Why Your Homeowners Insurance Bill Keeps Going Up (And What to Do About It) Special Episode SB1876

Homeowners insurance prices are up a whopping 24% since 2022. One in seven homeowners now has no insurance at all. In some parts of the country, companies aren't just raising rates -- they're refusing to write policies. Bob Litterman co-created the Black-Litterman model that the financial industry still uses to price risk, spent 23 years running risk at Goldman Sachs, and now chairs the Coalition for an Insurable Future. He joins Joe and OG on a special Thursday episode to explain what's actually happening, why it's not going to stop, and what you can do about it right now. What You'll Walk Away With Why the insurance market breaks down when probabilities stop being stable -- and how billion-dollar weather events went from three per year in the 1980s to 23 per year todayThe domino chain: how rising insurance costs in one ZIP code can drive down home values, freeze bank lending, shrink local businesses, and quietly hollow out an entire communityWhy this isn't 2008 -- and the one important way it's actually worse than what the mortgage crisis taught usWhy one in seven homeowners now carries no insurance at all -- and what that means for the next major weather eventThe 100-year flood problem: why homes built to withstand a once-in-a-century event are now getting hit every five to ten yearsWhat first-time homebuyers should ask that their realtor almost certainly won't bring up -- and why the insurance question is now as important as the mortgage rateHow to actually read your renewal letter: what to look for beyond the premium, what hidden changes insurance companies are legally required to disclose, and why your deductible may have quietly doubledOG's Claude trick: how he uploaded both his old and new policy documents, asked for the differences, and found actionable savings plus a jewelry rider gap he didn't know he hadWhy Bob says the real mispricing isn't in the insurance market -- it's in the pollution market -- and what that means for how this eventually gets resolvedThe risk management reframe: why thinking about insurance is the wrong starting point, and what to think about insteadWhy This Matters Now This isn't an inflation blip. The risk is genuinely increasing, the models are being rewritten in real time, and the insurance companies pulling out of markets are the canary in the coal mine. The good news: there are specific things you can do right now -- at your house, with your policy, and in how you think about risk -- that most homeowners haven't done yet. From the Basement Bob Litterman joins Joe and OG on a special Thursday episode to walk through the home insurance crisis from the inside -- the pricing models, the domino chain, the reinsurance squeeze, and the difference between a tail event and the slow-moving sea level rise underneath it. OG's takeaway: upload both your old and new policy to Claude and ask it to find the differences before your next renewal. Doug arrives with flood insurance trivia tied directly to the episode content. The Coalition for an Insurable Future, a nonpartisan cross-industry group, made this episode possible. Stacking Benjamins received compensation for this episode. Resources Mentioned Coalition for an Insurable Future -- nonpartisan cross-industry group on climate and insurance risk; coalitionforaninsurablefuture.comBlack-Litterman Model -- referenced for Bob Litterman's background in risk pricingClimate Central -- tracks billion-dollar weather events annually; climatecentral.orgNational Flood Insurance Program -- referenced for the 1968 government backstop for flood risk; floodsmart.gov See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

• 0:00Speaker 00

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• 1:02Speaker 02

  Ladies and gentlemen, we have a big show, a real big show.

• 1:11Speaker 03

  Live from Joe's mom's basement, it's a special episode of the Stacking Benjamin Show. I'm Joe's mom's neighbor Doug, and on today's show, why is your homeowner's insurance bill so high? Heck, if you're in some parts of the USA, you might be begging companies to cover you at all. So why is this happening? What's the future look like? And what can you do today? Those are the questions we're asking the co-creator of the model the insurance industry uses to price risk right now. It's Bob Litterman. And just because it's a special episode, I've brewed up some special insurance-themed

• 1:56Speaker 03

  trivia. You're welcome. And now, here come two guys who feel especially lucky that mom pays the insurance bill down here. It's Joe and O-J-J-J-J-G.

• 2:15Speaker 00

  Hey there stackers. And you're right, not just rent free for the win, but also homeowners insurance for free for the win. Welcome back to the stacky Benjamin show. You're not used to hearing us on Thursdays. I'm super happy that we're doing this special episode. Not only am I doing this episode, but the gentleman across the card table from me is here as well. Mr. OG, how are you, man?

• 2:40Speaker 04

  I didn't know that we had to work on Thursdays, but you know, okay, it's so great. Happy to be here. Thanks for the invite.

• 2:51Speaker 04

  Boy, I sure hope we could do this again someday.

• 2:54Speaker 00

  Where's my time and a half?

• 2:56Speaker 04

  No kidding. Double time. What are you talking about? Yeah, no, I'm feeling pretty good. This is an interesting show idea, Joe, and obviously outstanding guest. How did we, how do we land this dude?

• 3:07Speaker 00

  Well, what's interesting is

• 3:09Speaker 04

  What did we have to bribe him with? How many donuts?

• 3:13Speaker 00

  We offered him not our donuts, some of mom's, you know, she's, there's one baker in this house and we don't compete, but no, we were approached by the Coalition for an Insurable Future. They're a nonpartisan cross industry group of experts and they come from business, from finance, from real estate, risk management. And what they deal with is the economic fallout of what we've all seen, this home insurance crisis as things have changed around the nation. And we've seen, as an example, we've seen hurricanes hitting like Asheville, North Carolina. We've forest fires out west. We have unpredictable weather. They said, Hey, would you do an episode

• 3:54Speaker 00

  about how do we price this in? How do, how do insurance companies look at this risk? How do they price it? We don't deal with climate. We don't deal with, with like big scale economic stuff. But if there's something we could do about it, OG, on our end, when it comes to making your homeowners work better for you. I want to speak for you, but I think you and I, we're all about that.

• 4:18Speaker 04

  Yeah. Yeah.

• 4:21Speaker 04

  Yeah.

• 4:22Speaker 00

  So with that ringing endorsement from OG, let's introduce our guest. Doug, you mentioned his name, Bob Litterman. This guy, this guy is a legend when it comes to pricing risk. He spent 23 years at Goldman Sachs, running risk for the firm, heading up quantitative investing. He co-created the model that the financial industry still uses to price risk today called the Black Litterman Model. He now chairs KPO's Capital and chaired the CFTC Subcommittee on Climate-Related Market Risk. But most important for today, he's built a career out of finding where markets are mispricing risk. And we're going to ask him a lot about

• 5:04Speaker 00

  this when it comes to your homeowners. What are the risks? Where is it mispriced? And what can you and I do about this to get a leg up when it comes to our insurance policies? Let's meet Bob Litterman.

• 5:22Speaker 00

  And coming down the stairs to mom's basement, sitting down at the card table, Bob Litterman is here. How are you?

• 5:27Speaker 05

  I'm great. How are you, Joe?

• 5:29Speaker 00

  Fantastic. Even after the heatwaves we had a couple of weeks ago, you're still doing all right.

• 5:35Speaker 05

  I'm in California. It was nice and cool here, but the rest of the country, boy, they were sweltering.

• 5:40Speaker 00

  I know. I was in Boston over the 4th of July. It got up into the high 90s in Boston, which you just don't see. And that's kind of what we're, we're going to talk about. But before we get into all this, Bob, you spent 23 years at Goldman Sachs, as Doug so eloquently said, as he introduced you, you co-created the model that the entire financial industry still uses to price risk. At what point did you decide, you know what my resume needs? Insurance. Like, walk us through that decision-making process, Bob.

• 6:13Speaker 05

  Yeah, well, people call me a risk manager, but I I'm not an expert in insurance. The group, the Coalition for the Insurable Future, reached out to me because of my expertise in risk management. You know, climate risk is a risk management problem. We're not dealing with it very well, and its impacts are showing up right now in the homeowner's insurance market. And that's why they asked me to join them and talk about what we can do to address this issue.

• 6:42Speaker 00

  It's interesting because as a financial planner, a problem I've always had is that a lot of times people want to just talk about insurance, but really, it's it's not about insurance, it's about making sure that when bad things happen, that you're covered. Managing risk really is the bigger, broader issue.

• 6:57Speaker 05

  Right, right. Insurance is just one form of managing risk. It has some special properties, which mean that it doesn't work very well when you have changing probabilities of disasters, as we have today because of climate change.

• 7:12Speaker 00

  Well, that's what's fascinating to me is all these insurance companies, the actuaries, dealing with all this changing data, like, what do you do? So you've built a career, as you just mentioned, finding places where markets are mispricing risk. And I want to talk about that for a second. What does it actually mean to misprice risk? And why should somebody who just wants to own a house actually care about whether risk is priced right or not?

• 7:37Speaker 05

  Yeah, first of all, pricing risk sounds very abstract, but in the financial markets, it's what we do. You know, when you hold an asset and it has an uncertain value in the future, that's risk. And the more uncertain it is, in theory, the more you get paid for it. Money that pays off when you need it is worth more than otherwise. And insurance is a form of that for extreme events, when you have very unlikely events that happen every so often and would be really bad if you didn't have insurance. You can get someone to come in and say, well, if you pay me in advance, I'll take care of that. I'll pay you off when that bad event occurs.

• 8:22Speaker 05

  And so that's kind of, you know, how you price risk in the insurance market. Now, there are certain conditions that have to be true, or else it doesn't work very well. One of those conditions is that it has to be a rare event. You know, if this thing is happening every two months, there's no point in insuring it. You just, you know, it's going to happen. And so you save the money and you pay for it. But if it happens very rarely, but if also it's a predictable probability, then it's easy for an insurance company to come in and say, I'll diversify across all these different policyholders and I'll have a relatively known number of events. And so I can price it in a way that I can make money.

• 9:06Speaker 05

  So that's kind of the insurance approach. But if the probabilities are changing so that the future is not like the past, then all of a sudden you get into a problem. The insurance company doesn't know how to price it. If we don't know exactly what's going to happen in the future. And that's kind of from a big picture point of view, what's going on with climate change. The extreme events that are caused by extreme weather events that cause damages are becoming more common.

• 9:36Speaker 00

  And so Hurricane in Asheville, as an example, comes up. Some of the wild places, we've had forest fires recently. We've had droughts recently, the extreme weather that we just had across the United States.

• 9:48Speaker 05

  You know, there's a time series that really makes this clear. They call it the billion dollar events series. It used to be computed by the government, the US government. Now it's computed by a company or a nonprofit called Climate Central. But in any case, you go back to the 1980s and you had, you know, on average about three billion dollar events per year. Now it's like 23 in the last couple of years. Yeah.

• 10:15Speaker 00

  Wow.

• 10:15Speaker 05

  These are climate related. Now, interestingly, they're not all hurricanes or wildfires. A lot of them these days are tornadoes or just convective storms flooding in the Midwest. So it's, it's not everywhere that's at risk, but there's a lot of places that you might not think about.

• 10:33Speaker 00

  And it's interesting, we talk about mispricing risk, which was my original question there and why homeowners care about it. I think you answered why insurance companies care about it, Bob, because they want to be able to price it so they stay in business. Our stackers' first thought process is, I don't really care. But truly, we do. If I'm relying on them to make sure that my house is covered, I need to make sure that this company stays, it's in everybody's best interest to make sure that State Farm or whatever the company is can withstand whatever the storm might be.

• 11:08Speaker 05

  Yeah, no, absolutely. And that's the fundamental problem, that these insurance companies are not able to stay in business, doing business the way they did. Here in California, up until recently, the state said you have to look back at historical events in order to price insurance. They mandated that you could only look backwards. Well, the future is not going to be like the past. And so that, that they basically had to give up on. And that kind of phenomena is happening a lot of different places. And it means that insurance rates are going up almost everywhere. It's a question of how much. And it's also a question, to be fair, in some places, there's not a lot of climate risk. In other places,

• 11:51Speaker 05

  there's a tremendous amount of climate risk. And so you're seeing differentiation in different zip codes and different states. It's a very local phenomenon, really. In California, we worry about wildfires. In Florida, they worry about hurricanes in the Midwest. It's, it's hailstorms and tornadoes and floods and straight line winds. There's a lot of different hazards and it affects a lot of different people.

• 12:16Speaker 00

  Well, and just from the homework that I did, trying to keep up with you a little bit, Bob, it also looks like those locales are changing. Even the place where we should expect a tornado, maybe that range is different this year than it was last year.

• 12:30Speaker 05

  Oh, yeah, absolutely. I mean, the weather is changing. Now, it's changing in predictable ways. Some people act as if, well, I never saw this coming. Well, that's not true. Scientists have been talking about this for decades. And it's kind of finally here is what's happening. When the regulators say you can't look forward, you have to look backwards. Well, that's not going to work. And when we talk about the impact of storms, they're getting bigger. The heat is, you know, heat waves are getting longer. There's less snow. There's less runoff. It, it, there's a sea level rise. We could go on and on about the impacts. These were all predicted and they're now coming to pass.

• 13:15Speaker 00

  I think you made an important point that these insurance companies are regulated so that they have to work with these different state governments who are trying to protect individuals in that state. So there's this check and balance system. The reason I would want to bring up the regulator and looking in the past, I feel like this is the same thing that happened with long-term care. Long-term care is something that we see a lot more now than we saw in the past. Long-term care insurance policies, Bob, I don't know how much you know about this, but CFPs are really struggling with how do I solve it? Because insurance companies have gone, we can't do this. But the friction isn't that insurance companies didn't see it coming. It's that the friction was between regulators

• 13:57Speaker 00

  and the actuaries who said, no, no, no, we got this avalanche of people who are going to be using long-term care in the future. We didn't have it in the past and therefore we saw people have to exit. Is this kind of along a similar slant is what we've seen in long-term care?

• 14:12Speaker 05

  Yeah, I would, it's from, you know, I'm not an expert in insurance altogether and certainly not long-term care, but it certainly sounds like it. We expected these things to happen. They're starting to happen and we have to deal with it. Certainly both government and insurance companies and homeowners, we all have to deal with it. That the risk is accelerating. And so the real question is how do we respond and who has to pay?

• 14:38Speaker 00

  I want to go over some of the numbers before we get to how we solve it. Cause as you've already alluded to, Bob, this, the solving it, I think is going to be a little difficult. Let's start off with the pain that people are actually feeling. Homeowners insurance up 24% is what my numbers say between 2022 and 2025. I want to make sure that I'm hearing you right. You're saying this is not just like eggs or whatever we've seen inflation. This isn't an inflationary blip. You think this is going to continue?

• 15:11Speaker 05

  No, you're absolutely right. It's rising insurance rates on average are rising faster than inflation. And almost everyone is seeing this, something like 95% of homeowners are seeing increases. And so it really comes down to being a very local question about what are the hazards you're exposed to? And can you mitigate them or not? And then if not, yes, the insurance rates are going to go up. One thing to point out is people often think about the temperatures rising on average. Well, it certainly is, but that's, that's really the minor part here that affects insurance. What affects insurance is the extra volatility in the weather systems. The tail events, we call them the events that are extreme.

• 15:55Speaker 05

  It used to be, by the way, that people would say, well, you can't blame any particular event on climate change. You don't know whether that would have happened or not. That's kind of true, but it's sort of the wrong question. What you can determine is would that have been more likely? And so you're seeing events today that the extreme heat in the East Coast that we saw a few weeks ago, that is very, would have been very unlikely 50 years ago. Now, not so unlikely. So you can make a statement like that heat wave was five times more likely because of climate change. Those are called posterior odds ratios.

• 16:35Speaker 05

  The relative probability of an event today, an extreme event is much higher than it used to be. And those tail events are what lead to damages, homeowners, you know, not the normal weather, but the extreme. In fact, one way to think about it is that the infrastructure that we live in, our homes, the roads, everything, was built to a certain standard. And the standard is essentially a hundred year event. We wanted to be able to withstand anything that's going to come along every five years or every 10 years, every 50 years. But if it's so unlikely that it's one in a hundred years, we'll take that risk. The problem is that those one in a hundred year events are now happening much more frequently.

• 17:19Speaker 05

  They're happening every five years or every 10 years. Homes that were built for the hundred year flood, they're getting that much more often. That's really the problem.

• 17:28Speaker 00

  Yeah, insurers paid out nearly $80 billion in a single year from weather related events and a lot of our audience wants to blame the insurance company when we hear about prices going up. And I just want to, I guess, hit this nail squarely on the head. You're saying the insurance company is not to blame in this case. The actuaries are doing the best they can, but the risk is so difficult to place that the only way to cover yourself is to cover large swaths. Is that it? How do you, how are actuaries working to price this risk when you're really not as sure today as you were yesterday, where and when weather's going to hit, Bob?

• 18:08Speaker 05

  Yeah, well, first of all, they do rely on models. There are climate models that make predictions about the likelihood of these events going forward that are different than what they were in the past. But of course, those models may be wrong. And so the insurance companies have a little bit harder time. Uh, you know, relying on a model based forecast of future losses relative to what had been a historically relatively stable period. That's one source of uncertainty for those insurers. And then the other thing is insured, you know, it's a little bit more complicated because the way insurers work is they often buy reinsurance, which is to say, I'll take the risk of, you know, normal events.

• 18:49Speaker 05

  But if it's a super large event, a hurricane that hits the whole coast or whatever, I'm going to have another insurance company buy that. Well, those reinsurance companies now are so full of risk that they're saying, whoa, wait a minute, we can't take anymore. And when that happens, then the underlying insurers say, all right, well, we're full. And by the way, we may not want to have as much as we already have. And so they're starting to not renew. So you're having homeowners who are finding that either their rates are going up significantly or they're being dropped. And you have areas like Florida and now California is moving in this direction where in certain areas, it may be very hard to get insurance all together.

• 19:34Speaker 00

  Yeah, I have a friend in a part of Colorado where it's impossible to get homeowners insurance because of the risk of forest fire where they live.

• 19:42Speaker 05

  Yeah, that's coming up in a lot of places and there are things that can be done now. Sometimes a homeowner can take actions to remove debris around the house or harden the roof or something. If you're in a neighborhood that's surrounded by homes that may catch fire, it's not just you, it's also your neighbors. So you have to have the whole neighborhood work together. So that's what some areas are doing and insurance companies can certainly facilitate that. And we're sort of moving toward risk-based pricing. And when the insurance companies pay you to harden your property or give you a discount on your insurance

• 20:22Speaker 05

  more likely, that's something that can help. But the rates are going to go up. That doesn't mean your rates are going to go down. It just means they might not go up as much or you might be able to get insurance where you wouldn't otherwise. But there are places where, as you say, it's really almost uninsurable. If you're, you know, on a hill where there's no other homes and there's brush around, it's going to be very hard to build a livable home there. You're going to have to build with concrete and glass and have a safe room underground and keep the vegetation 100 yards away from the house. It's just, at some point, you say, you know what? It's not a great place to live.

• 21:02Speaker 00

  It's going to be interesting though, too. I also think that based on what you're saying, we may see insurance companies with the use of increased technology. I know that in some cases, I went on a tour of USAA facilities and they were talking about, you know, their increased use of drone footage and being able to look at your house versus your neighbors, different than looking at just one block or a square mile. Now they can look at house versus house versus house. I want to make this clear though, you know, we've talked a lot about Florida, about California. This is a problem though, hitting Kansas. This is an issue hitting Iowa. This is hitting these places that you wouldn't, you wouldn't

• 21:42Speaker 00

  think that there would be accelerating homeowners' insurance prices. You expect that to be somewhere else, like the volatile places we're talking about. This isn't a micro issue. This is a national issue. Well, worldwide issue, really.

• 21:55Speaker 05

  Couple of years ago, we had that freeze in Texas. It's just more volatile. It's not just heat.

• 22:02Speaker 00

  We need to talk about something that you call that I find fascinating. You call it the domino chain. We're going to talk about this later from an investment standpoint, how this hits financial markets. And as we mentioned earlier, Bob, your expertise is in mispriced risk areas. Walk me through this idea of a domino chain because I really want to make sure that our stackers understand how this goes from my premium went up to there's a problem in the broader economy, like step by step, pretend I'm a homeowner in middle America.

• 22:33Speaker 05

  Yeah, well, I would say the domino is likely to happen where you have concentrated, what we would call correlated risk. So let's take an example would be homes in the Florida coast. You know, they may have been terrific homes 20 years ago, but now with hurricane risk, the cost of insuring those homes is going up and up. And it may be in some places, two or 3% or 4% of the value of the home per year is an annual premium for insurance. Well, you know, you just can't afford that. When, when you bought the home, you weren't thinking that it was going to cost that much.

• 23:16Speaker 05

  And, and then it's going to cost more in the future. And what that ultimately does is it drives down the value of that home. So at some point, home values are, are going down. The cost of insurance is going up. And if there's a big event there, you may not be able to rebuild that community. So far, we haven't seen that where we've had big events. You've basically seen people come in and rebuild. But at some point, it's going to not make sense to rebuild. You're going to have people retreating. And at that point, that whole neighborhood, that whole community, or maybe even a region sees property values going down. People can't afford to buy these houses because they can't afford the insurance going forward. That's where you can see a domino effect.

• 24:01Speaker 05

  And you may have banks that are heavily exposed to homes in that area. So they then can't land. You have the businesses, you know, because the population is leaving. All of these things contribute to, you know, the economy collapsing.

• 24:17Speaker 00

  You're saying, I mean, you know, talk about risk management, banks look at risk management every bit as much as insurance companies do. You're saying that even the risk management areas of banks may not be as open to lending in these areas because of the fact that the home, the home insurance risk is so high?

• 24:36Speaker 05

  Yeah, well, it could happen. Certainly, regional banks that are, you know, have their lending focus in this region would be very exposed. Big banks, of course, are much more diversified.

• 24:47Speaker 00

  Sure.

• 24:47Speaker 05

  And we haven't seen a lot of that, but this could happen. It's a problem that's getting worse, not better.

• 24:53Speaker 00

  A lot of our stackers were beginning to stack some Benjamins during the 2008 crisis. Bob, help me draw the line. What's similar to this? What's different? When I was doing my homework, you don't think this is 2008 all over again, though?

• 25:10Speaker 05

  No, I don't think so. You know, 2008 was similar in some ways, but in some ways very different. You had mortgage risk and banks thought that if we take these mortgages and kind of mess them all up and, you know, diversify so that we have some from Florida and some from California and some from all over, that it'll all be independent and they'll never all go south together. Well, it was a good theory, except when the whole economy starts to go south, then all of these homes everywhere start to go south. And so the diversification didn't work. And these mortgage bonds that people thought were going to be safe ended up not being safe and it took down the whole economy. Now, climate risk is not messed up

• 25:55Speaker 05

  that way. We haven't made it hard to sort out the way that homeowners were. So I don't think you're going to get the same kind of countrywide impact that you had with the mortgage market. But you do have these insurance contracts that, as we said, you know, they're going to be hard to renew going forward. So there's definitely real effects. I don't think it'll be the same kind of collapse that we saw in 2008.

• 26:21Speaker 00

  Yeah, I think most of us don't even think about the fact that lenders acquire insurance. If you can't get insured, or you can't afford to be insured, you literally can't sell your house. I could just imagine what that does to home values.

• 26:35Speaker 05

  Well, you certainly take a lot of people out of that market. So whoever would buy your house would have to self-insure. And what you're seeing today is an awful lot more people who don't have insurance. That used to be very rare, the homeowner that didn't have insurance. Today, it's something like one in seven homeowners who don't have insurance. They self-insure.

• 26:56Speaker 00

  Wow.

• 26:56Speaker 05

  The next time you have a big event, that could be a major problem.

• 27:00Speaker 00

  Well, we are halfway through this special episode, the second half, investing, real estate, and what aren't markets pricing in yet? Plus, what can you do on your end? We're going to tackle all that. But it wouldn't be a stacking Benjamins episode if we didn't bring in Doug, sitting in the wings. He has some insurance-themed trivia you can regale your friends with. Doug, what do you got, man?

• 27:26Speaker 03

  Hey there, stackers. I'm Joe's mom's neighbor Doug. And okay, it is my big moment. Bob Litterman, sitting right over there. I'm sure a great trivia question is my ticket out of here. I'm sure he can recommend me to some of his old Goldman Sachs friends, right? Isn't it who you know? Well, Bobby, boy, check out this piece de resistance. As Bob explained, insurance prices are on the rise, and there have been times when the US government got involved. Back in 1968, insurers struggled so much in one area that they created a public program to step in where insurance wouldn't. And the reason? This type of insurance had claims so high that none of the insurers could cover them

• 28:10Speaker 03

  successfully. Something it sounds like Bob is saying is happening right now. So here's your question, stackers. What type of catastrophe did this 1968-created government program seek to help both homeowners and the insurance industry? I'll be back with the answer right after I go connect with Bob on LinkedIn. I'm sure now that he's in mom's basement, it's my ticket to bigger and better things. Winning.

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  Be there in a couple hours, honey. That doesn't stop me from drinking a cup or three of I Got Lucky Again Coffee.

• 30:15Speaker 06

  Sure, coffee won't make you millions, but you'll feel like a million while you drink I Got Lucky Again Brew. Available now.

• 30:25Speaker 03

  Hey there, stackers. I'm insurance trivia adjuster and guy who never raises the premium, Joe's mom's neighbor Doug. One type of insurance the industry was struggling to get its arms around in the late 1960s, so the government stepped in. What type of catastrophe did this insurance? Program helped cover. If you said hurricane, great guess, but unfortunately we'll need to give you another guess because the answer is flood insurance. The National Flood Insurance Program was created because the private insurance companies largely refused to cover flooding

• 31:07Speaker 03

  because they'd suffered so many catastrophic losses. And for insurance to work, you gotta keep covered and there has to be a company there to do the covering. And here comes two guys back to keep covering the topic of insurance premiums. It's Joe and Bob.

• 31:30Speaker 00

  Well, Bob, did you get it right? Guess it was flooding?

• 31:33Speaker 05

  Yeah, it was flooding. You know, there's something special about flooding, which is that it's not something that private insurers like to cover. It's because it's concentrated, it's hard to diversify, and it's predictable that, you know, the same homes flood all the time. And these characteristics are a little bit like the impacts from climate change. That's why insurers are now pulling back on a lot of climate-related risks as well.

• 31:59Speaker 00

  In this case, the government stepped up with the program. I can hear a lot of our stackers just going, oh, God, no. That would be, but is this the same thing on a wider scale in slow motion?

• 32:11Speaker 05

  I'm afraid it has a lot of the same characteristics going forward. Climate-related risks are going to be hard for private insurers to cover. There's definitely a role for the government. The real risk is going up. The real losses are going up. We talked about that. The number of billion-dollar losses has just exploded and it's going to continue to grow. So the question is really not, can we stop it? The question is who's going to pay? That's where I think you have to spread it out. You can't expect homeowners to absorb all of this themselves. You've got to have governments come in, both state and local, as well as federal. And, you know, they have to work with the insurance companies to help people figure out how can we minimize the amount of risk. So how can we harden our

• 32:56Speaker 05

  homes, our communities, and so on, and thereby reduce the impact of these extreme weather events?

• 33:04Speaker 00

  I feel like Bob, this is one of the old Bugs Bunny cartoons where the, there was a lion and Bugs Bunny was asking the lion where he wanted to get hit. And the lion was like, do you want to get hit on the paw? Do you want to get hit on the head? He didn't ask him if he wanted to get hit. You're saying we're getting hit no matter what. Would you rather be hit on the paw or be hit on the head? We got a lot of discussion around that, that we've got to solve.

• 33:27Speaker 05

  Yeah, and maybe we can pat ourselves a little bit and prevent some of the damages and, and build the infrastructure of the future that's going to be hardened. Most likely, a lot of people in rural areas are going to have to move to cities where they have, you know, hardened infrastructure because it's just hard to protect themselves out in the, in the rural areas.

• 33:48Speaker 00

  Let's talk about over the short run, what our stackers can do. Obviously, a lot of investors listen to this show. A lot of our stackers are rental property owners or they're thinking maybe about buying rental property. What question about insurance should they be asking that maybe not enough people are asking?

• 34:06Speaker 05

  Well, it's, insurance is very local. So first of all, you have to figure out what is my situation? Am I at risk or not? And if your insurance company says you're at risk, then, you know, you have to first of all, figure out how much is it going to cost? And then what can I do to reduce that? Can I harden, you know, my home? Can I reduce the brush around for wildfires? Or get a super strong roof if I've got, you know, wind or hail or whatever. So those are the kinds of things that individual homeowners can do. Basically work with your insurance company. And if your insurance company isn't giving you the answers, look for another insurance company or, or look for the state backup if that's the only thing that's available.

• 34:51Speaker 05

  It just, it's hard to say you should do this because it depends so much who you are, where you are, what are the risks you're facing?

• 34:59Speaker 00

  No, but you know what I like about your answer, Bob? It's think about the area where you live. Think about what the risk is. Don't think about insurance. Think about what risk do I have? And then how can I solve it? Insurance might be one part of the puzzle, but like you said, cleaning out brush around your house or better storm drains or your roof, whatever it might be for your area. Think about risk, not about just insurance. I think, and you know, we opened up with that. I think too many people think about insurance, but we don't think about managing risk. And there's a lot of things we can do to manage risk on top of working with our insurance company.

• 35:33Speaker 05

  But you're absolutely right. It's, it's working with your insurance company. They should give you a discount if you do these things. That's absolutely something you should think about and talk to your insurance company about if that's the risk, you know? For some people it doesn't matter, but for others, that's a huge impact.

• 35:50Speaker 00

  There's also something else there too, Bob, that I love, which is people that work at these insurance companies don't want to pay out claims. And I have talked to so many insurance people that know how to reduce risk. They know how to make sure that you don't file a claim. It's in your best interest and in their best interest. So they may have a program, they may have a, I'm thinking about some of the driving programs for kids as an example. It's nothing to do with what we're talking about today, but you know, insurance companies have already figured out that if your student gets great grades, that they are less likely to be in a traffic accident. I don't know how that correlates. I have no idea, but they figured it out. And so working with your insurance company on things like that, I think is, I think is

• 36:35Speaker 00

  big. But you said something that I think is really important at this part of the conversation, which is, well, you had written this elsewhere and you mentioned it earlier. The math of catastrophic risk doesn't care about averages. It cares about tails. And you've mentioned tails. It seems to me this idea of a tail, that something big happens, right? That this is what we're really worried about. For somebody that doesn't live in math, how do we unpack that word, a tail?

• 37:06Speaker 05

  Yeah, well, it's the extreme event. I guess the way to think about it is that as long as these events are within kind of normal range, they don't create much damage. And it's, it's only when they get outside that, we talked about the 100 year flood. And it's sort of when, when you go beyond that in some dimension, I mean, it's a flood or it's a heat wave or a drought or sea level rise. There are two different types of events too, which we should talk about. One is the extreme event that happens at a point in time, the tornado. The other is the sea level rise kind of event that's just slowly happening, but you see it year after year after year.

• 37:48Speaker 00

  Extended, like forever change.

• 37:49Speaker 05

  Yeah. And then you get a hurricane and all of a sudden it's catastrophic damage because the sea level is a foot higher than it used to be. So that's the kind of thing. And I remember I lived on the East Coast when Sandy hit and there's a barrier island off the coast of New Jersey, Long Beach Island on the southern side, there were three feet of water over the island and the northern side, it barely got over the island at all. And that was all due to the timing of the event, the way the wind was blowing and tides and so on. So there's different kinds of events. You can't always predict them, but the insurance companies are experts in risk management.

• 38:32Speaker 05

  And, you know, they have all these sophisticated models and, and they look at your property and say, what are the risks for you and how can we mitigate them? So it's, it's definitely something where homeowners should be working with their insurance company. And if their company isn't providing that kind of service, find another company.

• 38:49Speaker 00

  Change companies, yeah.

• 38:50Speaker 05

  Yeah.

• 38:51Speaker 00

  I want to talk outside of insurance. It's investors, as I mentioned earlier, that listen to this show. If I'm invested in REITs, real estate investment trusts, which for our brand new stackers are basically a mutual fund full of houses. It's a little more technical than that, but a mutual fund full of properties. Or I'm in financial stocks. We talked about maybe the impacts to banks, the impact to insurance companies or just plain index funds. Is climate risk starting to show up in the people that look at the risks of these different collections of investments, these different exchange traded funds and mutual funds? Or is this still a known unknown that the markets are, haven't priced in yet?

• 39:34Speaker 05

  Well, I would say as an investor and someone trying to take advantage of mispriced securities, I would say most securities are priced appropriately, meaning that there is some premium built in depending on what they are. Take an oil company, for instance. I've talked about oil companies as being stranded assets. They're not going to be around forever, but the uncertainty is for how long? Are they going to be around for 10 years, for 20 years? How profitable are they going to be? You know, is oil going to go the way of, you know, the horse-drawn carriage? Or oil companies in particular, are they going to find other ways to make money? And are we still going to be burning

• 40:18Speaker 05

  fossil fuels 20 years from now? There's a lot of uncertainty. These impacts of climate change are definitely hitting the valuations of securities, but it's hard to say that they're being mispriced because there's so much uncertainty about the future. You know, 10 years ago, I was betting we would move much more quickly to addressing climate risk. And I was wrong. So if you bought companies that you thought were going to be great investments 10 years ago because we were going to address climate change and it was going to be priced, well, you didn't do so well. I would put it this way, there's a lot of uncertainty about if and when we're going to price climate risk. Most everyone, I think, understands

• 41:00Speaker 05

  that climate risk is real, especially after some of these heat waves. They understand that we're going to move toward a low-carbon transition. The question is, how quickly is it going to move? The problem there is that you have economic actors who it's not in their interest to move quickly. You know, if you're a petrostate and 95% of your wealth is fossil fuels underground, you're not in a hurry to move off of fossil fuels. And we know who those countries are. And in fact, the US is one of those countries. We have lots of fossil fuels. So, you know, it's not necessarily in the US interest to move more quickly. It's certainly in the interest of the world.

• 41:43Speaker 05

  And it's certainly in the interest of some countries that are moving much more quickly than others.

• 41:48Speaker 00

  It is interesting, though, to see some of these companies. I just did, I wouldn't say a deep dive, but a medium dive into British Petroleum. The name Petroleum, Bob, is in the name, and yet the, the amount of money and time and energy British Petroleum has spent on alternative energy over the past five years especially has been astounding. And maybe as an investor, that's the way I look, is I think, okay, if this, if a company like BP, and by the way, this is not a BP recommendation, it just happens to be, I looked into them, but maybe we start looking with our dollars at, these are companies that have the future in mind.

• 42:24Speaker 05

  Yeah, absolutely. Years ago, I bet against coal industry saying, you know, it's going to go out of business. And indeed, for a while, it did very poorly. But, you know, last five years, it's done very well. So

• 42:38Speaker 00

  They're back, yeah.

• 42:39Speaker 05

  They're back. And maybe not for long. But, you know, the valuation, it's all a question of the valuation and how much profits over the next few years, or however long they last. And it's hard to say, broadly speaking, that certain assets are mispriced today.

• 42:55Speaker 00

  Sure.

• 42:56Speaker 05

  They might be, but it's hard to say.

• 42:58Speaker 00

  For somebody buying a house right now, maybe it's their first home, let's go away from investors to somebody who's just trying to invest in a better life. I'm buying my first house. What's an insurance question I should be asking that maybe the realtor's not bringing up?

• 43:12Speaker 05

  Well, you certainly should ask about what's the cost of insurance and make sure you can afford it. And not just today, but think about what might happen to that insurance going forward. And it's not necessarily bad news. You may be in a house where there's very little risk. As I mentioned, here in the Bay Area, you know, housing is incredibly expensive. So a brand new starter home, you know, might cost you $2 million. But there may be very little climate risk associated with that home. So you might be able to buy that home with $1,000 a year insurance, and that's not going to be a problem for you. If you, if you can afford a $2 million house, the $1,000 insurance isn't going to be a problem.

• 43:53Speaker 05

  The same house on the Florida coast might cost you $20,000 or $40,000 a year. And all of a sudden, it's a whole different equation. So I guess the point is you have to think not only about what's the insurance going to cost this year, but what's it going to cost in the future? And it may or may not be increasing rapidly. That's a question, again, that's very local.

• 44:15Speaker 00

  Which means one other tactical thing that you've pointed out that we should be doing is reading our insurance renewal letter. And I got to admit, when I, when I knew that we were going to talk about that, I realized I've been doing this forever. I barely read mine. What's the information I'm looking for in my renewal letter?

• 44:36Speaker 05

  Right, well, you certainly want to see whether your rate has, you know, your premium has gone up and most likely it has. So the question is, how much?

• 44:44Speaker 00

  Well, it sounds like I want to start tracking that, too.

• 44:47Speaker 05

  You probably want to start tracking it. The other thing that can happen, these insurance contracts, you know, they're a little bit complicated. So has your deductible gone up? Your, your rate might not have changed, but your deductible might have gone up. Or maybe there's a, a rider now that wasn't there before, or they've increased your earthquake insurance. And you ask yourself, well, why did that, you know, and nothing's changed there. But it's just a way of, you know, the insurance companies have to make a profit. And so they're going to move things around. So be very careful about any changes.

• 45:19Speaker 00

  Yeah, they're legally required to tell you. And what you're saying is that renewal letter is them legally informing you a material change in your coverage.

• 45:30Speaker 05

  Right, right. So definitely you want to, you want to read it. You want to understand it and you may want to look for alternatives. But even though they're, you know, everyone's raising their rates and they may or may not be competitive.

• 45:45Speaker 00

  I find this fascinating. I find the intersection of pricing risk, insurance planning and meteorology just all together, just such a fascinating and difficult place. And I know for some of our stackers, Bob, today, you put a pit in their stomach because they're worried and maybe rightly so. But as a guy who built a model that looks at pricing risk, if we look at this on a scale of don't panic to we should all run panicking, where are we at right now, really?

• 46:24Speaker 05

  Well, I don't want to tell people to panic, but on the other hand, they have to be realistic. And there are a lot of things you can do. You don't want to move into a area that's going to be a problem. So you want to look for a safe area. If you're thinking about moving, if you're in a house and you're not going to be moving and it's at risk, there are things that you can do, as we talked about, to try and mitigate that risk. You have to be aware for sure. And more generally, I would say, you know, climate risk is a very serious risk. We don't know what's going to happen, but we're not managing that risk.

• 47:05Speaker 05

  And what we really need to do is we need to price, you know, who's going to pay for this? Well, polluters should pay. They're the ones that cause this. And the fundamental mispricing of risk is not the insurance market, it's the pollution market. We should have a price on carbon dioxide and other greenhouse gases. I think everyone, almost everyone agrees with that. If you ask people, should we have an appropriate incentive to reduce emissions? 80% of people would say, of course. And yet, if you ask the same people, do you think there's going to be a carbon tax anytime soon? They're going to say, oh, no, that'll never happen. It's not going to happen. What it really is, is do you think that we'll ever

• 47:50Speaker 05

  do that? And then they say, oh, politicians will never do it. Now, I think that's wrong. I think they will do it at some point, but they haven't done it yet. And that's the problem. We really, you know, time is a scarce resource when you're managing risk. Problem is huge. It's accelerating. And, you know, we've got to slam on the brakes. Now, I say we, it's a global problem. So I'm not going to blame the US. It's a global problem. Hopefully, the world is going to address it. And I think we're probably getting to that point.

• 48:23Speaker 00

  What I really love is that even though this is a global problem, there are things that we can do in our backyard, which I think we often listen to a show like this and we think, okay, that's somebody else's problem. But there truly are things that we can do. Read your renewal letter, work with your insurance company, think about this more along the lines of risk management than just buying insurance. And that's step one. Bob, I so value you taking the time with us today and sharing your expertise to help our stackers make better insurance and better risk management decisions. Thank you so much.

• 48:56Speaker 05

  Thank you, Joe. It's been a real pleasure. Anytime.

• 49:00Speaker 03

  Hey, it's Matt in Gainesville, Georgia. And when I'm not delivering on this consumerism and a big brown package car, I'm stacking Benjamins.

• 49:08Speaker 00

  Oh gee, let's double down on one thing that Bob brought up. What's your big takeaway?

• 49:13Speaker 04

  Well, 100%, you've got to read that renewal letter. Our property insurance just renewed not too long ago. You know, it's an annual deal, at least ours is, I guess, maybe some might be semi-annual, but, but maybe annual. You know, the first thing that you're attracted to is the price, right?

• 49:29Speaker 00

  Right.

• 49:29Speaker 04

  And I have mine monthly because it's such a big premium, but it's hard to discern what the differences are. So, so you got to go through kind of line by line and see what they've changed or proposed to change because once you, you know, have that contract, that's the one that you're in. So I took my renewal policy documents and my existing policy documents, fed those both into Claude and said, tell me the differences.

• 49:54Speaker 00

  Oh, that's interesting. That's really cool.

• 49:56Speaker 04

  And then do an analysis of like where I'm overspending money. Like, what are some ideas to adjust based on the economics of what's going on right now? Because.

• 50:06Speaker 04

  In our area, house insurance premiums are out of control.

• 50:10Speaker 00

  How do you prompt it to look at the differences? Do you have any specific wording that you use?

• 50:16Speaker 04

  No, I don't think so. Not with this. I mean, obviously the prompts and AI are really the most important piece, but I think just, I mean, just giving it the two PDFs and going identify the differences. I think that gets you kind of down the path of where you're

• 50:28Speaker 00

  Where you're going.

• 50:29Speaker 04

  Where you're going first. And then from that point forward, you can, you know, start putting in some other particulars, right? Like I've got X dollars of cash reserve. We talked about cash reserve on the show of being, you know, some people think it's a waste of money, but it's also useful in situations like this, right? Where you can say, you know, I've got a six month cash reserve. I can increase my homeowner's insurance premium to that next tier because I can self insure now $5,000 instead of 2,500 or 10,000 instead of 5,000. That's going to radically change your premium from your property casualty stuff. So you can kind of give it that intel and say, hey, here's the position I'm in. You know, what do you think about these changes? I'll tell you, it identified a bunch of stuff for us. We saved some money and it gave me some to do's that I haven't done.

• 51:11Speaker 04

  Like, you know, things with jewelry and that sort of thing that you just kind of go, I've got the jewelry rider. I'm good. And it's like, well, you're not unless you document each piece individually. So we've got a to do of kind of inventorying that's inventory.

• 51:24Speaker 03

  I'm like when you said, upload both, say last year's and this year, the last renewal and this renewal, whatever the timeframe is, and show me the differences. Cause there could be a lot of things hidden in there that are not just cost differences. That could be important for you to know. So I think that's a key thing.

• 51:41Speaker 00

  A hundred percent. I mean, Bob was all about, we used to cover this. We're no longer covering this anymore. The roof coverage is different than it used to be if you live in Kansas where you might get a tornado like he talked about, or you know,

• 51:52Speaker 03

  We're now giving ourselves permission to use satellite imagery to look at your house and decide if we're gonna cover you or not, because we see one branch that's extending over your roof.

• 52:03Speaker 00

  Well, and what I like about that, I really like Doug that Bob covered that. And I, and I like that he started with, he's not an expert in insurance. He's an expert in risk. And what do we say all the time, guys? We're like, you don't want to think about buying insurances because that's the insurance company's game. You want to think about managing risk and managing risk might be as much as Doug, to your point, getting rid of that limb that's over your roof, clearing out brush. If there's fire potential where you're at, whatever it might be, thinking about what the risks are and how do I cover those in a much broader way than just insurances as well. Hey, big thanks to the Coalition for an Insurable Future about helping us make this episode.

• 52:44Speaker 00

  They are a nonpartisan group of independent experts, finance, insurance, government, academia, who all agree, and we've all seen it in our premiums, right? With climate changing, getting worse, it helps us bring all of this to a reality. And really what I like is while we can't control any of that, what we can control is what we do about it. And hopefully we were able to help all of our stackers, all of you and us do better with our homeowners decisions. And by the way, you'll find more on the Coalition at coalitionforaninsurablefuture.com. All right, Doug, bring you home for us, man. What should we have learned on today's special episode?

• 53:22Speaker 03

  Sure thing, Joe. So what's on the old to do list today? First, don't just check what you pay. Verify what insurance you actually have. That way you're clear on what you can expect if disaster strikes. Second, I'll say it too. Who knew about reading your renewal letter from your insurance company? I'm going to make sure Joe's mom reads hers. But the big lesson, don't stack your career aspirations on knowing Bob Litterman. Sure, he's a big deal, but that guy's already upstairs begging Joe's mom for first taste of the brownies that just came out of the oven. Stay focused, Bob. I thought we had a connection, man. Those are my, hey, those are my corner pieces.

• 54:06Speaker 03

  Thank you to Bob Litterman and the team from Coalition for an Insurable Future for making today's special episode a reality. I learned a ton. Find out more about the Coalition at coalitionforaninsurablefuture.com. And while this is an important topic for all of us, Stacking Benjamins receive compensation for participating in this episode. Wait, I can read between the lines here. You guys all got cookies, didn't you? It's time for a team check. This show is the property of SP Podcast LLC, copyright 2026, and is created by Joe Saul Sehi. You'll find out about our awesome team at stackingbenjamins.com, along with the show

• 54:49Speaker 03

  notes and how you can find us on YouTube and all the usual social media spots. Come say hello. And oh yeah, before I go, not only should you not take advice from these nerds, don't take advice from people you don't know. This show is for entertainment purposes only. Before making any financial decisions, speak with a real financial advisor. I'm Joe's mom's neighbor, Doug, and we'll see you next time, back here at the Stacking Benjamin Show.

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