Why Home Insurance Markets in California and Florida Imploded

Tracy Alloway (0:02)

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Joe Weisenthal (0:17)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:23)

And I'm Tracy Alloway.

Joe Weisenthal (0:24)

Tracy, it's funny that in all the coverage of finance, generally, we talk about banking, we talk about brokerage, we talk about deals, et cetera. There's not a lot of talk about insurance.

Tracy Alloway (0:35)

I know, it's so weird. I feel like it's kind of a blind spot for financial journalism, and I'm sure I'm going to get a lot of tweets and emails from dedicated insurance correspondents.

Joe Weisenthal (0:46)

Who do their jobs wonderfully.

Tracy Alloway (0:47)

Yes, but-

Joe Weisenthal (0:49)

There should be more of them.

Tracy Alloway (0:50)

Yes, that's basically what we're saying. It's a huge pool of capital, and also it has real life consequences, right? I think those aren't discussed enough. There's a sort of feedback loop where insurers are often deciding what is economically acceptable in terms of risk, and so their decisions have actual impact on people's lives and the way we behave, where we live, things like that.

Joe Weisenthal (1:17)

It's interesting to think about the similarities between insurance and deposit banking, because both industries are basically, I give an institution an amount of money, and I expect at some point to get it all back.

And in the meantime, that company that I gave it to gets to lend it out or invest it or something like that. The difference is with banking, you sort of get the money back whenever you want it. With insurance, on the other hand...

Tracy Alloway (1:45)

When something bad happens.

Joe Weisenthal (1:47)

It'll probably happen at some point in your life. You just have no idea when. It'll unfortunately almost always be when a very bad incident that you want to insure against. But yeah, it really is interesting how there's this huge thing. And as you say, it touches every aspect of life, in many cases dictates even what people can and can't do.

But it's like, we know so little about like, there's so little talk about it.

Tracy Alloway (2:09)

It's the lesser known supply shock, let's put it that way. Recently, we did that episode on the Fed's preferred measure of inflation. And we were talking in that about the insurance component and the impact that's been having on the headline number.

Joe Weisenthal (2:24)

Right. So this is the one aspect of insurance that has gotten a fair amount of coverage over the last several years, which is that in certain states, particularly California and Florida and maybe some others, there have been these huge upward shocks to the cost of covering your home. We actually talked about this with the Howard Hughes CEO last autumn, where he was talking about their insurance surge. But I have to say, in my head, I still don't totally understand what's driven these huge spikes in premiums, particularly for homeowners insurance.

Tracy Alloway (2:59)

So I think what's confusing about this whole discussion is you see two very different headlines. So on the inflation side, you see things like the cost of insurance is surging in Florida and California. It's unaffordable to live in those specific places or specific areas within those states.

But on the other hand, you also see headlines that say things like insurers are 60 percent behind in terms of pricing from where they need to be, and insurers say the market is uneconomic, they can't make the numbers work. And so you're left kind of head-scratching, well, is this about insurers trying to cover extra costs? Is it price gouging?

Is it that there's something fundamentally too risky about this particular line of business? Is it political posturing? This is the other thing that happens here in California and Florida. They have very particular regulatory systems around insurance. It's really hard to disentangle what's actually going on.

Joe Weisenthal (4:01)

Completely. And there's always this question, any time you see an insurer pull out of a state, I never understand that, why don't just price it higher? Or it's like, oh, this is uninsurable.

Tracy Alloway (4:12)

Yeah.

Joe Weisenthal (4:12)

No, certainly, there's some risk that someone will desire to be compensated for, but yet you see this line uninsurable. I do think, obviously, in the case of Florida and California, we've seen disasters. Of course, we've seen various wildfires over the last several years in California.

Florida hit by a number of hurricanes, so there's a climate change element. But in my mind, I do not feel like I understand the whole story of why, at least in a handful of states, homeowner insurance premiums have spiked at levels that basically it feels like no one has seen before in history.