Fires and Floods with Firas Saleh

Episode Summary

Executive Summary: The episode explores how worsening wildfire, flood, and hurricane losses are reshaping insurance markets, premiums, and property values. Faraz Salay explains that risk is rising faster than pricing and that insurers, reinsurers, and state/federal backstops are adapting through better models, mitigation, and policy reform. Chris Daries adds that affordability and housing markets are already feeling the strain.

Main Topics: Climate-driven insurance losses are escalating (Priority: 5/5): Salay argues that wildfire and hurricane losses have become far more severe and frequent, with recent events producing 'hockey stick' growth in insured losses and forcing insurers to reassess underwriting assumptions. State insurance markets and residual plans are under stress (Priority: 5/5): The discussion focuses on California FAIR Plan, Florida Citizens, and NFIP as insurers of last resort that are absorbing more exposure as private carriers retreat from high-risk areas. Premium increases and affordability pressures (Priority: 5/5): Insurance costs are rising much faster than mortgage, tax, and other housing costs, making total ownership more expensive and contributing to non-renewals, underinsurance, and declining affordability. Mitigation, resilience, and better risk modeling (Priority: 4/5): Participants emphasize that improved catastrophe models, infrastructure hardening, levees, vegetation management, and building-code changes can reduce losses and help stabilize markets. Flood and wildfire insurance gaps (Priority: 4/5): Even in high-risk areas, take-up remains low, leaving many households uninsured or underinsured. Flood insurance gaps are especially large, but wildfire gaps are also emerging in California. Regulation, litigation, and social inflation (Priority: 3/5): The group notes that rate regulation, litigation, and claim costs affect pricing, but recent legal reforms in Florida may help slow premium growth. Housing market and economic spillovers (Priority: 3/5): Rising insurance costs are influencing house prices, commercial real estate values, relocation decisions, and broader consumer behavior, including refinancing and travel demand discussed in the game segment.

Key Arguments: Insurance losses from wildfire and hurricanes are no longer isolated events; they are becoming structural and increasingly expensive for carriers. Risk is not the same as bad business; the issue is bad pricing of risk when premiums do not reflect actual hazard exposure. Residual markets like the California FAIR Plan, Florida Citizens, and NFIP are expanding because private insurers cannot or will not fully cover the highest-risk properties. Premiums must rise to align with risk, but that creates affordability problems, more non-renewals, and more self-insurance/underinsurance. Mitigation investments—levees, flood barriers, hardening utilities, vegetation thinning, and elevated rebuilding—can materially reduce losses and support insurability. The insurance market is adjusting through reinsurance, insurance-linked securities, and regulatory reform, so a systemic collapse is not inevitable, but stress is real. Housing markets will eventually reflect the full cost of ownership, meaning insurance and tax burdens can push people away from hazard-prone areas. Zoning and supply constraints may limit relocation options, forcing some households to remain in risky locations despite rising costs.

Data Points: Wildfire insured losses (1964-2010): Almost only $1 billion total - Historical U.S. wildfire insured losses before the recent surge Wildfire insured losses (last 12-13 years): $75 billion - Industry insured losses from 45 major wildfire events in roughly the last decade-plus Southern California wildfire insured loss estimate: Up to $30 billion - Moody’s RMS estimate for the LA County wildfire event California rate filing threshold: 6.99% - Rate increases above this require a public hearing under California rules California homeowners insurance cost: About 35% to 40% lower than average - Average premium for a $300K dwelling relative to the U.S. average, due to pricing constraints California Fair Plan exposure growth: From $50 billion to almost $500 billion - Growth in residual-market exposure since around 2018/2019 California Fair Plan market assessment: $1 billion - Recent assessment charged to admitted carriers Citizens policy count peak: 1.4 million policies - Florida Citizens peak in 2022 Citizens policy count later level: About 800,000 policies - Reported decline as policies move back to private market NFIP current debt: About $22.5 billion - NFIP debt to Treasury after borrowing again to cover losses NFIP recent borrowing: $2 billion - Treasury borrowing following losses from Helene and Milton NFIP interest cost: About $1.7 million per day - Daily interest paid to Treasury on NFIP debt Flood insurance take-up in Tampa-area inland zip codes: Less than 5% - Very low flood coverage rates even near vulnerable coastal regions Flood insurance take-up in Asheville, NC: Less than 1% - Area hit hard despite very low flood coverage NFIP claims over 20-30 years: 1.1 million claims - Long-run claims experience discussed in the episode NFIP losses over 20-30 years: $70 billion - Total paid by NFIP over the same period Average NFIP claim size: $65,000 to $70,000 - Typical flood claim payout mentioned by Salay Homeowners insurance premium growth: 14% year-over-year - Nationwide increase from mortgage-record-based data Mortgage refinance applications growth: 89.7% year-over-year - MBA data cited in the game segment Total mortgage applications growth: About one-third year-over-year - MBA composite index discussed by Marissa Airline fares change: -4% - One of the data points from the CPI/risk discussion in the game segment Homeowners insurance cost in Miami: $6,200 average - Chris’s city-level insurance premium stat Homeowners insurance cost in New Orleans: $5,700 average - Second-highest city-level premium cited Flood insurance prevalence in California households: 2% - NFIP flood coverage take-up in California Flood insurance share in wildfire-vulnerable areas: 4% - Low flood-insurance penetration in areas vulnerable to wildfire Florida share of NFIP policies: 35% - Concentration of NFIP policies in Florida

Pivotal Quotes: "There's really no bad risk. There's really bad pricing of that risk." — Faraz Salay: On how insurance markets should think about rising catastrophe exposure "Insurance companies are not able to incorporate all these different elements, right?" — Faraz Salay: On California regulation limiting rate adequacy and use of catastrophe models "It's not just a California, western United States issue." — Chris Daries: On the broader geographic scope of wildfire risk

Implications: Insurance costs will likely keep rising in high-risk regions, pressuring home prices, affordability, and migration patterns. Markets should expect more mitigation, more regulation reform, and continued stress on residual insurers rather than a sudden collapse.