PolicyCast: Home Economics: Decoding the Insurance Crisis with Kyla Scanlon

Kirk Willison, Arch MI’s Vice President for Government and Industry Relations:

Welcome back to part two of my conversation with Kyla Scanlon on the Arch MI PolicyCast. In our first conversation, Kyla and I talked about the growing frustrations younger Americans are facing trying to become first-time homebuyers. In part two, she and I talk about the growing problem of homeowners insurance and how it’s vexing existing and potential homebuyers. The lack of availability, the souring prices causing problems throughout the country, and, as Kyla notes, it’s critical that we solve the issue if we’re going to add to housing stock here in America.

Willison:

Well, Kyla Scanlon, welcome back to the Arch Mortgage Insurance PolicyCast. On our first episode, we talked about the housing affordability crisis in general. I’d like to dig in a little bit more to a topic that you recently wrote about in your newsletter and that is the really emerging crisis involving the availability and the expense of homeowners insurance. We chatted in our first episode about the “housing theory of everything.” Can you explain maybe, how the current insurance crisis fits into that framework?

Kyla Scanlon:
Yeah, so the “housing theory of everything” is essentially that idea that everything in our society, all the problems that we have, are exacerbated by the fact that we don’t have enough homes. So, like the healthcare issues, climate change, slow growth, financial instability, the word is coined by the team over at Works in Progress, but home insurance ties into that because you cannot have a mortgage if you don’t have insurance. And so that could exacerbate this problem of the “housing theory of everything,” where it’s like, “Hey, we need more housing,” but also we really have to figure out insurance alongside of it.

Willison:

So, you’ve written about the need for repricing of the American risk model. But what does that mean for the average homeowner, and how might it reshape the traditional idea of the American Dream?

Scanlon:

Yeah, so that was just talking about how insurance across the board has been underpriced for a long time. You know, California, for example, has a cap on how much insurance rates can go up, so can only go up about 7% a year. So, people are paying much less in premium than what the risk of their home actually is. And so, as these increased climate disasters begin happening insurers are like, “Listen, we’re not making enough money here, so we’re gonna leave,” like State Farm. All of these big insurance companies have left places like California, Florida, etc. And the repricing of the American risk model is saying, “Well, you know, the American nature tends to be one ‘of the now,’ and we really have to sit back and look at where we’re building homes.” These oceanfront properties are not sustainable, and we have to figure out who’s going to backstop the risk for the increased issues that we’ve been having with insurance. Is it going to be the government? Do we provide tax incentives to the private insurers? And so that’s kind of the repricing of the American risk model. Is like, “Hey, we haven’t been paying enough in risk, and it’s starting to impact us.”

Willison:

And I think part of that it is because historically and traditionally, premiums are set by looking back and seeing what the disasters have been in the past, but they really aren’t relevant in the last half decade or so.

Scanlon:

Yeah, there’s a lot of issues with backward-looking data and the use of climate models and climate-aware catastrophe models, I don’t believe can actually be used in certain circumstances, which makes it very difficult to price out the climate risk that does come with building these homes.

Willison:

I thought you did a really good job in your newsletter talking, really explaining to people what homeowners insurance is, and I wonder if you could kind of walk through what it is and what it isn’t.

Scanlon:

Yeah, so I had some help from these two guys, Spencer Glendon and Barney Schauble, I believe their names are, and the way that they described insurance I thought was kind of the perfect way to talk about it. Because they’re like, “Hey, you know, insurance is not protection against hazards like flooding, wind, fire, hail. It is a financial contract to reimburse property owners for the cost of repairing structures after events that are predictably rare.” And so, I think that’s the thing to remember about insurance is like, it’s not something that’s going to protect you against these, like, big, scary things that are happening. It’s a financial contract that relies on assumed stability. And if assumed stability goes away, if these events become less rare, you know, insurers are going to back out of the market, because it doesn’t make sense for them. If this is a financial contract at the end of the day, and insurers want to make money and not lose money and they’re going to do that.

Willison:

Yeah, and it’s interesting, if you look at the maps for insurance and homeowners insurance and premiums, a lot of people would assume that Californians are paying the highest or maybe those people in Florida. It turns out that places like Nebraska have the highest, based on the actual price of a home because of hail damage and wind and the like. So, it really is a nationwide issue.

Scanlon:

Absolutely, yeah, two in every three Americans are underinsured. Like that is a nationwide problem if I’ve heard one. That’s a massive amount of people that are not paying enough in premium. But you’re right, like the New York Times did an excellent article talking about how it’s not people in California who hypothetically probably have the most climate risk, the most risk because of wildfires, flooding, etc. It’s actually people in Enid, Oklahoma, that are paying a lot in insurance. And Enid has its own issues, right? Like, I believe tornadoes are a problem there, but they’re far away from the ocean, they have relatively low fire risk, they have a small population and they’re paying a ton in homeowners insurance. And so, I think that’s the thing is, like it is a nationwide problem. Bloomberg had an article, too, talking about where insurance was increasing the most and it is places like Louisiana, which does make sense, but it’s also places like Enid and Michigan and Utah, Montana, these are all double-digit insurance increases in 2024 and you wouldn’t necessarily expect those states to have that problem, but they do.

Willison:

We just had, in a recent podcast, we had a guest from the American Property Casualty Insurance Association on and he said it really wasn’t the frequency of the natural disasters that are pushing up, but most recently, it’s been inflation particularly as it relates to building materials.

Scanlon:

Yeah, that’s, I think, definitely been part of the problem, and part of the problem too is reinsurers. So, the people who insure, the insurers have raised their rates because higher interest rates, you know, renting a balance sheet is now more expensive, and they’ve raised prices on property insurers by 37% in 2023 but it definitely is, too, that there’s just issues around building and there’s labor market. And there’s, you know, it’s more expensive to hire from the labor market, there’s issues with sawmill capacity. The scary thing about that is, like, the real estate market is such an important part of the economy. And so like, if we see weakness here like that, weakness eventually will bleed into the rest of the economy at large. But yeah, I think the statistic for how expensive supplies have become is structural replacement costs have been 55% of the insurance increase between 2020 and 2022 and a lot of that increase was due to the increase in the cost of construction materials.

Willison:

So, this gets into then, a topic that’s probably tough for folks, but do we continue to allow people to move wherever they want to? What’s the tension between housing as a speculative asset and a place to live? How’s it living out in the current crisis?

Scanlon:

No, I think there’s a lot of tension between the two and it’s a big question that we’re going to have to answer because 70% of people do require a mortgage to have a house so they require insurance. But if you pay cash you can self-insure. And that’s going to be probably the answer is, like, if you pay cash for your oceanfront property, like, sure, you can live there. But I think if we ask people, because insurance is a pool, right? Like, if we ask everybody to backstop the risk, if we ask the government to step in backstop the risk — that’s probably not a good use of money. And so, I think we’re going to have to rethink what it looks like to have the quote, unquote, “American Dream,” and what it looks like to have insurance, and what insurance requirements should be, and what does it look like if people begin paying the fair price of risk. And there’s like different things that we can do to mitigate the cost of insurance, like climate-resilient homes. There’s different legal reforms to that we could pass to make each party responsible for their own attorney fees. And then there’s micro-insurance things where we could patch together insurance for people. But, yeah, it’s it. Now it’s a very big question is like, what does it look like to backstop risk for the American Dream and is it sustainable?

Willison:

All these things do, and again, this is a policy-focused podcast, but all these things end up coming around to policy. And I don’t mean insurance policies, but flood insurance premium is another example of how, let’s say geography can be more important than politics when deciding public policy. Elected officials, whether they’re conservative or liberal from flood-prone states aren’t keen on their constituents facing huge premiums in their flood insurance. While politicians representing other areas are kind of tired of their constituents footing the bill for the same home to be built, rebuilt three or four times, and those folks not paying the proper risk.

Scanlon:

Yeah, totally. It’s like a model that doesn’t make sense and I don’t think it’s sustainable. And we’re just gonna have to reckon with that.

Willison:

So, do you think this is an issue that state regulators have to be more attuned to say, we’ve got to be willing to increase the rates in order to keep the insurers in debt? I did just recently, saw in California, I believe it was Allstate got a 35% increase in premiums, I think, as it relates to wildfires. And I know that California is trying to figure out a way to speed the process up a little bit for processing requests for increases in premiums.

Scanlon:

That’s definitely what it’s going to have to be, and that’s going to make it tough for a lot of people. But the other option is, you know, you don’t have insurance, and if you listen to the interviews with these people that have been entirely dropped from their insurers, it’s devastating. And so, I do think there needs to be more efficiency with passing on these rate increases but these rate increases are going to be high, it’s not going to be politically popular and there’s risk that comes with that too.

Willison:

We from a mortgage insurance point of view, obviously, are studying this with the implications of existing homeowners as their premiums increase. We’ve not found yet that it’s leading to defaults, but it’s certainly an issue that we are concerned with as they go up, because people certainly on fixed incomes are at most risk. Are you concerned, though, that it’s going to keep people out of even qualifying for home loans?

Scanlon:

It’s pretty high. I don’t know enough to comment directly on that but I can imagine this pricing people out of property insurance is a couple $1,000 a year and that is not marginal to a lot of people. And so, I think that is going to be tough. Louisiana, the projected annual rate is now $7,809 that’s a lot of money, right? The median wage is about or the median income is like $55,000 or so. That’s a lot of money. That’s going to probably hurt people. And right now, the rate of increase is nuts, like if Louisiana goes up another 23% next year that’s problematic, and so I think it definitely could keep people out. But that’s just pure speculation on my part.

Willison:

So, how does it affect then, decisions as to where we build more homes? And what kind of considerations should policymakers be looking at as we try to increase the housing supply?

Scanlon:

Yeah, I think it definitely comes down to the way that we’re building homes. Building climate-resilient homes. One issue that some homes have run into is that they’re not built with materials that are designed for the long term. There’s a lot of cutting corners, unfortunately. And if your house gets blown over and you have to rebuild it, it’s just, you know, you should have just invested in proper material in the first place. And so, I think that’s going to be the big thing is making homes that last and that’ll be expensive. So, I would say that’s like the best thing to consider. But it’s also the places that we’re building. One thing that’s unfortunate is that people really love the places that are expensive to live in. There’s been a lot of movement to places like California, Florida, Georgia, North Carolina, Texas. They accounted for 53% of the country’s population growth between 2010 and 2020 but insurers don’t want to be in a lot of the states, and so we’re gonna have to figure out, like, okay, where can people live in these states? What will that look like, and then how do we build proper homes to address the very real issue of housing supply? It’s tough, because you don’t really see a ton of conversation about this right now at least on the political campaigns about insurance specifically, but I think it’s kind of like we can’t talk about housing supply without talking about insurance at this point.

Willison:

I recently had a chance to have a conversation with a couple officials in the North Carolina Department of Insurance (Arch Mortgage Insurance is based in North Carolina) and they were pointing out that there’s been some interesting private-public partnerships made on resiliency. In other words, actually that the state will give homeowners who maybe live on the Outer Banks of North Carolina — very susceptible to hurricanes — some funds if they’re willing to rebuild their roofs and make their roofs much more resilient to hurricanes. So, it seems that there are going to have to be some unique, innovative ideas to help solve this problem.

Scanlon:

Yeah. I mean, with Hurricane Sandy, I believe a large portion of the Hamptons had to be rebuilt, and they built their houses on stilts in order to avoid that same sort of flooding. And so, I think it is going to be things like that where it’s like, “Okay, so we’re going to be living in this in this spot but we have to make the home as resilient as possible, whether that be roof or whether that be a home that is higher than flood level.” So, there’s definitely ways to do it. Humans are very innovative.

Willison:

On that note, we’ll conclude. Kyla, thank you very much for the time. How can people follow you online?

Scanlon:

Yeah, so the biggest thing is the book. It’s called “In This Economy? How Money Markets Really Work.” It’s available wherever you buy books. There’s also an eBook version and an audiobook version. And then I post on Tiktok, Instagram, YouTube Shorts and LinkedIn under the name Kyla Scanlon, and my username is at Kyla Scan, I have a newsletter, kyla.substack.com. I have a podcast called “Let’s Appreciate” and then I also post YouTube videos.

Willison:

And we’ll make sure that that information is contained as we promote these podcasts.

Scanlon:

Thank you.

Willison:

Thank you again for the time.

Scanlon:

Thanks for having me.