Host: A report from senior European and UK industry veterans at InsideTrack warns that accelerating climate damage is outpacing the global insurance model. While insurers hike rates, restrict coverage, and also abandon high-risk regions entirely, the group does caution a flood of uninsurable properties could directly destabilize the mortgage system. Joining us this morning to assess the implications for real estate as well as pension funds and portfolio risk is Jeff Gitterman, managing director of Gitterman Asset Management. Jeff, great to have you here. Thank you so much for joining us.
Jeff Gitterman: Thanks for having me.
Host: Well, first and foremost, tell us about the actual risk here, especially given that we've been talking about this for so long.
Jeff Gitterman: I mean, the biggest risk that we have is that insurers are pricing for one year, so their strategy is basically to reprice annually or ultimately withdraw or leave territories that become too risky. It doesn't really show up in the market data. So you're a homeowner, you have a mortgage, the bank has a loan on the house, you're both tied up for 30 years, insurance company is tied up for 1 year. If they walk away from that, what happens to the value of that property? Very risky. And what we're not seeing in the market is really good disclosure on how much the uninsured market is growing every year as insurers are leaving marketplaces. You'll hear that insurers leave, like State Farm left California, so it'll make big news, or Allstate, but what you don't hear about is the real actual statistics on how much that uninsured property risk is growing in the marketplace. These people in Europe, these insurers or people coming from really reinsurance marketplaces, experts, top people in multiple firms across Europe and London, came out recently with this report and said that the risk is growing well past what the market is understanding.
Host: Yes, and Jeff, we all know that this will have a domino effect. So where do your top concerns lie right now? Why?
Jeff Gitterman: The problem is that even if you want to rehabilitate your property or if you want to invest in resilience or adaptation, the market is not acknowledging that because the market and the reinsurers are pricing risk in a whole area. Unless every single property owner in that area was going to put money into resilience and they were going to build retaining walls, the municipality was going to come in, the insurers don't see that one investment, one-off, as anything that's going to lower that actual pricing or risk. So you've got a lot of resilience and adaptation ideas coming to the market. You don't have legislation and regulation rejiggering what insurance companies can do, how they can reward those investments, or how they can reprice risk that's allowed by the state regulators.
Host: Jeff, you understand the industry playbook very well when we're talking about insurance and reinsurance, but what happens to the local economies out there as well as communities once the private coverage actually evaporates?
Jeff Gitterman: The latest studies are that it's really damaging to everything across the board. You see employment go down because the municipality doesn't have housing that's affordable. If lower-income people can't afford to buy insurance or homeowners insurance because they're getting pushed into the state plan, which is very expensive and covers very little, then the employers that you need for that local area start to disperse in that area. It starts to raise risk for municipal debt, so you have this domino effect. Municipal markets, across unemployment, then all of a sudden it hits shop owners, it hits supermarkets, it hits the whole economy in an area when a state insurer withdraws from that community. And then we're also seeing post-disaster there's a huge economic hit, up to 3% hit post-natural disasters like severe heat waves or hurricanes or tidal flooding, so we're seeing risk increase across the market. We're not getting the real data because the insurance companies are just moving away and shrinking their coverage, so the insurance companies still make money. So the naysayers say, well, the insurance companies are really profitable. Yeah, they're really profitable because they're walking away from that risk. Where's the actual risk? The risk is in that uninsured pool, and uninsured expenses due to natural disasters have been climbing every year for the past 10 years.
Host: This is obviously going to impact portfolios as well as pension funds. So what do people out there need to keep in mind?
Jeff Gitterman: You need much more data. So what we need is a real push to the insurance companies. We need regulation, legislation that pushes actual data so we can see where the risks are right now. It's kind of just amorphous because no one is really looking at that risk from a business perspective. You're looking at insured risk, but no one is looking deeply at uninsured risk. Yes, you get a big number every year, but where does that number lie? Where are the risks accumulating? Without clear data, you can't manage what you can't measure. So right now you can't even measure it. So the market is just ignoring that data because they have no way to accurately measure it. Economic models that look at climate risk are not great. They need a lot of work. Small companies really can't even afford modeling. Bigger companies in this paper that came out are pressuring the modelers themselves to reduce the forward-looking risk so they can keep repricing. Remember, they only have to reprice for 1 year. So forward-looking risk is growing. It looks terrible in 5 or 10 years. OK, in 5 or 10 years we'll pull out of the market. Let's just worry about repricing where it's profitable for the next 12 months. So we're hitting this kind of leverage point where the risk is growing beyond where the insurance companies can cover it. And once the insurance companies pull out of too many markets, it reduces their spread and diversification of risk, drives pricing up even further, prices people out of the market, causes great economic damage.
Host: Well, Jeff, we will have to leave it there, but a lot to keep our eyes on, and I'm sure we will continue the conversation as we head into year-end. So I appreciate your time as well as your perspective. Thank you.
Jeff Gitterman: Thank you.
