Solutions

Catastrophic change is pushing real estate to redefine protection

A Conversation with Tom Larsen

Weather and climate are important risk factors that we monitor closely here at CoreLogic since these phenomena affect not only homeowners but also insurers and the property market at large. However, climate change is altering familiar seasonal climatic patterns, leading to more frequent and severe weather events that are sweeping across the nation and leaving billions of dollars in damages in their wake.

Host Maiclaire Bolton Smith sits down with Tom Larsen, an expert in catastrophe risk management and insurance solutions at CoreLogic, to answer some questions such as what led to the $56.92 billion in property damage in 2021? What is the difference between property damage and reconstruction cost value? How do natural disasters affect mortgage delinquency rates?

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic podcast, where we dive into the heart of what makes the property market tick. I’m Maiclaire Bolton Smith, your host and curious observer of all things related to property — from affordable housing to market trends and the impacts of natural disasters to climate change — I want to converse about it all.

So until recently, climate change had only been a peripheral concern for those across the property marketplace, from real estate to mortgage to the insurance industry. However, those same investors, regulators, builders, and insurers, just to name a few of the involved parties, are now beginning to change their tune as the very real financial consequences of the changes in our climate are becoming more apparent each year.

How apparent is more apparent? According to CoreLogic’s 2021 Climate Change Catastrophe Report, last year, the United States sustained $56.92 billion in losses from major natural disasters. To dig in a little deeper into what this staggering figure represents, we’re joined today by Tom Larsen, an expert in catastrophe risk management and insurance solutions here at CoreLogic. Tom, welcome back to Core Conversations.

Tom Larsen:

Hi, Maiclaire. It’s great to be back. I’m looking forward to this conversation.

MBS:

Awesome. So our listeners may remember you, Tom, from when you joined us to talk about the Central U.S. Freeze last winter in Episode 11, which really ended up being one of the major stories for the year. So before we get into what caused the country to rack up this really large bill associated with these climate catastrophes, can you first just remind our listeners about yourself and your background?

TL:

Well, thank you, Maiclaire. I focus my career on supporting insurers, governments and real estate owners and helping them understand what could happen, how do you anticipate the risk, the damage, from natural catastrophes such as earthquakes and hurricanes. The types of catastrophes that we’re seeing today and helping them translate the unknown into something that is manageable, foreseeable and achievable.

MBS:

Great. And that’s why we want to talk to you today. So we started this conversation on climate change last season in Episode 23 with our Chief Scientist Dr. Howard Botts. And for our listeners out there, if you haven’t had a chance to check that one out yet, you must, it really is probably my favorite episode of last season. But it also examines why we need to care about the impacts of climate change. So to build on that, Tom, can you explain this CoreLogic Climate Change Catastrophe Report that we just released and why it’s important?

TL:

When we think of climate change, we have to think of climate change in how do we as a society — individuals, companies or organizations — how do we plan and anticipate natural catastrophes? We’ve always had the goal of being resilient and maintaining operations, maintaining our communities after a natural catastrophe. And intuitively we as a community have been using experience-based, our intuition guided by the experience, to help us understand what’s going to happen in the future. And now we’re confronted where the future doesn’t look like the past, it’s a slightly different one. So we need to be able to use these tools and data and analytics and we’re going to need to rely on them more than ever to help us understand what is coming because we don’t have the intuition to help us understand and anticipate that.

MBS:

Right. So when we look at this climate change catastrophe report that we just released, we’ve already mentioned this really big number of $56.92 billion in property damage just from these climate events that happened in 2021. So can you talk a little bit about what does that number mean?

TL:

2021 was a larger-than-average loss year. The number that we’ve focused on here is damage to property of the real estate economy. So we are looking at the housing. We want to look at this is where Americans live and be able to look at that damage. It’s a significant number, not the largest we’ve ever seen, but it means it’s significant. These numbers are trending. If we get above average every year, it means the average is moving up.

MBS:

Right, right. So let’s dive a little bit into the number specifically. So I know we already mentioned the Central U.S. Freeze, I know that was one of the big stories, but that wasn’t it for last year. If we look at the full year of climate catastrophes, can you break it down? What happened specifically in 2021?

TL:

The catastrophes we see were not exceptional. We’ve had hurricanes before, we had them this last year. We’ve had wildfires before, we had them again. Severe convective storms with large hail storms, tornadoes, a winter freeze. Those are the things we’ve seen except every time we have to pay attention at the granular level to what happened on the ground. We had a hurricane that had enormous amounts of flood in Philadelphia. So we had damage in Louisiana and then we had a flood later on. That’s significant because that’s one event we have — the insurers they have to keep their promises. Insurers need to be able to have sufficient resources to pay what happens in an event, as these events change and are bigger, they’re more sudden, they’re measurable. That’s in a nutshell what happened.

MBS:

That’s really interesting because it’s one event. People think often hurricane, hurricane happens, causes damage to the place where the hurricane makes landfall, but that’s not at all what happened. What we saw and what you were just talking about is that one hurricane made landfall, caused damage in Louisiana and then continued to travel and caused flooding damage — which actually I believe was even more damaging than the hurricane wind damage in Louisiana — to subsequent places further in the East. Is that correct?

TL:

Oh yeah. And it’s important. We recovered from this, so it’s good, it’s a glancing blow. But we as a society, we have to keep learning. We have to build up that intuition and extend ourselves again to anticipate the future.

MBS:

One thing I’ve often said and I know I’ve mentioned it on this podcast before too, is that the No. 1 thing we can do to be prepared for natural disasters is to believe that they’ll happen wherever you might live. Just believe that this is something that may impact you because just that awareness is the first step. And whether you’re a homeowner and you’re protecting your own personal property or if you are an insurer or a mortgage company and need to understand what your risk is to your specific portfolio of assets.

TL:

Absolutely. There are a lot of different ways we can look at different sides of the coin. We can have the fear that it could happen to me or we can have the confidence that I am ready and I will survive this. Because really, the occurrence of these hurricanes and earthquakes are out of our control, certainly right now. But what is in our control is how well prepared we are, how strong our buildings are, how well prepared our claims adjusters are to getting people back into their homes so that they can get back to their lives and restore that community and keep that community going.

MBS:

I really love that you just said that, Tom because that really is our noble purpose of what we do here at CoreLogic is we help families and businesses protect and restore their properties. And that’s where the data and analytics that we offer really are out to help you with that preparedness.

TL:

Absolutely.

MBS:

I want to talk a little bit more about this big number. And there’s a few things that I think are at play here. I think we all are aware that we’re in the middle of a pandemic — and I don’t know if that’s ever really ending — but if we look at what happened in 2021, some of the factors were climate change, some were pandemic-related in particular with supply chain issues. Can we break down those factors specifically and talk about what contributed to that total nearly-$57 billion price tag that we saw last year?

TL:

You almost want to chuckle because everybody tells you this, “It’s complicated.” And it is. And we try to simplify it because it’s what helps me get moving and go through it? When we look at the damage, when a damage occurs, we have different types of events. A wildfire, it destroys the whole home, it’s tragic. Typically the foundation is still whole, but the home is gone. And a home means the homeowner is gone, all their contents, all their furnishings, all their clothing, everything’s gone. And there is insurance coverage for having to live at an alternative place, we call that additional living expense. So all of that. And we have that embraced in here, and for the wildfires, you’re seeing that factor in there. But for many of these other events you’re seeing, it’s mostly to the exterior of the building, it’s windows and roofing we’re seeing in a lot of the hurricane and severe storms.

The tornadoes are the worst of it. They start to look a lot like the wildfires because the home is gone, and there were some really tragic ones last year. But within and when we look at the damage to a building, we look at it in the terms of what does it cost to restore that person where they were before the event occurs? So we call that process the reconstruction process. So the values that we’re calling in here is what does it cost today? And we’re doing our best to really reflect what’s the cost today. And you introduced the term in the aspects of inflation and supply chain.

What we’re in, the situation of COVID — and we’re still trying to emerge from this COVID — we did see a supply chain that was leading to higher costs of materials. Many people saw it was a fivefold plus increase cost of lumber last year. We could talk about it in terms of — at different times. Supply chain bottlenecks on getting appliances, on getting roofing materials. They’re pulses and stresses in the system. And what we saw last year was what’s looking like up to about 15% at different times for different projects of the cost compared to what it would have been the year before. It was 15% more. So there was certainly an inflation. And I think it’s fair to say that much of it was not fully anticipated, so it was a surprise.

MBS:

Sure.

TL:

And that in itself was a catastrophe.

MBS:

And we did talk about that lumber shortage. I believe it was Episode 21, we talked about the construction cost and supply chain impacts of that. But putting it in the context of property damage and what’s it going to cost to rebuild, I think adds a new dimension to it. I’m glad you pointed out that not all natural disasters have the same level of damage. So what we see from a wildfire, this number is really focused on full total damage and a lot of additional living expenses because people can’t live in their homes because their homes have been damaged by wildfire. And tornado is kind of the same, that full property damage. Versus a flood or a hurricane, we’re looking more at just, I don’t want to say a little bit of damage, but just a different kind of damage, depending on the type of event that were to occur.

TL:

Exactly.

MBS:

So let’s go back to February 2021. And you and I have already talked about this Central U.S. Freeze previously on the podcast. And we look, yes, the report talks about it, and in 2021 we had all kinds of hazards: wildfires, hurricanes, severe convective storm and other winter storms as well. But that Central U.S. Freeze really had an outsized impact, damaging 12.7 million homes, causing $15 billion in property damage. And it resulted in $2.27 trillion in reconstruction costs. And those are numbers that we pulled out of the report there. So why did this storm outpace damage done by everything else?

TL:

From the perspective of a planner, we try to deconstruct natural catastrophes. We try to gain insights into how we respond and how we improve our response and how we can improve modeling. The Central U.S. Freeze was massive, affecting more than 12 million homes. It’s close to 10% of the housing stock in the U.S., that’s 1 in 10 of us.

MBS:

Wow, that’s huge.

TL:

Not everybody’s home got damaged, and it had a happy ending. But there were moments where certainly there were a lot of learning opportunities in that event because it could have been a lot worse. It was driven from a cold event that they had seen in the past, it was every 25, 30 years. It was exceptionally cold and then there was a cascade of unfortunate events. Some of them are related to how we’re modernizing our electric grids and changing the vulnerabilities of electricity. Some of them are related to how we’re shifting to more efficient means of heating our homes. The is instant water heaters are more vulnerable to freezing if the power and the water simultaneously shut off than our big, massive water tanks, the traditional water tanks.

It’s that type of big cascade that could be monumental. Now, we survived this one and we want to be able to survive all the future ones with these things. But it really is important for us to help understand to make sure that we can address and understand vulnerabilities and find those homes that are more vulnerable, perhaps we harden those and strengthen those homes. Again, it’s with the concentration, the focus is to keep our communities. We don’t want to have to force the migration of people from one place to the other because you can’t live there anymore.

MBS:

Right, right. One thing I wanted to talk about as well too, Tom, is we did mention two different numbers there. I talked about damage and reconstruction cost. Can you dive into this a little bit? I know we talk about this in the report too. The difference between those two numbers. What is the difference between that $2.2 trillion in reconstruction cost? That’s a huge number compared to the $15 billion in property damage just from that event alone.

TL:

And thanks for asking that, Maiclaire, because looking at damage as a researcher, you want to be able to look at well, how much damage was and what was the denominator? How much was there? Did that represent 100% of the damage? What we call it as a model where we use the term severity to gauge and look at how severely was a community or an area impacted. So we like to look at the denominator, what could have happened, that 100% number. So that 100% number is the $2.27 trillion, the numerator is the $15 billion. Now what it tells us is that on average there, it was a low severity event but that nobody’s outcome was average. You either got in that loss or not. But on average it was a low severity but it was vast geography. And it’s important for us to just plan to make sure that we don’t want to have to rely on being lucky every event.

MBS:

That’s a good context I think, Tom, because we mentioned just a little bit earlier how not all events cause the same level of damage. And if we’re looking at a wildfire or a tornado, that could be that 100% damage. So then that reconstruction cost becomes very relevant to the actual damage cost as well too. But it gives you that denominator to scale how severe the property damage actually was. Is that a good way of looking at it?

TL:

Mm-hmm (affirmative), that’s fine.

MBS:

One more event I want to dive a little bit deeper into is Hurricane Ida. That was the largest hurricane event that did happen in 2021 — we touched on it a little bit earlier too, talking about how it was a hurricane but also it caused flooding in different parts of the country as well too — but I want to talk about a really interesting case study. In August, the mortgage delinquency rates in the Houma Metro Area of Louisiana stood at 7.4%. And after a Hurricane Ida made landfall at the end of August, on August 29th, the delinquency rates nearly doubled to 13.3% in September before reaching up to 13.5% in October. So can you talk a little bit about how natural disasters can be a strain for banks as well as for insurers?

TL:

Looking at some other disasters that have occurred on the stresses on the U.S. economy, the U.S. government has used a term “systemic risk,” with the concern that a stress in one part of the economy may topple over and impact another part of the economy. And what we’re looking at here is when you increase the delinquency rate, you’re increasing the stresses on banks. Now, much of that is insured, but a lot of it is not insured. So that means it is putting a financial stress on the banks. Now, the banks are not infinitely elastic, so we want to measure and it’s an important stress test to see what’s going to happen.

But it’s also really important to start testing these metrics and get people comfortable with these things because we already started this cycle talking about climate. And climate, we’re going to see something different and into the future. We want to test and monitor and make sure that we are still in a safe place where we can continue to grow and thrive as a nation and as a nation of communities going into the future. So we are tracking this to make sure that these stresses remain acceptable to the interveners.

MBS:

So I like that you mentioned the future and I think just to wrap up here today, Tom, what do you think we can expect in 2022, specifically insurers? What can they expect in 2022 for a year of disasters?

TL:

That’s very difficult.

MBS:

We’re not in the prediction business.

TL:

We don’t predict business. On average, you have two hurricanes in a year, one to two major hurricanes a year. But most of the U.S. coast is barren or not really densely populated so we don’t normally see a lot of catastrophes. We expect many hailstorms. Hailstorm remains the largest single damaging peril, severe convective storm, in the country. Tragically, we will expect more wildfires too. And they’re a tragedy because the whole home’s gone, someone’s life is gone. But what we can also expect is faster claims, people back in their repaired homes at a faster pace because, with this new technology that we just talked about today, insurers are able to be faster in restoring the lives of their policyholders. And so we should see more happiness, more happy outcomes.

MBS:

I like that, Tom, that’s such a positive outlook to end with. That, yes, we’re not in the business of predicting natural hazards, we do know which ones we may expect, but from what we can expect in 2022, I love the fact that technology and innovation has moved us forward and we are now able to be more prepared and respond better to these events when they do happen. So Tom, thank you so much for joining me today on Core Conversations: A CoreLogic Podcast.

TL:

You are very welcome, Maiclaire.

MBS:

All right. And thank you for listening. I hope you’ve enjoyed our latest episode. If you’re interested in downloading a copy of our 2021 Climate Change Catastrophe Report, please visit corelogic.com/catastrophereport. Please remember to leave us a review and let us know your thoughts. And subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life. Producer, Jessi Devenyns editor, and sound engineer, Romie Aromin, and social media by Sarah Buck. Tune in next time for another Core Conversation.

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