fires and the events and everything else. But given the direction we're headed here, that hockey stick you were talking about, is that something that we should be worried about, the viability of the insurance markets and the insurance industry? Is that something that you worry about? Are you going to give me a warm, fuzzy feeling about that?
Firas Saleh: No, when I think about it, when you look at the insurance market as a whole, you have the carriers, those are the primary carriers underwriting the policies. And then, of course, you have reinsurance, so global reinsurance companies. And then, of course, you have the element of the ILS or Insured Link Security. So there's all these mechanisms, I would say, that allow the insurance market to continue, I would say, to operate in these markets. Insurance is all about taking risk, and there's really no bad risk. There's really bad pricing of that risk.
Mark Zandi: Bad pricing, okay.
Firas Saleh: I think that's the important aspect because in many of these regions, the rates are not aligned with the risk. So what we're seeing here is we're starting to see that shift. I was reading a report that came out from the budget senate committee. They reached out to all the carriers in the U.S. and collected information about, okay, where are we seeing non-renewals? And they collected information for about, I would say, 65% of the market share. And you start seeing, yeah, the non-renewals are essentially happening in these areas that are very, very vulnerable to risk from wildfire, from storm surge, from floods. So carriers are understanding the risk much better now. They can understand that, okay, this is an area that is at very high risk. What should I do about it? Or this is an area at very high risk, but they're investing in mitigation. Because remember, one of the biggest challenges is the aging infrastructure.
You have aging levees, you have aging dams, you have, for example, aging utility infrastructure that could potentially create some ignitions that could create wildfires. So these are elements where insurance companies are better understanding the risk through the lens of enhanced data or models, and now they can understand, well, yeah, this is an area that was vulnerable, but now I see that, for example, the federal government or the state invested in a levy. You see downtown Manhattan, they're investing billions of dollars in seawalls and flood barriers. In Hoboken, portable flood barriers. So the risk, the hazard is there, but we're also starting to build differently, and they're factoring in all that information when they look at the risk.
Mark Zandi: Okay. So my interpretation of what you're saying is we're adjusting. All these different mechanisms are... The insurance industry and market are under stress because of the reality of these storms and the costs so it wouldn't be surprising that there'd be stress, but the industry is adjusting in all these different ways. You mentioned the reinsurance and the risk sharing through securities markets, talked about the mitigation efforts to make sure that communities that are more at risk for being hit by these things are in a better spot, improving the infrastructure, that kind of thing. That's what you're saying to me.
Firas Saleh: Yeah, exactly.
Mark Zandi: And I guess at the end of the day, would you think if we got nailed by a really catastrophic storm, a Cat five, that went right through Miami, and I'm just making that up, that would be very expensive, obviously, stress any kind of system, you would think the government would step in at that point and help out, you would think.
Firas Saleh: Yeah, it depends. For example, when you think of NFIP, the National Flood Insurance Program, they just took a big hit. They estimate that their losses from Helene and Milton could reach 10 billion. So really, that puts it very high, that puts it equivalent to their losses with Harvey or Sandy. So they had to go borrow again from Treasury. They just borrowed $2 billion, and now their debt stands at about 22.5 billion U.S. dollars. So every day they pay around $1.7 million just in interest to Treasury. So it is going to depend on who gets that hit. So if it's NFIP, is it Citizens. The FAIR Plan just saw that in California. So it is just going to depend. But one thing that insurance companies look at is, really, diversification, because, really, diversification is the name of the game here. Where can you diversify the risk and spread it to make sure that you're not very exposed when an event like that happens?
Mark Zandi: Firas, did you notice your co-author, he gave that kind of a skeptical look when I said the government would step in and help out here. Did I misread you, Cris? I mean, that was a pretty, you look skeptical.
Cris deRitis: Yes, I am skeptical. You know what happens Friday at midnight?
Mark Zandi: What?
Cris deRitis: If nothing-
Mark Zandi: Government shut down?
Cris deRitis: [inaudible 00:29:41] expires again. NFIP can't write any policies. So it's been this way forever now. It's always touch and go. So I don't know, if we get hit by a big storm, will there be a sufficient interest to cover it, to provide support. This program, it's under FEMA. FEMA's also under the gun when it comes to Doge and whatnot. I think at the end of the day, probably yes, they would step in, but I don't think there's any guarantee anymore.
Firas Saleh: And I think maybe also an important element to highlight is the element of insurance gap. Not everyone, for example, has flood insurance. Even if you, like Mark, you mentioned Tampa. If you go maybe two miles inland, you're talking about take-up rates, which means how much policies are within a zip code of less than 5%. So which means a hundred homes, you have maybe 5% that have flood insurance. When you look at Asheville, North Carolina, that area that got hit really bad, it's less than 1% of properties had flood insurance in that area, which really means they're on their own. Now, flood possibly, it depends on what kind of flooding that property gets hit by. If it's fluvial versus coastal storm surge, it's a completely different story. But generally flood, what we see is more of content damage. So if you look at NFIP, over the last 20, 30 years, they had 1.1 million claims, and they paid around 70 billion in losses.
So you're talking about 65K to 70K on average for a claim. But when you talk about wildfire, you're talking about a full destruction, the whole property is gone, content is gone, everything is basically gone. So the size of the claim is completely different. And that's one thing that, as we build these models, as we talk to the market, there's a big huge difference between the peril, the type of destruction and so on. But with flood, we know there's a big insurance gap. But one thing I would say the California or the LA wildfires highlighted was also an insurance gap when it comes to fire. Because historically, really, who doesn't have wildfire insurance? And now when you look into these areas in LA County, you see there was a lot of non-renewals. And you also see that there were many properties that went uninsured. Because if you don't have a mortgage, there's no requirement for you to get insurance essentially.
I've been living in this house for 30 years, I go to another carrier or to the FAIR Plan, it's very expensive, I can't afford it, and I'm just going to go uninsured or go underinsured.
Mark Zandi: Underinsured, yeah. Well, it does feel like at some point, who knows when, we are going to get nailed by a bad event where it's going to test government, state government, federal government, whether you'll see whether they stand up or not. I suspect, ultimately, they would, but it'll be a real test. So that gets to the other way to adjust to all this, and that is, first you deny service if you don't think you can charge a premium, if you're an insurance company, that would cover the risk. But you also raise premium, and we're seeing premium increases to a very significant degree. I know, Cris, you follow that data pretty carefully, particularly on the homeowners insurance side. I know vehicle insurance is up too, and for lots of different reasons, also including, I think, climate damage, weather damage. But do you know, Cris, do you have any sense of the numbers in terms of the homeowners insurance premium increases?
Cris deRitis: The data's a little bit hard to get, but I think one of the better data sources I've seen looking at actual mortgage records, so the fact that people have to escrow for insurance, I think it showed about a 14% increase, if I'm not mistaken, over the last year. So that's-
Mark Zandi: 14... that's nationwide.
Cris deRitis: Nationwide.
Mark Zandi: Homeowners insurance has gone up 14%.
Cris deRitis: Right. And that's after several years of double-digit increase.
Mark Zandi: Right.
Cris deRitis: It continues to rise.
Mark Zandi: I always get confused. What does that really cover when it comes to weather events, the homeowners insurance? What does the cover exactly?
Firas Saleh: It generally covers the named storms. I was just looking at my policy last week, and I think I'm underinsured.
Mark Zandi: Oh no, that's not a good sign.
Firas Saleh: Something happens, I don't think we can rebuild. So it covers named storms, convective storm, because that's a big peril. Severe convective storm, this is a high frequency peril, and then it's causing a lot of issues and it doesn't cover flood. And then after that, it depends on what coverage do you have? Is it standard content. For example, how much of additional living expenses is covered in that policy? What's your deductible for a roof? There's all these different elements of it, I would say.
Cris deRitis: That's a great point, as well. This number doesn't reflect the fact that you also have people who have, or homeowners in general have been increasing their deductibles. So it's more premium for less insurance, essentially. So there's another under-insurance piece of it.
Firas Saleh: But I think when you look at the four major sub-components, which is the mortgage interest, the mortgage primary balance, and then the property tax, insurance, on average, has been going up significantly higher than the other three components.
Mark Zandi: Yeah. Well, I think that, this is fuzzy in my mind, but there's a growing, not inconsequential, and growing share of homes where the property tax plus the insurance is now more than the mortgage payment on the home, which is-
Cris deRitis: Crazy.
Mark Zandi: Crazy.
Firas Saleh: I mean, even with NFIP. So NFIP, what they did, they went and revised their rates two years ago. And now what's going to happen is for some of these rates to become aligned with the risk, they could go up by 700, 800%. Because what's happening now is if I'm in a flood zone, I'm subsidizing someone else if my property is not vulnerable to flood. I'll give you an example. Lee County in Florida, now, the average premium is 900 and I think it's $960, but that's expected to go up to almost 3,400 on average. But of course, it can't go up immediately. They have stages [inaudible 00:37:03] at 18%. So it will reach, eventually, by 2037, some of these areas would reach their full actuarial premium. So that's going on with NFIP.
Mark Zandi: And Cris, I know you've done work here as well on house prices. You can see it in house prices, particularly... I mean, Lee County is a pretty good example because Southwest Florida, I believe house prices are actually falling.
Cris deRitis: Yeah, it was a bit of a mystery during the pandemic years, despite the fact that insurance had been going up and continued to go up, we actually continued to see house prices rise faster, and I attribute that to the low interest rate environment. You were able to kind of play off the fact that, okay, I have to pay more insurance, but I've got this great deal when it comes to the interest rate. Now that that's no longer the case, I think you are starting to see the homeowners reevaluate. Some folks on a fixed income are retiring in Florida, it just is not feasible anymore so they're having to sell and move. And I think you'll continue to see this reveal itself in more and more markets as people realize the full cost of ownership, not just the mortgage rate itself, but the insurance premium. And as Firas said, it might moderate here, but it's still going to go up as the premiums catch up with the actual risk.
Mark Zandi: Yeah. Well, I guess, and this sounds a little green eye shade perspective. Doesn't this have to happen though? We are locating and living in places that are at real risk of getting nailed by climate events and we've got to adjust and this is the way it works. The cost goes up for living in those areas and it pushes people out of those areas. It's a very painful adjustment, particularly for the families that are involved. But how else would it happen? Am I wrong? Is there any other way? There's other ways, but that seems like the most efficient way of doing it.
Firas Saleh: Yeah, we've been looking a lot on these trends and we looked at it also globally. A recent paper that the team published was looking at, in terms of the growth of exposure in flood risk areas, and what we saw is, really, the population growth in flood prone areas has been, I would say, non-linearly exceeding the growth in non-flood prone areas. And this is in North America, this is across the board, which means that we are continuing to see expansion or urbanization in these flood prone areas. No one would talk about in the past because, yeah, it would flood, but there's no exposure there, so no one would report it. But eventually now when you're continuing to build in it, and now you're going to see it all over the news, how this area flooded. It never flooded before, so you're seeing that dynamic.
But at the same time, I think in coastal areas, we're starting to see a little bit of a reverse of that, shift in that dynamic. The reason we're seeing that is when some of these properties are being impacted, when they rebuild, for example, they elevate. They have a higher first floor height or they build differently, and that is the element of, I would say, resilience is how can I rebuild and bounce back, but bounce back better to make sure I don't get impacted by some of these events that happened in the past or could possibly happen into the future. So the hazard is still there, but we're starting to see building code that is different. But there's a lot of confusion, there's a lot of confusion in terms of, yeah, am I in a flood zone? Am I outside of a flood zone?
I think I have a really interesting example in New York. So Sandy hits 2012. FEMA, of course, FEMA is the agency that is looking after these flood zones or flood boundaries, depending on the terminology, and they revised these flood zones and went back to New York City and said, okay, these are the updated FEMA flood zones. But now these updated FEMA flood zones are going to put hundreds of thousands of residents in now flood zones, which means now they have to get flood insurance. It's going to impact the ability, it's going to impact potentially the valuation of the properties.
The city appealed it, and they cited the issues with the methodology, and there are uncertainties in the methodology. They won the appeal, I think, in 2015 or 2016, and it's still there. Today, if I want to underwrite a policy in New York, the official FEMA flood zone map or the flood insurance rate map is based on 2007, which really dates back to the '70s, if you will. But if you want to go build something in New York, they tell you you have to look at the 2015, you have to look at which one is more conservative, and you could possibly end up picking up the one that they appealed. So there's all that confusion if you take flood insurance versus if you're trying-
Mark Zandi: Actually what you just said confused the hell out of me.
Firas Saleh: Exactly. You could have two neighbors. One of them is using the flood insurance rate map that goes back to 2007 or even prior to, but the adjacent neighbor, they want to pull a permit or do a new reconstruction. They might end up using the 2015 that was appealed. So there's two maps out there and it's still not unified, but this is the dynamics the consumer is dealing with. So if we're confused, then the consumer is even confused further because there's the risk of someone saying, oh, I'm not in a flood zone, and they would go and pay if they know that their property was vulnerable to flood. But it's giving them that false sense of security, because the lender is telling them, you don't need flood insurance. My neighbors in New Jersey with Ida, a lot of them flooded and the perception was, oh, we didn't know we needed flood insurance or we're outside of a flood zone so why would we flood? There's all that confusion.
Mark Zandi: But just to make sure, we would expect to see premiums continue to rise. That's almost written in stone now because in places like Florida, like Lee County, that's going to happen.
Firas Saleh: For NFIP, yeah. There's some areas that will drop though.
Mark Zandi: Some areas will drop?
Firas Saleh: Because in the past, NFIP specifically would look at it from a binary perspective. So you're in a flood zone-
Mark Zandi: Oh, I see.
Firas Saleh: But now you could be in a flood zone, but you're relatively elevated. So topography plays a very big role. First floor height plays a big role. But in the past, yeah, it's more of a peanut butter approach. Now, it's different.
Mark Zandi: I see. But generally, we'll see higher premium that'll put pressure on prices. You'll see more self-insurance, you'll see adaptation in terms of how people build and building codes going higher, for example. But ultimately, it sounds like populations are going to be incented to move away from areas that are prone to natural disasters or not.
Firas Saleh: Unless there is more investment in mitigation, and that is [inaudible 00:45:12] The mitigation, really, the big one here, because that's the variable that can change everything because a lot of this risk can be mitigated. When I think about it from, because I'm a hydrologist, I think of the upstream and I think of the downstream. Downstream is essentially we're always reacting to, okay, an event happened here, we're reacting in terms of event response, rebuilding and so on. But if we move a little bit upstream and try to see, okay, if an event happens, how can I build better to make sure that these properties are not impacted? And that's really now the dynamic we're seeing in California. There's all these programs that does mechanical thinning, which means you basically do vegetation management to make sure that the fuel is not burning. Utility companies is investing a lot and hardening their infrastructure to make sure there's no ignitions that are caused by their transmission or distribution lines.
In terms of flood, we're seeing more and more investments in levees, more and more investment in enhancing stormwater systems. A lot of these systems were designed to absorb a limited, let's say, one or two inches of rainfall per hour. And we're seeing more than that. So we're seeing a lot of that investment in terms of how can I retrofit the built environment to allow me to become more resilient when I have an event like that.
Mark Zandi: But even that, the mitigation has a cost, and presumably that means my property tax is going to go up, because-
Firas Saleh: Yes.
Mark Zandi: Right.
Firas Saleh: Mitigation has a cost, yeah.
Mark Zandi: It has a cost. Like in Miami, I've got seawater coming over every day. I got to put a seawall, that's expensive. Someone's got to bear the cost. It would be presumably the residents of Miami. Cris, do I have that right? Am I thinking about there? Firas, we kind of look at it from the perspective, what does it mean for an economy where people live and what does it mean for house prices and commercial real estate values? And our thinking is that this is going to put downward pressure on prices for commercial real estate and for residential property.
Cris, do I have that right? Is that-
Cris deRitis: Yeah, that's right. The only other thing I might throw out there is that these people have to go somewhere.
Mark Zandi: Have to go somewhere. That's a good point.
Cris deRitis: We also have the issue of supply in other locations. And if zoning continues to restrict that supply, that may actually force some people to continue to live in more riskier areas. They don't have another choice, so they're just going to roll the dice and see what happens because they don't have another option or it's not a feasible option. So that's another consideration. It always comes back to zoning.
Mark Zandi: Right, right, right. Well, I want to play the game. We'll end the conversation with that. Firas, you were saying you're in London, you're at a conference, an insurance conference in London.
Firas Saleh: Yeah, yeah.
Mark Zandi: So I want to know, I've got this image of all these British insurance guys that what they do is at 4:00, they go out to the pub to drink a beer. Is that just my imagination? Have you been out drinking already with your buddies?
Firas Saleh: No, I've been busy, back-to-back meetings.
Mark Zandi: Oh, okay. Yeah, sure. Sure, Firas. Yeah.
Firas Saleh: But I like London, it's fun.
Mark Zandi: I like London, too. Yeah.
Firas Saleh: Yeah. Nice.
Mark Zandi: All right, let's play the game. We each put forward a stat. The rest of the group tries to figure it out through clues, deductive reasoning, questions. The best one is not so easy, we get it immediately. One that's not so hard, we never get it. And if it's apropos to the topic at hand, which is pretty clear, all the better. And we always begin with Marisa.
Marisa, you're up.
Marisa DiNatale: Okay. This is kind of a tangential topic. Just throwing that out there. It's not directly related to what we're talking about here, but it's tangential.
Mark Zandi: Tangential. Why do you think it's tangential to this topic?
Marisa DiNatale: It could be a direct, it could be directly related, but it's not. All right. This is a statistic that came out this week and it's 89.7%, 90%.
Mark Zandi: 90%. An economic statistic?
Marisa DiNatale: I'm rounding. Yep.
Mark Zandi: Is it survey-based?
Marisa DiNatale: No.
Mark Zandi: Oh.
Marisa DiNatale: No.
Mark Zandi: Okay. This is going to be a tough game. This is a tough [inaudible 00:50:08].
Cris deRitis: Related to insurance and-
Matt Colyar: Related to insurance?
Mark Zandi: Probably not.
Marisa DiNatale: No.
Mark Zandi: Inflation?
Marisa DiNatale: No.
Mark Zandi: Prices, no. Okay.
Cris deRitis: Is it related to the tariffs?
Marisa DiNatale: Tangentially.
Mark Zandi: Tangentially.
Marisa DiNatale: Third order of magnitude related to inflation.
Cris deRitis: Is it a government statistic?
Marisa DiNatale: No, it's not.
Mark Zandi: Is it an NFIB survey related?
Marisa DiNatale: No.
Mark Zandi: Which is a small business trade group. No. 90%. You kind of rounded up 89.7 to 90%. You want to give us another hint?
Marisa DiNatale: This is a year-over-year growth rate in an index that came out this week.
Mark Zandi: Oh, goodness gracious.
Matt Colyar: Refinancing applications?
Marisa DiNatale: Yes.
Matt Colyar: Nice.
Marisa DiNatale: Yeah.
Matt Colyar: As soon as I stopped thinking about insurance, that's the only guess I had.
Mark Zandi: So go ahead, tell us.
Marisa DiNatale: It's from the Mortgage Bankers Association, came out this week on the number of mortgage applications, and they break it down into purchase applications and refis. And the number of refi applications is up 90% over the year.
Mark Zandi: Wow. From zero to something, but okay.
Marisa DiNatale: But I actually wasn't even going to pick that. I was just going to pick the total composite index is up a third over the year. People really loving this 6.7% mortgage rate, I guess.
Mark Zandi: Right. Well, I guess you're saying it's tangentially related because when people refi, some take cash out.
Marisa DiNatale: Housing. Housing.
Mark Zandi: Okay. Okay. Okay. Very good. What do you think, Cris?
Marisa DiNatale: That was right up Cris's alley.
Mark Zandi: He's kind of disappointed that he didn't get it.
Marisa DiNatale: He probably wanted to pick it.
Cris deRitis: A little bit. A little bit. It's off a low base, right? It's in the doldrums.
Mark Zandi: It's like a home equity borrowing. Home equity borrowing is up a lot. Not 90%, but up strongly. But it's up from very low levels, very low levels.
Marisa DiNatale: Yes. This is a related statistic to that.
Mark Zandi: Yeah. Interesting. You could use a home equity loan to mitigate.
Marisa DiNatale: Rebuild.
Mark Zandi: Rebuild.
Marisa DiNatale: Rebuild your home that insurance won't pay for, sure.
Mark Zandi: Right, exactly. Yeah.
Cris deRitis: Build that seawall.
Mark Zandi: Build that seawall. Yeah. Okay. Matt, you're up. What's your stat?
Matt Colyar: Okay. Marisa was tangential. This is just risk.
Mark Zandi: Left field.
Matt Colyar: Yeah, left field. Just risk broadly, we could probably-
Mark Zandi: Risk, okay.
Matt Colyar: Minus 4%.
Mark Zandi: Minus 4%. Inflation related?
Matt Colyar: Of course.
Mark Zandi: Oh, something's down 4%. In the CPI report, consumer price index?
Marisa DiNatale: Year-over-year?
Matt Colyar: No.
Marisa DiNatale: Month over-
Mark Zandi: I saw airline fares were down 4%.
Matt Colyar: That's it. That's it. Yeah.
Mark Zandi: Surprise. Surprise. Do you see how this is done?
Matt Colyar: Yeah, I love it.
Marisa DiNatale: Masterful.
Mark Zandi: Only when I get it. Yes. Okay, you want to explain?
Matt Colyar: Interesting week. Delta's earnings call got a lot of attention. Their CEO reported some pullback in consumer demand. That is a pretty clear indicator of just economic cyclical demand. Tracking TSA Throughput is a government daily data point that's released that we track and bank. I look at that. You compare it today to this time last year, there's starting to be a little bit of a deviation, a pullback after tracking pretty closely through 2024, this year, tracking closely with 2024. I'm seeing some pullback. Also, some international flight data came out. We've seen the first year-over-year decline in February since the pandemic. The decline is very slight, but all pointing in the same direction. Corroborating data there that people are pulling back on vacations. Maybe it's a little bit of business travel. Is it economic uncertainty, or is it a pretty gruesome plane crash a few months ago, are people dialing back their willingness to go to fly? So find it interesting.
Mark Zandi: Very interesting.
Matt Colyar: Early indicator.
Mark Zandi: Watch that very carefully.
Matt Colyar: Yeah. Risk, as I said. So you might be waiting for the tie-in, but there is none coming.
Mark Zandi: That was a good one. No, that was a good one in the context of all the things that are going on. Hey, Firas, you want to go next?
Firas Saleh: Yeah, I'll go next. 2%.
Mark Zandi: 2%.
Marisa DiNatale: Insurance related?
Firas Saleh: Insurance related, yeah, for a specific peril.
Mark Zandi: For a specific peril. So it's an increase in insurance premiums for a certain peril?
Firas Saleh: It's not an increase. It's what-
Mark Zandi: Oh, 2%. Oh, 2% of losses are from this peril?
Firas Saleh: I would say 2% have it.
Mark Zandi: Two percent have it.
Firas Saleh: Two percent of-
Mark Zandi: Oh, okay.
Firas Saleh: From a specific state.
Mark Zandi: Have insurance. 2% of households have this form of insurance for this?
Firas Saleh: Yes, in a specific state. Yeah.
Marisa DiNatale: Florida flood insurance.
Firas Saleh: California. It's in California.
Marisa DiNatale: California wildfire. Is that even a thing?
Firas Saleh: You're close, but it's not wildfire.
Marisa DiNatale: Earthquake insurance?
Mark Zandi: Oh, earthquake.
Firas Saleh: No, it's not earthquake. Earthquake is a little bit more than 2%.
Mark Zandi: A little bit more. I want to say termites.
Firas Saleh: It's related to climate peril.
Mark Zandi: Oh, okay. [inaudible 00:56:06] I was being flip. I was being flip. What could that be? It is not wildfires.
Marisa DiNatale: Not fire, not earthquake.
Firas Saleh: It's not fire, earthquake.
Mark Zandi: Oh, it's got to be something very-
Cris deRitis: Mudslides?
Mark Zandi: No, not mudslides.
Marisa DiNatale: Insurance against tornadoes?
Firas Saleh: No, we were just talking about that peril.
Mark Zandi: Okay. We give up. What is it?
Firas Saleh: It's flood. Only 2% of property.
Mark Zandi: Oh yeah, we [inaudible 00:56:43] Matt, I'm surprised you didn't say flood. What the heck?
Matt Colyar: I thought Marissa covered it, but I might have misheard.
Marisa DiNatale: Well, I said Florida. Flood was the first thing I said.
Firas Saleh: Oh, you said flood. I couldn't hear it then. Yeah, sorry about that.
Matt Colyar: I'm glad somebody, I was about to say El Nina, so I'm there a horrible, so I'm glad you stopped before that.
Firas Saleh: You said flood, so I didn't hear it. Sorry.
Marisa DiNatale: Focus.
Mark Zandi: Oh wow. 2% of California households have flood insurance.
Firas Saleh: On NFIP, yes.
Mark Zandi: NFIP. NFIP. Interesting.
Firas Saleh: Only 4% of the areas that are vulnerable to wildfire have flood insurance. Which is a bit concerning because generally when an area is impacted by wildfire, it becomes more vulnerable to flood.
Mark Zandi: Right, right. How interesting. Well, do you know off-hand which state has the highest share of that?
Firas Saleh: It's Florida, of course.
Mark Zandi: Florida.
Firas Saleh: 35% of the NFIP policies are concentrated in Florida.
Mark Zandi: In Florida, right, right. Good. All right, well let's do one more. Cris, you're up.
Cris deRitis: Okay. $6,200.
Matt Colyar: Some form of insurance premium?
Cris deRitis: Yep.
Matt Colyar: That's the insurance cost, homeowners insurance costs in the state, Louisiana?
Cris deRitis: Let's get more narrow. A city.
Matt Colyar: Oh, a city. Baton Rouge.
Cris deRitis: New Orleans.
Matt Colyar: New Orleans. New Orleans.
Cris deRitis: That's 5,700. That's second.
Firas Saleh: Miami.
Cris deRitis: Miami is number one. That's the average.
Mark Zandi: Really, Miami's that high?
Firas Saleh: Miami's very high.
Mark Zandi: I didn't know that. Wow. That's a good stat. Where's the lowest, Cris? Do you know?
Cris deRitis: Oh, I used to know. It was-
Mark Zandi: I think it was Hawaii.
Cris deRitis: Hawaii.
Mark Zandi: I wonder if that's the case.
Cris deRitis: But I think that's changed now.
Mark Zandi: Yeah, it must be that.
Marisa DiNatale: That seems counterintuitive that that is-
Mark Zandi: Because of that wildfire.
Cris deRitis: Yeah.
Mark Zandi: Yeah. Anyway. They don't have many perils.
Cris deRitis: But now they do, even wildfires.
Marisa DiNatale: Yeah.
Matt Colyar: Wildfires.
Mark Zandi: Right. Well, very good. Well, I think I don't have a stat, so I'm derelict, but I think that we covered it. Is there anything I missed, Firas, that you would like to call out that you think is important? Did we cover all the bases here? Cris, anything that you think I missed?
Cris deRitis: I don't know if you wanted to talk at all about the so-called social inflation. I think part of the reason why the premiums may actually stabilize a bit or not grow as quickly is that you do have measures to deal with. Litigation. Litigation had been a big driver of a lot of the insurance premium increase. And I think in Florida now, there are laws that are preventing or reducing some of that, nuisance lawsuit, let's call it.
Mark Zandi: Oh, I see.
Cris deRitis: So I don't know, Firas, if you have looked at that at all or what fraction of the increase do you think has been due to social inflation versus-
Firas Saleh: Yeah, it's relatively high. The cost of reconstruction is always a big driver. And when we look at it from a short loss estimate, we factor that into our estimates. For example, when we look at California wildfires, we looked into, for example, what would happen if California potentially decides to accelerate, let's say, the reconstruction. Because now you have some major international events happening, you have the FIFA soccer or World Cup happening next year. Eight games are being played close to that, 30 minutes away from the wildfires. You have the Super Bowl in 2027, you have the Olympics in 2028. So those are elements, we call them demand surge, which means is there going to be more demand that could increase the reconstruction prices. So that is one important element.
We look into historical information to trend some of our social inflation factors that go into the estimates, but there are, of course... Reconstruction is going to take years. So we don't know what could happen potentially with the lumber prices if there are tariffs and so on. So that's another important element to keep in mind.
Cris deRitis: But if we do expect to see fewer lawsuits because of some of the-
Firas Saleh: In Florida, [inaudible 01:01:12].
Cris deRitis: That will help to keep premiums from rising at a exorbitant-
Firas Saleh: Exactly. And in Florida specifically, because the element of assignment of benefits and lawsuits now has, there's legislation that protects insurance companies from that, then that, of course, that's favorable. I would say regulated requirement allowed now Citizens to offload some of these policies to the private market because Citizens picked up 1.4 million policies in 2022, and now it's at about 800K. So we're seeing that market stabilize and part of it is because of this reform that allows more carriers to come back to the market.
Mark Zandi: Well, we're adjusting. It's not fun. And hopefully, we adjust fast. It feels like we need to, but we're in the process and you're doing all this great work to help with that adjustment. So thank you for that and want to thank you for joining us, Firas. Really appreciate you spending the time. I know it's late in London. Go enjoy a, I was going to say, go enjoy a beer, but at this point maybe you need a cocktail. I don't know, but yeah.
Firas Saleh: Yeah. I'll find something.
Mark Zandi: You'll find something. Very good. And with that, dear listener, we're going to call it a podcast. Take care now.