EPISODES
Episode 51.
Andrew Douglas, VP at Lockton Insurance & Allie Carter, Project Manager at Lockton Insurance
Hurricanes, forest fires, flooding, rain, Oh my, the crew at locked in insurance helps us wade through the waters of insurance and uncertainty in this week’s episode. I’m Dalton Elliott. This is the real estate of things. You’re listening to the real estate of things podcast. All right, we have the locked in insurance crew here and we’re recording this first thing on a Monday morning. So y’all, are y’all, are real troopers. We were just chatting before this that my uh my boss gives me trash every once in a while about the fact that I love a good first thing Monday morning meeting. No better way to start off the weekend. Y’All, are y’all, are being so sweet to join me on this early Monday morning adventure. But thank you both for joining and I think I love anytime we have two guests on the podcast at once. It’s always more fun. Uh. So give me some quick background on on each of you and just what locked an entrance does, you bet. Thank you so much for having us, Dalton. We certainly appreciate it, and Ali and I both are at locked in. We’re on a very specific team within locked in. The handles a large residential risk, from home building to multifamily single family for rent. Myself and Allie are both client advocates for locked in, meaning we control a large book of business. We advocate for our clients not only in the marketplace but also with council for coverage terms and conditions. And twelve of us in general on the team and we’ve been successful in the space for many years. I think the the difference, what separates us is that we start early. So we’ve got a team that half of US start around five thirty in the morning. We go to five thirty PM Pacific Time. So our East Coast clients, we have a large track home builders over on the other side of the country appreciate that extra hours towards the end of the day that we’re on the clock. So our roles are, like I said, very similar. And again I’m Andrew Douglas and from Ali Carter. Yeah, and we really do hone in and focus on, you know, strategic risk management, planning for our clients right and putting together, Um, really specific and like niche white glove services to our clients that are really specific, you know, to each client’s need. We and one thing to add is we always try and go outside the box, like Ali said. So anybody can be a broker of insurance, but when you start delivering solutions to the marketplace that have not been seen before or talked about before, or connecting underwriters directly with their clients, those are where we focus all of our attention, is trying to go above and beyond the normal roles and duties of an insurance broker. Yeah, the fact that y’all have such wide coverage on a day to day basis. You know, US as a growing company over the years we’ve had to deal with I had to figure out like how to most effectively serve the client base because we’re in southeast and you know, part of our lending map growing further and further west and West over the years and Um, that’s something we’ve tried to tackle. And Ali you mentioned White Glove Service, and so much of it comes down to that. Like we we sell money, you’ll sell insurance. There’s so many groups that do the same. It’s like how do you differentiate yourself? And our money spends the same as a competitor’s money, and same thing on the insurance side. It’s like how do you differentiate that? So much of it comes down to customer experience and and the White Glove Service side. So it’s always fun to chat with folks from another shop who really have that philosophy and approach. And I think another pieces some of the content you all put out…
…in market updates. And I was I was thumbing through a market update over the weekend from locked in and it talked about inflation. Right, that’s if there’s you know, year by year, if there’s a Buzzword, was covid? I don’t know what Buzzword was. Probably can we be finished with covid and then is I think we safely could say inflation is the word of the year. So how does inflation affect the insurance world? Right, I’ll want to throw the lab that big, big ball over in your court. I can touch on that Um and we’re pretty big on statistics, Dalton. So, uh, inflation is affecting the property market. It’s it. We’ll get into why in just a minute or two. But the statistics that we’re seeing on renewals for properties with no catastrophic exposure is around ten percent. So just expect that. You have to message that correctly as a broker to your clients. As to why you can’t just say here’s ten percent and it’s a hard market. You have to give them specific examples of what’s driving this. But to answer your question, inflation is driving renewals. On average we’re seeing ten percent increases properties with catastrophic exposure, let’s say, for example, Texas, Louisiana, down by the coast, even without any losses. UH, no, big catastrophic losses. It’s just based upon their location. Okay, because they’re expecting things to happen. Modeling is changing, the you know, the world is changing, climate is changing, so that’s being looked at closely. And then, when you take it one more level, we have clients that are in catastrophic areas that have sustained losses, whether it’s when fire, flooding, it’s from the renewal increases. So, Um, it’s where you’re choosing to operate, where you’re choosing to do business, and to look at those metrics and to expect that just from a business operation standpoint. And, like I said, things drive this. Um, we like to give examples of why this is happening and maybe let Ali touch on a couple if you don’t mind. But Um, I think it’s relative to the inflation conversation. Yeah, definitely. I think you know, as Andrew kind of mentioned, it’s no secret that work in a hard market, right. So like premiums are at, you know, a an increase and then capacity is decreasing, right, and I think that, you know, you really need to look at the state of our climate and natural disasters and really what’s been happening over the last fifty years. I think there’s been, you know, increases in frequency and severity to the natural disasters, whether those be wildfires, thunderstorms, when hail, earthquakes. We’ve had, you know, just immense flooding across the nation. So I mean even in the last like three years alone in California we’ve had around twenty five billion in losses. So you know, all of those things contribute to carriers having decreased capacity, right. And then I think, to take it one step further, you have to look at again, over the last fifty years we’ve kind of had this big migration of people who are moving like from coast to coast, right. So the more people that you have, the more structures that are being built like all along the coastline. It just increases the risk there as well. You know, to touch on that movement from let’s say the past two years, for example, right California, a lot of Californians went to Texas and as we all know, so what part? Where did they go? They want to be by the water, so they go to those coastal type areas, New York, New Jersey, those guys are coming down to Florida. So, as Ali mentioned, the demographics are changing, Um, and it’s a more populated and more dense area. Um, a specific claim example I’ll give you is we remember…
…the flooding in Kentucky this past summer, Early Spring, Missouri, Kentucky. That’s a you know, a billion dollars is going to be ultimately the losses that the insurance market are going to see from that. So, Um, it’s not helping our cause, but it’s something that must be messaged. As you look to the renewals, like I said, which are going to be increasing, the the fires. There’s a fire in Canada, another billion dollars and in a starting in a sawmill Um and and these models, they can predict when these properties are in flood zones or fire zones, that this is a probability that’s going to happen. What they can’t predict with the fires, which is an interesting one, is human behavior. You can’t predict how someone’s going to have a campfire that jumps into burning thousands of acres in northern California. So, Um, you have to rely on modeling, but there is a little bit of hunpredictability with human behavior. Yeah, I didn’t think about that being a nuance on the wildfire side. And you know, in the last few years it seems like not only because the frequency of those increased, but the magnitude is increased as well. UH, so we’re we’re in, uh, you know, hurricane season area and I grew up on the coast of South Carolina, so I remember evacuating and then eventually, the more years you lived there, it took a bigger and bigger storm to get you to evacuate. Um, you think about Florida right like when I started in the private lending space, Um, seven, little over seven years ago, as an underwriter. You know, you Florida was always kind of the wild card when he comes came to insurance, flood insurance and all that’s tied around. So much of its tied around natural disaster. Right. So can you unpack for me a little bit why Florida is this beast? Why so many carriers just say, Hey, I’m just not going to operate here, we’re gonna drop coverage. And are there any other UH states, markets areas that are in that high concerned bucket? And you see, from an ensure ability standpoint, those areas just deteriorating over the next few years. Yeah, I mean I think you know, Florida is a it’s an exceptional state, right, because you’ve got the humidity, like you know, like you said, you’ve got the flooding, you’ve got hurricanes and, Um, I think something that not a lot of people think about too is there also is a risk for wildfires and Florida as well. So your wildfire like high risk states, it’s going to be California, Texas in Florida. So right now there are about three point nine million properties in Florida alone that are in high has, high fire hazard areas. So Um, like I said, I think it’s going to be California, Texas and Florida. If you’re going to pick out three states who are going to really just be the toughest, it’s going to be those three. And again it goes back to the climate and just the state of, you know, natural disasters and the frequency and the severity, kind of like we mentioned before. Do you have anything else you I mean, you look at you know, Ali mentioned fire. It is it is the major issue. Um, you mentioned when Dalton. You know, wind is expensive. It’s like buying earthquake in California right. So a lot of folks choose to surpass that because they say if indeed an earthquake happens and it affects our structure so much to where they fall down or are not replaceable, then the Fed will come in and declared an emergency and then they begin to make reparations. Where wind is it’s the same thing. It’s just on the other just on the other coast. We don’t deal with wind so much in California a butt our clients in the East Do. Uh. And Wind is expensive. It’s it’s spend to this earthquake. Um. And you know, you…
…look at an inch of water when the wind causes flooding in Florida. So this is what the under udger you look at. I got wind problems. Now I gotta fire potential exposure in Florida and I’ve got flooding issues. With flooding, for an inch of water in your home, you’re looking at dollars of costs to fix that issue. Fire is usually a total loss, destructive loss Um. So, to answer your question, is kind of a double Wammy in Florida. I don’t want to say don’t do business there, because a lot of folks do, but they they look at this risk and they accept that risk and they’re willing to take that on. Got It does in terms of you know, we talked earlier in the episode about premiums rising. You know, I assume things are looked at market by market, state by state, but if you have, you know, massive wildfires in California that are way of of the average, and what your assumptions from a model standpoint assumed prior to all these fires popping Um? I mean that’s going to affect rates, not just in the specific market that’s affected, but that’s going to affect rates across the board. Right, I’m true for any natural major out of the norm, way worse than we anticipated or modeled natural disaster. Right, it will, you know, and these when these wild parts happen, not only is it affecting the direct markets where we place coverage. It’s also affecting the reinsurance markets. So throughout the year reinsurance markets are the ones that ensure the carriers that are writing the business. They will analyze their own book as well and the reinsurers have been upping their treaties or their rates. It’s a treaty is a fancy way of saying rate, essentially what they’re going to charge these insured carriers to do business with. That’s been rising as well, so that it’s affecting both of them. Got It? That makes sense. Doesn’t doesn’t seem like any of it’s going down anytime soon. Doesn’t seem like anything is going down there time soon. Uh. So, from you know, one one thing that we have uh a lot of investors making moves from the single family world to the multi family world, going from that wonderful unit property up to the five plus unit property. Like does does insurance change in that world? Are there any tips, tricks, things to watch out for that you would uh tell an operator who’s looking to go from single family to multi family? We’ve experienced that as well. Our clients traditionally have been very large single family detached for sale. They pivoted more to multi family lately as well as single family for rent, is a very popular type out there. What we tell them, Dalton, is make sure to engage council, make sure that you’re brokers that you’re using have the right team of attorneys that can review contract language, make sure that where they’re operating and doing business. UH, looking at the trade contractors policies. Are They compliant? Are they going to protect the owner in the case of a loss? Um, single family detached totally different animal than multifamily or single family for rent. From a liability perspective there’s a lot less exposure um, but from a property perspective there’s more. So it’s it’s a balancing act right. So Um, you know where you’re building. There is that property placement once the assets are in place that you need to manage, whether it’s in coastal areas or out in California. But there are two different animals and we’re experiencing a lot of help from attorneys…
…getting involved and looking at contracts and terms and conditions for the insurance policies. That have been helpful to us. Does so similar topic, you have values right. We’ve had crazy HP a home price appreciation, uh, since covid kicked off, which is I don’t think that’s something that any of us in the space expected back in March or I think the first feeling everybody had was, oh no, here goes another Oh, seven, o eight and everything is going to crash. And then it didn’t, because it was a healthcare issue, not a not a housing issue, not a fraud issue, it was just healthcare that uh, it didn’t do anything to take away the fact that we have a lack of supply of housing in the country, which helped push up prices, helped push up rent you didn’t have a lot of building going on because of lockdowns. Then you roll into today, a couple of years later, and you still have supply chain issues, still have labor shortages. So all of that ties up into, I think, keeping home prices and rents strong. But we’re starting to see some at least deceleration and home price appreciation and some markets really moved back to the norm. I think we’ve as a space may have forgotten that it’s not normal to list of property on Friday and have a dozen offers on Saturday. That’s not the norm and a normal market is home is going to take, you know, a couple of weeks to sell. Not The craziest thing in the world. Uh. But all that said, how do you how do you deal with that in the insurance world? Home prices skyrocketing up, starting to pull back up and down, uh, and just the uncertainty that you know for so many years before covid it was it seemed like it was. Everything was pretty stabilized, you didn’t have too much outside of the norm and now you have have just more uncertainty than we’ve had in recent past. And so how do you model that out? How do you deal with that on an insurance cost standpoint? So one of the things the responsibilities for large operators Dlton, that are in that space is we, as broker’s partner with our clients to make sure that quarterly we’re reviewing those values to make sure the construction value is in line. Like you said, there’s some factors that are making those price of valuations go up and down. So got gotta stay on top of that. We want to make sure there’s there’s no surprises, because we are seeing those carriers look at that very closely and it can be very penal if you’re not up to date on those construction values. Um. A solution to this is mid term. For example, of your property builders risk policy, you look to put in place excess layers. Um. It’s an option that can mitigate cost. If your limits you go burn through your limits, look to put look to the cost to put in some excess layers. Mid Term and Um, and I say mid term because it’s a lot easier conversations. Underwriters are not flooded with submissions. They can take that mid term conversation in a timely fashion and that’s that’s a solution we’ve seen to h this challenge. I would say, yeah, that makes complete sense. That’s a really good actionable piece. In terms of your space, what do you think some of the biggest challenges or pressures on increasing insurance premiums? What is it? Is it going to continue to be inflation? Is it natural disasters? What’s what do you look at and say this is gonna stick around, this is going to continue to put upward pressure on premiums? I mean, I would say it’s probably, you know, just a mix of of what you just mentioned. Um. Now disasters,…
I think is really is really a huge one. Um, just because you know, we’re not really sure what the state of the world is going to look like, you know, five years, ten years, twenty years from now. Right we don’t know how much more severe our natural disasters, you know, could be in the future. Um, and I think also to you know, you have to look at defects. You want to talk maybe a little bit about like product yeah, you know, as as there is a housing shortage, as you mentioned, we know that. You guys know that. The solution to that, everyone thinks, is density, like let’s build as many units as we can, let’s move from that single family detached to that, uh, whatever it’s, if it’s multifamily, town homes, condos type of model. The issue we’re going to have there is as you become more dense, and the most simple way I could put as folks live closer to each other. Um, if there’s something wrong with one particular unit in this town home development or Condo, it usually resides in all of the units. Versus a single family detached home. There may be issues that can be fixed in one home, but as a developer in a Condo Unit of say, twenty Condos, if there’s some sort of defect, whatever that may be they’re gonna have to go in and deal with class action lawsuits. Right, class action, WE’RE gonna go against the developer. All the twenty units get together and combine efforts against the developer to make sure they mitigate the situation. So that’s something that will continue to deal with. Um, one of the things that we always tell our folks is if there are issues, go in and fix them. Uh, don’t wait until the lawsuits come. You’RE gonna avoid a lot of frictional costs. You’re Canna avoid litigation costs. So, as your home buyers, if there’s anything that they expressed that they would like taking care of within the norm, go fix it and it will save you money in the long run. That’s a that’s something that we measure and we’ve measured for many years. So that’s important. Yeah, that’s super insightful. One one thing that made me think about is carrying flood insurance when you’re not in a flood zone. So I my primary residence not in a flood zone, I absolutely carry flood insurance. It’s like five hundred bucks a year and for that peace of mind. Um, because growing up on the coast everybody carried flood insurance. One point we were a hundred and fifty ft from the ocean and it’s like, yeah, you know, this is this isn’t floods on carry flood insurance. But you look back at Houston some of the other massive rainfall events that uh, so much of the loss was not in a flood zone. Uh. So, you know, I think I know what the the answer, a route of the route of the answer, is going to be. But thoughts on carrying flood insurance when you’re not in a flood zone, because I think it’s probably, in my mind, one of the most frequently overlooked. I don’t even need to think about it. Um, parts of the insurance world. That’s a that’s a great question and I agree with your methodology on purchasing the flood insurance. I’ll give you an example of in Houston. Um there was a very large development, hundreds of homes being put in place that happened to be higher up in elevation than a neighboring community. Um, there were some rains that came in. We’re talking Houston. Some rains came in and it washed some dirt, silt water all into this neighboring community. That ultimately flooded a hundred homes. Um You’RE gonna need to have not only looking at the climate but also looking at what’s going on around my house. What is are there developments? Could anything potentially affect my home that way? So that was a very expensive claim. That happened…
…and I don’t know, two years ago, Um. But ultimately it was settled, but for quite a bit of money. With the flood insurers kicked in and for those who had the flood in that neighboring community that had to just be sitting down a little bit elevation. Wise it was a wise decision. So yeah, it’s especially knowing that. You know that science of science that hurricanes are getting stronger, slower, uh, that dump smore. Yeah, they’re predicting the seventh year right now, consecutive year of more hurricane activity. I don’t know if that’s from climate change. Who knows what that’s from, but it’s continued to trend. You know, hurricanes have gone into September October versus in the past. You know the end of September was the end of hurricane season. So you know, if you’re looking at buying wind coverage for eastern areas, coastal areas. Look at it well ahead of times. Don’t look at it in a hurricane season because you come to an underwriter and say I need wind and it’s July, it’s gonna be a tough conversation. That’s it. That’s something you want to look at in January, February or something like that. Yeah, that is good knowledge, good to have. All Right, Andrew Ali, I can’t thank you enough. This has been great. We have to we have to get another check in on the books here a few months later just to see what has changed in the insurance world. It’s something that I think just often overlooked and thought of as a secondary piece. But you know the age old saying of you know, you don’t care about it until you need it Um and it is such a such an integral part of the world. It’s an integral part of the world for every lender because we all require insurance. It’s an integral part for operators because if you’re not properly insured you have just a massive, Um dark cloud hanging over your head. And sure you may be lucky, but also it is a constant all over this country that you have weather events just completely unexpected, wild things happen. And my sister lives in Dallas and they had crazy rainfall a month or so ago where some places got fifteen inches of rain in twenty four hours. And you’re like, it pretty much doesn’t matter which property looks like, there’s a high chance that you had some water related issues or just a complete flood, because a few places are meant to sustain that type of rainfall over that short period of time. So there’s just so much unknown Um and I’m I’m a little geeky and passionate about the weather world, and so that’s why I always go back to uh just like these weather events, snow and snow and Malibu. Yeah, yeah, snow, insanity, Insanity. So go get just flood insurance, your window insurance, your earthquake insurance, get all of it. We were in Hawaii, uh for a friend’s wedding back in April and my wife was like, Hawai is wonderful, but I would always be worried about the volcanoes. So if you’re in if you’re talking insurance, UH, small friends to pay to be to live in that a real thing right. Well, well, next next episode we’ll have to do it remote from Hawaii. And do some do some volcano insurance talk. So, Canna, I thank y’all enough for jumping on this. If people want to get in touch with you locked in insurance, what’s the best way reach out to either one of us? We’re both on linkedin social media. Um locked in insurance brokers is the name of our company. Andrew Douglas Alie Carter Ali Andrew thinks again. I gotta have you back on here soon, and thanks to everybody for listening. Take care. Are you a real estate investor looking…
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