FOXCast: Can We Offset the Cost of Living in Paradise?

In this episode, we pick the brain of Robb Lanham, Chief Sales Officer at HUB International. In his role, Robb works with family offices to develop creative solutions for complex risk.

And speaking of complex risk, losses due to natural disasters are on the rise worldwide and the insurance world has had to dramatically shift in response to recent catastrophic events. He explains why, for the first time, we're seeing the cost of insurance driving the home buying process.

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Below is a transcript from the conversation:

KC: Can you offer a sort of overview of the changes the insurance market is facing following a string of natural disasters, like fires in California and floods in many other parts of the country?

Robb Lanham: Sure. You know, I think if we take a step back and look at the evolution of our business, that may offer some perspective of what's happening today. For decades, insurance companies have been improving the coverages that they offer on their policies, so they keep pace with the changing needs of their customers. So, we're a fairly reactive industry, and the fact is that we wait to see what a consumer needs and then we develop a product to cover it.

So, if you think—before the Internet was created, was there really a need for cyber coverage? Or, as people become more affluent and they travel internationally, creating the need for worldwide liability became a must. Well, space will be the new frontier, thus creating the need for intergalactic coverage. Fire, however, has been an exposure since Ben Franklin wrote his first homeowners’ policy in Philadelphia in 1752. So, we have a more comprehensive policy being written, and it's being asked to handle more claims than ever, and there hasn't been enough premium to offset those costs.

Last year alone, there were 11 billion-dollar events and that's still only ranks fourth highest, ever. If we look at just the wildfires from California that happened last year, it may offer some clarity as to what I'm talking about.

Wildfires are measured in acres burned. And over the last eight or nine years, the average number of acres that burned per-wildfire has doubled. And if we look at the last 30 years, has quadrupled. So, we're having more fires and they're burning more acreage each time. So, if we take a look at the difference between 2017 and 2018, we had fires and acres burned—1.2 million acres burned in 2017, and that number increased 500,000 acres the next year, to 1.7 million acres burned. Maybe a more realistic look at this, and more impactful, is to say there were 22,000 structures destroyed in 2018 which was a 14,000-structure increase over the year prior.

So, people are continually building homes in areas that are affected by wildfire. So, insurance companies step back and say, “OK, we know these events are happening. Why are they happening?”

So they say, “well, we have higher temperatures.” That's really about climate change. We're having record-high winter precipitation. So, in wintertime, there’s more moisture—we're getting rain in the winter, which leads into spring. So, we have all this rich, lush vegetation that in a few months is all going to dry up because of these prolonged droughts. So, lush green vegetation turns brown and crispy. And over the last 25 years, our fire season has grown by 105 days.

So, we're having now all this brown crispy vegetation, a longer time span when a fire can occur, we have lower relative humidity—so, it's dry. The Santa Ana winds which come through there, they fuel the fire, they push it farther. They're getting stronger. And as air heats up, it moves faster. So, a fire creates stronger winds, creates more fire, creates even stronger winds. And people just continue to build in these areas.

So, I think that when we look at what's happened to the insurance industry, they're saying, “wow, we have all these policies that are covering all these things now and we're having more claims to boot.”

KC: How have these losses impacted the affordability and availability of homeowners insurance?

RL: When you look at what's happening, our industry is changing drastically. Where I think that we're seeing people canceled for no reason, whatsoever. Not because they've had a claim, but because there's the possibility, and a higher probability, of a future claim. That's never been heard of before. So, if the data suggests that a particular home, in a particular neighborhood, on a particular street will be more likely to have a claim—because of the construction of that home and the way it's been mitigated—the insurance company will say, “we can't collect enough premium for this over time. We're out, you're on your own.”

That's beginning to happen. And clients and homeowners have never been exposed to this. And when I say that it affects market values—what is the likelihood that that person tries to sell that house that the new homeowner coming in is going to say, “yeah, I don't want to live in an unsafe home?” And if the insurance companies know there's enough data to suggest that this house is a problem, I don't want to live there. Now the market value goes down.

It's kind of a weird environment that we're living in, and capacity is shrinking. And by capacity … insurance companies—no one wants to write all of their policies in Florida. They'll write in Florida, but they also want to write in Indiana and Iowa, because it kind of offsets that. And so, they may agree to write a thousand new policies in California, or a thousand new in Florida, but only the best-protected are going to get in. Because they can't even charge a premium for those others, they’re going to say, “if you want to work with us and you want us to protect your house, you're going to have to do a few things to make it worthy of us insuring your property.”

And I think that that's some uncharted waters for some people. Home builders and newer properties, they are being built up to code and standards are there. It’s some of the older properties that have never been updated that are going to have the problem.

KC: But people will still need insurance despite the threat of natural disasters, so for the families you work with, what are your top recommendations to offset some of this cost?

RL: If we know that affluent individuals want to buy homes in areas—Southern California, they're very beautiful areas, on the eastern seaboard of Florida, or in Texas. You know, natural disasters aren't limited to Florida and California, they're all they're all over. But it's in these geographies where we're having more exposure and more incidents happen. So, where we have to talk to them, I think the whole process of our industry is changing.

Historically, a client would approach us after they've made some form of a purchase and say, “hey, I bought a home in Malibu. What is the cost of insurance?”

And I think now what's happening is people are saying, “I'm considering a place in Malibu. Tell me about the insurance there because I really, really want that. But I really want it if certain conditions are met.”

So now what we're seeing is, even the market values are being affected. Because if a house is uninsurable because it's unprotected, or it sits in an area that is really prone to wildfire, they'll come to us and say, “OK here's the situation, Robb, I’m buying this house, but what about insurance?”

If it's unprotected, the homeowner's insurance could be so exorbitant—if they can even get it—that they may they may elect to go elsewhere. And I think for the first time, we're seeing the cost of insurance driving a buying process.

KC: So, houses are actually uninsurable?

RL: And I'll tell you why that is. So, insurance companies charge a premium. And if we go back and look at what I had mentioned … So, let's take a five-million-dollar home. As we build policy, they cover the house that burned down, but they also cover other things. They cover all the contents in your house and those numbers are calculated in the rate. But if your house burns down, we also have to pay you to go live someplace while your house is being rebuilt. So now, we're having to rebuild your home. And one of the things that we found in the recent fires is that 70 percent of the homes were under-insured. So, the insurance companies were collecting premium on five-million dollars. After the claim happened, they went back and said, “hold on, it's costing us more than that.”

 So, the cost to rebuild is more. And now we have to pay you to go live somewhere else. Now five million that they collected on the premiums for five million dollars has turned into $10 million. Insurance companies are saying, “hold it, we can't raise rates fast enough.” Therefore, that's not a sustainable model.

Now that is in the preferred market if we go out to the non-standard markets, they are even saying “hold it—there's such a high probability that this particular home will have a claim, we don't think at any cost, that's viable for us to insure that.” Then then people are left to self-insure, or where we try to offer assistance is to say, “OK, this is what will make your home more appealing to an insurance company.”

KC: Right. So, what are some of those things?

RL: Well, look, if we take it take the eastern part of the country. So, a hurricane. So, what happens with hurricanes? Well, winds blow, and waters come in, and roofs blow off. So, we look at that and say, “OK, this house as it stands, if a storm comes this way, will probably have more likelihood of having damage as it stands.”

But, let's say we put shutters all over the windows, or put impact glass in. Or we put a metal roof on, or hip roof. And then maybe, flood vents. Now, we can't stop a catastrophe from happening. But what we can do is say, if it does happen, the likelihood of damage starts to go down by our mitigation.

Well first of all, shutters aren't inexpensive. Impact glass isn’t inexpensive. But long term, the cost of having to pay for higher insurance premiums can be offset by short-term cost. So, if you pull the money out of your pocket to put these things on now, not only is your home better protected, but long-term you're going to be paying lower insurance premiums. Because without these protections, the standard carriers won't take you anymore. There's just too much data that suggest homes that are unprotected are going to sustain a more severe amount of damage. For the first time, there's going to be a real cost of living in paradise.

Where before, there was a little bit of a cost. And if you lived in Malibu and you lived in a brush zone that had brush close to your home, yeah, you'd pay a little bit more. But not a lot more. Or if you lived in Florida, right on the ocean in an unprotected house, you paid a little bit, but not enough to alter how people react to that. I think today, and moving forward, insurance companies have not been faring well on properties that are not properly mitigated. So, what we're starting to see is, not only is the rate going up, in some cases, clients are being canceled. “I'm sorry, you haven't taken the necessary step.”

Let me give you an example for California. So, if we go back and look at California, and we understand that the number-one cause of loss for structures being destroyed out there, is an ember that flies through the air. We know that. But what we can do is say, “OK if that ember flies onto my property, I can reduce the likelihood that it catches something on fire, by what?”

Well, I can get rid of wood mulch that sits around my house. Or, how about a railroad tie that I used in my landscaping? Or, how about an Italian cypress tree that when it catches on fire shoots off like a roman candle causing more embers?

And at the end of the day, it's going to be their decision. If they would prefer to have wood mulch around their house and not stone, that's OK. That's their call. They just won't have the ability to get into one of these preferred insurance companies. Because there's too much data that suggests wood mulch is going to catch on fire. Rocks don't catch on fire, therefore it's safer. And that becomes uncomfortable. But at the end of the day the insurance companies will be driving the profit. That's our job as a broker—to be able to identify, and then articulate, to our clients, “hey, this is what can make you a more attractive risk for an insurance company. It will ultimately be your call.”

But at the end of the day, here's what they're looking for. You may have to put some money out short term, but long term, you'll be in a better insurance company with lower premium. And you may learn to love the rocks that are sitting around your house, as opposed to the mulch.

KC: Can I ask, what is your outlook when it comes to catastrophic risk moving forward?

RL: Climate change—this is a real thing. And the result is providing all the necessary ingredients for future catastrophes. We're living on a warmer planet. It's more precipitous weather in colder months. It's allowing for more moisture. Our sea levels are growing and they're becoming higher. The polar ice caps are melting. And this creates your hurricane potential that can cause more problems.

So, we know that people want to live in paradise, we know that we can't eliminate these threats of catastrophe, so we need to mitigate better. At the end of the day, Insurance companies are reactive. And if we know lawsuits are coming, then we advise our clients better. If we know that people are always going to live in Florida or in California … We had this back in 1992 in Florida when Hurricane Andrew hit, that sent the insurance industry into a tumultuous time. But over last several years, we understand what causes the claims. It wasn't just the wind blowing and the waters that were rising. We understood that, and we learned how to make homes safer.

Today, the wildfires in California—it’s tough to model those. That won't be forever, though. We will get around this and understand, “hey, if we build houses with certain materials, we'll have fewer claims and less severe claims.”

And I don't think it's bleak. I just think it's going to take us time to understand how to make these places safer and more attractive to live in.

KC: That makes sense. Well, we are out of time but if somebody wanted to learn more about you, how can somebody get in touch with you?

RL: They can feel free to call me on my cell at 215-327-5412 or email me at robb.lanham@hubinternational.com.

KC: Perfect and I will include the HUB link on the FOX website. And it was really great talking to you. You just know so much about what's coming down the pike, and this was very enlightening.

RL: Well, thank you for having me, I appreciate it.