A Conversation With Tom Larsen, Scott Giberson, Garret Gray and Selma Hepp
A lot has happened this year. From Hurricane Ian sweeping across the Gulf Coast to interest rates soaring, this year reflected the economics, world affairs and climate change impacts that shape our world. But there is much good that has happened too. Following interest rate hikes, the housing market has tempered after years of explosive growth, and the U.S. government is implementing a more accurate, equitable approach to understanding flood risk throughout the country.
As we wrap up this season, we are bringing back four of our favorite guests to get an update on what happened in 2022 and their outlook on the year ahead.
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.
It’s that time of year again. The year 2022 is coming to a close. And over the past 18 episodes, I’ve spoken to industry leaders about topics ranging from FEMA flood maps to luxury real estate trends — and everything in between. Much has changed since last March when we kicked off Season 2. While it is part of my job to keep pace with changes in the industry, I recently found myself wondering what had happened to particular governmental policies that were in the works, as well as industry changes that were on the cusp of becoming trends.
And I knew our listeners, like me, would be curious to have an update on some of the subjects that we touched on this year. So that’s what we’re going to do today. I’ve invited back Tom Larsen, Scott Giberson, Garret Gray, and Selma Hepp for an update on the discussions we had in their episodes.
So, to kick us off, let’s start with Tom Larsen, who’s an expert in catastrophe risk management and insurance solutions here at CoreLogic and who has weathered many a storm this year, providing expert guidance and insights along with a good sense of humor. Tom, welcome back.
Hi, Maiclaire. Thank you for inviting me back.
Okay, so when you joined us last spring for Episode 34, we talked about climate change, specifically our 2021 CoreLogic Catastrophe Report. The report summarizes the year’s largest losses from natural disasters, which nearly reached a whopping $60 billion. Can you tell us if 2022 is likely to have a similar loss figure?
The expense book for 2022 is not closed yet. We don’t know the true cost until we’ve restored everything to its prior condition, and the end of the year may bring us yet more climate disasters.
But the current trajectory for 2022 cumulative catastrophe losses in the U.S. is insured losses to exceed $80 billion, probably a slight increase for the cumulative losses compared to 2021.
2022 losses are dominated by Hurricane Ian with an expected loss figure to exceed $50 billion. More losses than 2021’s Hurricane Ida. Significant severe convective storms and the losses — convective storms being tornadoes, hail, straight wind and flooding — are contributing significantly to the annual totals for 2022. The absence of a severe freeze, like last year’s Central U.S. Freeze, and minimal wildfire losses seem to balance out the losses for this year compared to 2021.
Wow, interesting. Thanks for that, Tom. You mentioned Hurricane Ian. It really was one of the big events of the year, so we would be remiss not to mention it. But I think one thing that’s really important with Hurricane Ian, can you comment on how inflation has affected the value and the impact of insurance benefits provided to help rebuild structures that have sustained damage?
To start out, one of the ways that we measure community resilience is how efficiently we can restore properties and individuals to the conditions they were in before the catastrophe. Towards that we, as a society, have improved our resilience in the last decade. Our abilities to anticipate losses with loss projection modeling, our abilities to immediately know what happened with forensic science, weather observation and, most importantly, insurers’ ability to coordinate their claims response with restoration contractors leave us better prepared to be the resilient communities we aspire to be. But given that there are still several headwinds and challenges, current trends, most exacerbated in Florida, are challenging that model. Assignment of Benefit laws are changing how an insurer works with their client, their policyholder, to restore their homes. And that’s delaying and slowing and leading to a lot of assertions that claims are being paid too much.
Because remember, if our neighbor is getting a roof when they don’t need it, we have to pay that in our premiums. But you mentioned inflation and inflation is a challenge right now. Inflation represents a very large challenge to insurers and to all of us because the storm occurs, but the repairs may not be made for another six or eight months prior to the event. For some of these very large events, there are many people who lost their homes in Hurricane Ian. So that means that the reconstruction costs will be higher than what they were assessed at the time the policy was written. And even more, they are higher than what our current assessments might be at the day of the event. We’re coming out of a very low inflationary period and going into a very high inflationary period where this is more of a problem. And so it makes it even more important for insurers to make sure that they have the proper assessment of what today’s cost is going to be, and they’re able to project adequately to make sure that they have the adequate resources to restore people back into their homes. And we think that we’re getting better.
I like that. There are challenges and significant headwinds ahead, but we’re getting better. And I think that’s a positive way to move forward. So thanks, Tom.
Now let’s turn to talk to Scott Giberson, who is a principal of flood compliance here at CoreLogic. He happened to be our first guest on Season 2 when he came to talk about flood insurance and FEMA’s, or the Federal Emergency Management Agency’s, Risk Rating 2.0. So Scott, welcome back. I can’t believe it’s been a full season since you were here on Episode 31. Can you remind our listeners what exactly Risk Rating 2.0 is and how it ties to the National Flood Insurance Program and what, if any, noteworthy changes have taken place since you were here in March?
Thank you, Maiclaire. Yes, and I’m really happy to be back to Core Conversations, and I’m also pleased the network didn’t cancel the entire season after my first episode, so that’s a good sign. Yes, so to remind folks about Risk Rating 2.0, FEMA repeatedly uses two words to describe Risk Rating 2.0, they call it “transformational,” and they use the word “equity.” And so for transformation, I say that’s not an overstatement on FEMA’s part, it really is the largest shift in the program’s 50-year history. It’s an overhaul of how rates are determined. So, in the legacy system, it was per flood zone. Either you’re in a high-risk flood zone and you have a certain rate table and that determines the premium, or you’re in a low-risk flood zone and you use the rate table to determine the premium for the low risk.
Now with Risk Rating 2.0, it is a structure-by-structure flood risk assessment that’s based on a number of factors, not the flood zone itself. Instead, flood frequency, flood types, distance to a water source, first-floor height, and other flood risk factors. So it really is a transformational change in how rates are being determined for the National Flood Insurance Program, the NFIP, policies. And on equity, let me just mention, so FEMA even uses the phrase, “Equity in Action” when describing Risk Rating 2.0. It’s in the title, if you will. What that means is that the rates established for policies on homes across the nation are equitable across the spectrum of home values as opposed to the legacy system, where rates for policies for lower-value homes were higher per a hundred dollar coverage relative to value than for higher-value homes. So, in fact, your listeners may not be aware that CoreLogic’s reconstruction cost value is the data set that the NFIP uses to ensure that equity across home values.
So, I would say equity and transformation are kind of keywords to think of. Now, Maiclaire, with respect to what’s changed since we last spoke. Just a couple of things I’ll point out. There’s more data and information that’s available now. And NFIP has been very deliberate in releasing more and more information to the public, such as some state-by-state profiles that detail the rate increases, or decreases, and rate changes, if you will. And more consumer-facing guides. They’ve heard from the public that they want more information, more transparency about the NFIP. So there are guides for consumers around rate setting, around mitigation discounts, et cetera. And the last thing they’ve made available, which I think is really fantastic, are these small three to seven-minute video vignettes available on YouTube. So I would encourage your listeners to go out and type up “NFIP Risk Rating 2.0 video vignettes” on YouTube and they’ll be able to sit back and learn a bit more about Risk Rating 2.0.
That’s so great, Scott. So really transformative, but also transparent in many ways for those that are using Risk Rating 2.0.
Okay. Is there anything that insurers or lenders should watch out for in particular with these updates that have come?
So, importantly where we are today is we’re six months away from the full transition to Risk Rating 2.0, meaning that come April 2023, all of the book of business will be renewed under Risk Rating 2.0. NFIP was deliberate in that it had a transition or phased-in approach to Risk Rating 2.0. And so we’re still waiting to see the full effects on the renewal business of Risk Rating 2.0. So, three things I’d say to watch for, for lenders, insurers, agents, et cetera. Again, over these next six months, look for anomalies or challenges. This is a transformation. So with any transformation, there’s going to be hiccups, there’s going to be tweaks that need to be made. So if agents run across a given quote that does not seem right or the data seems off, then work back with the NFIP and contacts to ensure that it is the right data going in to give the right premium coming out.
Secondly, watch for more information. I just mentioned all the great resources that FEMA has made available to the public, but I would expect more to come and more specifically around mitigation discounts. One of the things I’ve heard from agents is that they’ve had some frustration in working and trying to help the policyholders, their customers, to obtain discounts on a given policy based on specific elements about a structure. And so I think NFIP is going to do more around making some mitigation discounts available more broadly. So more to come on that.
Last thing I’d say to watch for is watch what Congress does with the NFIP, if anything. So some questions I’d pose are, “Will Congress look to pass a law that affects the 18% statutory limit?”
Currently, there is this limit that’s in law that serves as a glidepath for premium increases by limiting year-over-year changes to be no more than 18% for any given policy. So will Congress do anything to change that? And also will they do anything around the mapping program, the flood mapping program, to make it more lockstep or consistent with Risk Rating 2.0? Currently, lenders rely upon FEMA’s flood maps for the mandatory purchase, for example. However, Risk Rating 2.0 does not rely upon those flood maps. So, there’s a bit of a programmatic disconnect. And so I’m curious to watch to see if Congress or FEMA does anything to address possible implications of that disconnect.
That’s great. So watch and see and see what’s yet to come.
Exactly. It surely will be interesting.
Thanks, Scott. And we are going to stick with insurance now for a second and we’ve welcomed back Garret Gray, who is president of CoreLogic’s Protect Division, and we want to get an update on the status of things in the insurance industry. Garret, welcome back to Core Conversations.
Thank you for having me back. Excited.
Okay. So yeah, last time when we spoke early in August, we talked about the property insurance industry at large and how the insurance industry is heading towards a more integrated ecosystem rather than traditional segmentation. So, can you just tell us how the insurance industry is continuing to develop and what can we expect in the near future?
Yeah, look, I think with some of the dispatch technologies that we’re pushing out with some Top 10 carriers, I think what you’re just seeing is a continuation of technology propelling forward the ability for all parts of the ecosystem to come together and service both the policyholder and the different stakeholders in the claims and underwriting process in ways that are more integrated and with less friction. And I think really that’s a big part of our intention. We’re starting to see that play out as technology really starts to bridge the gap between all the players making it easier for people to work together and for information to move around faster in ways that are more accurate and allow for faster, fairer settlements both in the claims process and then for those on the underwriting side, getting to better property data so that they can better match price-to-risk. Just continuing to see technology play a bigger and bigger role. And I think this is something that will continue well into 2023 and beyond. This is just a train that won’t stop. More and more technology really influencing the whole process.
And I think that’s something we’re seeing across the property industry is that technology is just continuing to move everything forward. I guess with advancing technology there come challenges. So, what challenges do we still need to overcome as we move forward in the industry?
One I think is technology adoption. Technology adoption is not easy, especially in the different contexts that it’s being used. So think about restoration contractors having to adopt new technology. Sometimes we’re still dealing with connection issues. Think about Hurricane Ian, and while cell phone companies were pretty quick to get coverage back up, it still creates a challenge in an online real-time environment. But it’s a challenge that continues to get better and better. I remember back in the day, it took a long time to get connectivity, and now that is happening much faster. But I think the difficulty of technology adoption and getting everyone on the same platform is getting easier as there’s more consolidation among carriers and in terms of what technologies they’re choosing and as people are getting more used to implementing new technologies.
Okay. So now the last thing I want to hear from you, Garrett, is, what is your prediction or expectation for 2023? What do you think is the biggest thing we’re going to see come out of the industry in 2023?
Well, look, I think you’re going to see it, from a CoreLogic perspective, you’re going to see more Top 10s adopting our full technology stack, which has fundamentally changed the way that the industry is operating. Frankly, in some of our claims platforms, especially along estimatics, there really was one player and that really created an innovation gap to be bridged. And so, as we’ve come together as one CoreLogic with the Next Gear acquisition, and all the pieces that we’ve really uniquely put together in this offering, you’ve seen this outpouring of carriers who are really excited about how they can move forward. And you’re going to start to see those carriers in 2023 and beyond make that move, which fundamentally changes the industry. It really will create more innovation. It’s going to allow for our competitors to get better. It’s going to push us to get better. And so I think you’re just going to see an explosion of integrations and innovation that happens in 2023 as a result of these carriers making some pretty significant moves.
An explosion of integration and innovation. I love it. So, Garrett, thanks so much for joining us again for our year-end recap. It was great to have you back.
It’s great to be back. Thanks for having me.
And to wrap up today, we want to take a more holistic look at economic trends within the property industry. And welcome back our Deputy Chief Economist, Selma Hepp. So, when you were here in July, I think, for Episode 39, we were talking about the luxury real estate market and how this summer, the number of homes that are selling for seven- or even eight-digit sums climbed by over 100%. Can you give us a little bit of an update on if luxury home purchases are still climbing or if this trend has cooled off, and how does this compare to home prices in general?
First of all, hey, thank you for having me back. It’s a pleasure to talk to you guys again.
It’s good to have you here.
Well, a lot has changed. Financial conditions and housing markets have been changing with breathtaking speed since mortgage rates started surging earlier this year. I think last time we spoke, mortgage rates started to creep up, but they still didn’t impact the markets to that level. So what we are looking at right now is significant deterioration of consumer demand, of homebuyer demand, and that’s the case in luxury markets as well as traditional markets. And so now home sales are down some 20% overall housing market from 2021, but the luxury market is down even more. So in markets where we have most of the luxury home sales, such as the Bay Area in California, Los Angeles, San Diego, Miami, luxury home sales are down some 50% to 60% on a year-over-year basis. So, a lot of cooling in the market. There’s a lot of concern about, well, first of all, very high mortgage rates. It does make the cost of a purchase much higher and reduces people’s budgets significantly.
The other thing is there are economic concerns. There are concerns about how the Federal Reserve’s policies will impact the economy going forward. And a lot of people are talking about a recession in the next year. And particularly that’s the case…financial services have been hard hit and they are most concerned about it because of how much they depend on federal treasury rates. And so their business is really dependent on what happens to the rates. So that segment of the market, and a lot of the folks that are buying in the luxury market, when you think about it, do come from financial services or the tech sector. And so they have been hit hard and their stock prices have been hit hard.
So the other concern is obviously global political conditions, the escalating war in Ukraine, unfortunately. Then we have the energy crisis. I mean we have so many things going on globally as well in the U.S. with the inflation that I think a lot of people are on pause right now. So, they’re sitting on the sidelines and they are sort of waiting it out to see what happens next. So, with that in mind, I think we’ll continue to see slow housing market conditions over the next three to six months, probably until the middle of next year. And then some expectations are that mortgage rates will come down a little bit or hopefully a little bit more than just a little bit, which would help the housing market at the end of 2023 and into 2024.
That was a great overview, Selma, and really quite a substantial change within just a few months. So, it does lead to the question that I want to ask which is, have increasing interest rates affected the long-term health of the luxury real estate market? Or do we think things will bounce back?
Yeah, so I think what’s interesting about the mortgage rates at the moment right now is that going into this year, and even halfway through this year, we did not expect mortgage rates to come as high as they have. And yesterday, Freddie Mac, or there have been reports out of rates over 7% and there are quotes, if you’ll Google mortgage rates for 30-year fixed, it’s approaching 8%. This is not at all what we were thinking going into this year. But what’s happening is mortgage rates have increased much faster than the 10-year Treasury, which is what 30-year mortgage rates are priced off of. And so that spread between them has increased because of the uncertainty about the economic conditions because investors are not sure what’s going to happen with home prices. They’re not necessarily willing to invest in mortgages right now because of all that uncertainty out there.
So that led to an increase in the mortgage spread. Now, if investors down the road become more comfortable, if we see that home prices in fact level off, as opposed to some expectations that they’re going to decline on a year-over-year basis, then they may feel more comfortable that the spread will compress and mortgage rates will come down. So in theory, that’s what should happen. But again, a lot of uncertainty. There are what we like to call black swans, sometimes unexpected events in the economy. And so a lot of things can happen, but in theory, I think that’s what is most likely to happen going forward.
Well, Selma, we look forward to having you back on Core Conversations in 2023 where we can kind of look and see how things change and what does happen. Because I remember us taking a look back and a look forward at the end of last year, and this is not what we expected to happen. So. there are a lot of unknowns in the unpredictability in the housing market. So, thank you, Selma, for being a part of this podcast and for always being here to provide us with insight. So, we will be back again with you in the new year for sure.
Thank you so much for having me again.
And thanks to all of our guests today, Tom, Scott, and Garrett for joining me once again to cap off Season 2 of Core Conversations: A CoreLogic Podcast.
And thanks for listening. I hope you’ve enjoyed our latest episode. 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 again to the team for helping bring another season of this podcast to life. Producer Jessi Devenyns, editor and sound engineer Romie Aromin, and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.