Post 46: The Jetsons Are Coming

I like speculating about the miracles (or horrors) of the distant future as much as the next guy. After all, who can resist painting a picture of what life will be like in 2050, or 2070, or even 2100? When it comes to my blog posts, however, I generally try to stay grounded in what is real, or at least likely to be real in the next couple of years. During my career I have witnessed predictions of “the next big thing” burst onto the scene only to fade into oblivion just a few years later.

Still, I have gone out on a limb from time to time to tout a technology that is more than a few years away from prime time. Things like autonomous vehicles, virtual/augmented reality, and the combination of artificial intelligence and robotics – all things that get a lot of press but have yet to reach mainstream adoption.

My timing may have been a couple of years off, but I stand by my predictions of those technologies being urban (and societal) game changers. After all, Waymo is providing over 50,000 paid trips per week in its autonomous robotaxis with virtually no serious accidents. Apple, Sony, Meta and many others are selling virtual reality headsets to gamers all over the world to immerse them in fictional but realistic worlds. And augmented reality glasses are being sold by Apple, Microsoft and Magic Leap to businesses who are looking for ways to increase productivity by layering information on top of the real world. And if you don’t think the AI/robotics combination is for real, check out the Amazon fulfillment centers where 750,000 robots are augmenting – and replacing – human workers. Ubiquity is still a ways off for all of these technologies, but their potential should be obvious to just about everyone.

The Archer Midnight eVTOL

This month I’m going out on a limb again to talk about a technology that has a great deal of promise, but which is probably 5 or 6 (or 10) years away from common usage. The technology is known as Electric Vertical Take-Off and Landing aircraft (or eVTOLs). Those who are less technically inclined sometimes refer to them as electric air taxis, because that is likely to be their first commercial use, but the potential goes beyond that to a variety of transportation needs.

Virtually all of the big names in aviation are pouring money into this suddenly trendy business venture including Boeing, Airbus, Embraer and several major airlines. But much of the innovation has come from smaller companies that seem to be pushing harder for actually getting eVTOL aircraft into production. Companies like Archer [1], Joby [2], Lilium [3] and Wisk [4] are currently getting the bulk of the headlines. Click Here to see an eVTOL in action.

The industry is so new that there isn’t even an agreed upon name for this new class of travel. Advanced Air Mobility (AAM) is probably the leading candidate, but Urban Air Mobility (UAM) is frequently used as well. For the moment, this technology is focused on relatively short, intra-urban trips. A few manufacturers with somewhat longer range capabilities, however, refer to the service they can provide as Regional Air Mobility (RAM). The divided terminology reflects an industry with lots of different players, each with their own vision for the service being provided and the aircraft being produced. Over the next few years, I expect there to be a considerable amount of consolidation but innovation in design is likely to continue.

The title of this blog post references the 1960s cartoon in which the family of George and Jane Jetson had a flying car, among a variety of other futuristic household devices. Although eVTOLs could in theory be used for personal transportation, that is not what I’m going to write about here. Flying cars are much further into the future and may never be widely adopted because of costs and safety issues. But an eVTOL-based air taxi service is both technically and financially feasible, assuming that things continue to progress as expected over the next several years.


Distinguishing an eVTOL From a Helicopter

It may seem like an eVTOL is a solution to a problem that has already been solved. After all, traditional helicopters offer vertical take-off and landing, and already function as air taxis in many major cities. There are, however, several differences in basic design that give eVTOLs a distinct advantage in urban settings.

Multiple motors - greater safety. Helicopters typically have one large rotor for lift and propulsion and a much smaller second rotor for stability. In contrast, eVTOLs typically have many motors for both lift and propulsion – generally 6 to 12 motors, but sometimes 20 or more. The advantage of this configuration is that it does away with the single-point-of-failure problem that has plagued helicopter travel. If an eVTOL motor fails, it can continue safely to its destination using the remaining motors. Multiple rotors (generally with half spinning in opposite directions) provide lift to the aircraft that is distributed across the airframe as well as perfectly counterbalanced, so that no tail rotor is required. The stability that is inherent in this design makes it both safer and easier to fly. Easy enough, in fact, that at least two companies (Wisk and eHang) are testing autonomous eVTOLs where the pilot is replaced by computers.

Electric power – less pollution and less noise. Air travel typically comes under attack from environmentalists because of its reliance on fossil fuels. As noted above, the “e” in eVTOL stands for electric which means there is no direct pollution emitted and total pollution should drop over time as the country’s power sources get greener and greener. It does entail the use of batteries for energy storage which have their own environmental issues, but even that is likely to be lessened over time as battery technology improves. More importantly, in my opinion, is that the combination of electric motors and multiple rotors results in noise levels that are 20 to 40 decibels lower than typical helicopters or piston airplanes. An eVTOL flying overhead is likely to be so quiet that it won’t be heard over the background noise of most cities. That low noise profile will make it easier to locate landing facilities, even near residential areas that are noise sensitive, and to operate during noise sensitive portions of the day (such as early mornings).

Fixed wings and tiltable rotors – greater efficiency. Helicopters rely upon the main rotor for lift at all times. The multiple rotors of an eVTOL provide lift for take-off and landing, but generally are designed to tilt forward to provide lateral propulsion to travel from point to point. Most eVTOLs also have a fixed wing to provide lift during the forward travel segment of each trip. This is a more energy efficient arrangement for the majority of the flight – something which is crucial for battery powered aircraft. Even with this added efficiency, eVTOLs have a much shorter range than a helicopter – in the neighborhood of 100 miles – because batteries are much less efficient at storing energy than fossil fuels. While this is a crucial limitation for many use cases, the urban air taxi role typically does not involve long distances which is why that has been the early focus for this technology.

Electric motors – cost savings. Helicopters are typically powered by what is known as a turboshaft engine. Although they are marvelous feats of engineering, they are expensive to buy, expensive to maintain, and expensive to operate. Electric motors, on the other hand, are much cheaper on all three fronts – even if you have eight of them. Consequently, an eVTOL is projected to be roughly two-thirds the cost to buy and operate compared with a similarly sized helicopter. That cost savings makes a huge difference in the cost per passenger mile which means in turn that the potential market for eVTOL-based air taxi service is substantially greater than the current market for helicopter-based service. A current industry goal for eVTOL taxi service from a downtown “vertiport” to the airport is to be able to match the cost of a luxury ride sharing service (e.g. Uber Black).

With all these advantages it might seem as though helicopters are destined for the trash heap. That isn’t likely to happen in the foreseeable future, however, because eVTOLs cannot match the range and payload of gas-powered helicopters. That means that most military uses, search and rescue operations, police patrols and many other use cases are still going to rely upon traditional helicopters. In the near term at least, eVTOLs are likely to focus on the air taxi role and similar short-trip uses such as sightseeing (e.g.tourism flights over the Grand Canyon).

Vertiports

Contrary to the world of the Jetsons, an eVTOL-based air taxi is not going to pick you up at your house. Air taxis will need special take-off and landing facilities similar to the heliports and helipads used by helicopters today. The industry currently refers to these facilities as “vertiports” although the distinction between a vertiport and a heliport is not entirely clear. The FAA has issued some provisional guidelines, but final regulations are still undefined and may be subject to frequent revisions once they are issued simply because the size, weight and re-charging needs differ substantially from manufacturer to manufacturer.

Since air taxis are not going to replicate the anywhere-to-anywhere service that ride sharing companies like Uber provide, it means that vertiports will need to be located where travel demand is high. Airports are an obvious location because they are a high-volume travel destination and because they are already equipped for handling aircraft take-offs and landings.

In fact, trips from a big city downtown to the nearest airport are likely to be the predominant trip type when eVTOL air taxis first start doing business. The appeal of an eVTOL trip will be particularly high in cities where the airport is poorly served by mass transit and traffic congestion makes driving to the airport a time-consuming task. Think of downtown Manhattan to JFK, LaGuardia, or Newark airports. Or downtown Dallas to DFW. Or San Jose to SFO. United Airlines has reportedly signed a $1 Billion deal with Archer Aviation to use their eVTOLs to shuttle passengers to their airport hubs starting with the Chicago Loop area to O’Hare airport. A trip that might otherwise take 45 minutes to an hour in an Uber is likely to be 8 to 10 minutes in an air taxi – assuming, of course, that you are near a vertiport.

Where will people traveling to the airport start their trip? Existing heliports near commercial centers are an obvious option although some of them might not be able to accommodate the modifications that eVTOL traffic might require. Office building rooftops are sometimes used for heliports and supposedly eVTOL companies are actively scouting these potential locations in major cities. Not every building, however, is going to have the necessary structural strength or the ability to dedicate part or all of the top floor to air taxi operations. Parking garages are another possibility since they have a large footprint and the top level is often underutilized. Unfortunately, a parking garage surrounded by tall buildings might have issues with safe approaches and departures, particularly if swirling winds are common.

In short, dense commercial and mixed-use areas will be the prime locations for vertiports but it will not necessarily be easy to find the ideal site.  As air taxi travel becomes more popular, major commercial districts may build their own vertiport just to make sure that their tenants have access to the eVTOL transportation option.

Regional Air Mobility

Although the vast majority of the AAM industry is focused on relatively short trips within a metropolitan area, Lilium is developing an eVTOL aircraft with broader aspirations.  Their product will have a range of at least 150 miles which means that short intercity trips are also a possibility.  Think New York City to Philadelphia, or Washington, D.C. to Baltimore, or San Diego to Los Angeles.  Click Here to see the Lilium prototype in action.

Again, the selling point is the time savings that will come from both higher speeds and the avoidance of congested streets and highways.  Lilium’s website shows a hypothetical trip from New York to Philly that takes half the time of a trip by car or train at a cost that is competitive with both (roughly $200).

Battery technology is improving rapidly so it is not inconceivable that in a few years the range could expand to 200 or even 250 miles.  That would open up a much larger number of urban pairs that could be served by eVTOL aircraft and potentially change the economics of short hop airline flights.

Obstacles

So far, I have painted a pretty rosy picture of the Advanced Air Mobility industry.  The technology is largely proven, the economic potential seems legitimate, and venture capitalists and major aviation companies are jumping into the field with abandon.  What could possibly go wrong?

Well, plenty. [5] To begin with, none of the eVTOL designs have been certified by the FAA for passenger service. Only a handful are actually doing full-scale test flights with their final motor, airframe, and control system designs. Doing computer simulations and remote control mockup flights are fine, but nothing replaces hours and hours of actual flight time with the final product. Most of the manufacturers will give optimistic assessments of where they stand in the certification process, but aviation history is littered with innovative aircraft that got bogged down chasing certification not just for years, but sometimes for decades. The more exotic the product, the greater the chances for delays, and eVTOLs are about as exotic as aircraft come.

Second, the public has to learn to trust this new approach to transportation enough to use it and to allow vertiports to be built in their cities. I rode in a Waymo autonomous taxi and thought it was both safe and exhilarating. But many of my friends said that they would never trust a computer to drive them around. How are people like that going to feel about a battery-powered air taxi that uses tiny motors with tiny propellers to zip around town? And how are the NIMBYs that oppose anything other than single family homes going to react to a vertiport in their neighborhood and eVTOLs flying over their kids’ schools?

Third, this is a technology that seems almost custom made for cost overruns. Sure, you can say that an eVTOL will cost two-thirds as much as a helicopter, but until you are actually selling them at that price it is all just speculation. Any untested technology is likely to encounter problems at some point in the development process and that can lead to both time delays and unexpected expenses. As far as I can tell, no one in the entire AAM industry is in full scale production or even anything close to that. Scaling up from hand-built prototypes to a production line product is both complicated and expensive.

Impact on Cities

Assuming that the AAM industry can overcome these obstacles and get a certified eVTOL into production, how much of an impact is it likely to have on cities? Probably not very much. It is tempting to think back on the Jetson cartoons where everyone had a flying car and conclude that eVTOLs are the solution to automotive congestion on our roads. Or you might be thinking of eVTOLs as “Ubers that fly” and assume that they will be just as commonplace and carry just as many passengers around the city. Both assumptions are wrong and the total impact on the urban transportation mix is likely to be almost unnoticeable for the foreseeable future.

First of all, this type of air taxi service is only going to be financially feasible in big cities where there is a lot of congestion. It is not going to reach mid-sized midwestern cities until the costs come down considerably. I live in midtown Kansas City and typically an Uber ride to the airport costs around $60 and takes about 40 minutes. Those numbers would have to go up considerably for an air taxi service to make sense. For most cities, eVTOLs are going to be an exotic rarity.

Secondly, even in big cities vertiports are not going to be common enough to support a large number of flights. New York City only has three public heliports, and while there are considerably more private helipads, few of them are likely to be interested in or capable of supporting regular air taxi flights for the general public. I’m sure more vertiports will get built but it won’t be a fast process. Without many vertiports accommodating many air taxi flights throughout the day, the trip totals are simply too small to really make any difference.

Thirdly, the cost of an eVTOL may turn out to be just two-thirds the cost of a helicopter, but that still means that the cost will be several million dollars apiece.  Starting an eVTOL-based air taxi service won’t be like buying a used Camry and becoming an Uber driver.  This is an industry that is going to be funded by serious capitalists with deep pockets.  The roll-out is going to be cautious at a few cherry-picked locations until true demand is fully understood and profitability is a reality not just a projection.  This again means that ridership volume will be too low to have an impact on the overall transportation pattern.

Finally, I’m highly skeptical of the estimates that riding an eVTOL to the airport will be about the same cost as a luxury Uber ride and two-thirds the cost of current helicopter air taxis.  The reason I’m skeptical comes down to simple supply and demand.  For at least the first five to ten years, supply is going to be severely constrained by limited eVTOL aircraft and limited vertiport capacity – and limited supply means high prices.  That means this is going to be a transportation option for the affluent or for businessmen with generous expense accounts, which is too small a segment of the population to make any difference in the streets.  Time is money for some people, but most of us will tough it out and slog through traffic.

At some point, eVTOL supply will be unconstrained and vertiports relatively common but even then I’m guessing that the share of total trips made by air taxis will struggle to get over even one- or two-tenths of one percent.  In my opinion, the early adopters are likely to be major corporations replacing the helicopters they currently use for their executives with eVTOLs so they can look “cutting edge” and environmentally conscious.  Air taxi service will pop up in the cities where traffic congestion is the worst and gradually spread to other locations.  

As range increases with improvements to battery technology, short hop service between nearby cities will also become more common.  The big advantage versus traditional aircraft will not be flying speed or cost, but the ability to go from downtown to downtown rather than from airport to airport.  Still, an air taxi ride will be the exception, not the rule.

Summary

It will be interesting to watch the Advanced Air Mobility industry over the next several years as they wind their way through the FAA certification process and start providing rides to the public.  My guess is that you might see a few pilot projects in two or three years, but I doubt that a fully certified, day-in-day-out eVTOL taxi service will be running in less than 4 or 5 years.  I would not be surprised if regular service started first in other countries where the certification process is not as rigorous.  

The bottom line, however, is that while this is a fascinating technology, it is not likely to be more than a niche player in the urban transportation mix.  There are some interesting partnership possibilities – with commercial airlines at one end and ride share companies like Uber and Lyft at the other – that could help the industry get off the ground (sorry for the pun).  It could be that someday your trip to another city will be a package deal that includes an Uber from your home to the nearest vertiport, an eVTOL air taxi to the airport, and a commercial flight to your destination.  Whether prices ever come down enough to make that commonplace is the unknown.  In my opinion, replicating the mobility of the Jetsons is a long way off.

Notes:

1. Archer Aviation; https://www.archer.com/usher/

2. Joby Aviation; https://www.jobyaviation.com/

3. Lilium GmbH; https://lilium.com/

4. Wisk Aero LLC; https://wisk.aero/

5. Robin Lineberger, et al; “Change is in the air”; Deloitte Insights, 2019; https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/di-the-elevated-future-of-mobility.pdf

Post 45: Learning from Insurance

I should be, in my mind at least, the perfect customer for homeowner’s insurance.  I live in a neighborhood that is quiet and stable.  I haven’t made a claim against my current policy in decades.  My home is well maintained and my finances are solid.  I’m such an ideal customer my rates should be going down – right?

Nope.  In fact, over the past two years the amount I pay for insurance on my home has gone up by a total of 26.3%.  That is roughly double the rate of inflation based on the Consumer Price Index.  Clearly, I’m getting ripped off – right?

Nope.  I probably should be thanking my lucky stars that I’m not paying more.  In many locations across the county homeowners are being hit by percentage increases in the high double digit and even triple digit range.  Property insurance has gone a little crazy in recent years.  The traditional measure of insurance industry health is known as the combined ratio (insurance payouts plus expenses divided by premiums times 100) and it has been well above historical averages (bad) for the past several quarters.  Insurance giant State Farm announced that its property and casualty section had a net underwriting loss of $14.1 Billion in 2023 on top of a 2022 loss of $13.2 Billion, and many other companies are struggling as well.  

The aftermath of the 2023 Maui wildfires.

It would be fun to posit that the rate increases are the result of some nefarious conspiracy or to curse the greedy capitalists that run insurance companies, but alas that is not the case.  Insurance rates are rising for a variety of complex reasons, but it boils down to policy payouts being much higher than expected.  Rates are not rising because of random chance or bad luck, they are rising because the world is changing.  Understanding why this is happening is an opportunity to learn how to build buildings better and how to build cities better.

The Midwest Is Not Property Insurance Heaven 

Insurance rates are based upon the likelihood of claims being made upon a given insurance policy and on the likely size of those payouts.  Insurance companies have been writing property coverage policies for a long time and they have amassed a great deal of data which they mine constantly for ways to fine tune their rates and costs.  Unfortunately, the risks that property owners face are not constant which means that rates change as risks change.  It is also important to understand that the big drivers of insurance cost are not the occasional house fire caused by a careless smoker or the random break-in by local hoodlums, but rather the major weather events that can affect thousands of property owners across a broad swath of the country.

I have lived in the midwest all my life and have always thought of it as a relatively safe place.  Oh sure we have the occasional tornado, but at least we don’t have to worry about hurricanes which cause far more damage.  Unfortunately, it turns out that the midwest offers a smorgasbord of disaster opportunities which might be less damaging than a hurricane but which can still add up to big bucks.  The list includes not only tornadoes, but also thunderstorms, hail storms, derechos, ice storms and heat waves/droughts.   It turns out that 2023 was a banner year for disasters that exceeded a billion dollars in damage and, as the accompanying map illustrates, the vast majority were located in the midwest and great plains.  

Source: NOAA

Although tornadoes get the publicity, hail and high winds account for the bulk of insurance claims in the midwest.  As with most natural disasters, the amount of restoration and repair that needs to be done after the storm has passed will overwhelm local contractors.  As a result, out-of-town contractors often follow storms across the country looking for work that local companies can’t handle and charging excessive rates because no one has an incentive to get multiple bids, let alone use the lowest bidder.  Even relatively normal storms can generate high insurance payouts.

It should be no surprise then that midwestern states figure prominently in the list of locations with high insurance rates.  In 2021, Bankrate conducted a state-by-state survey of insurance costs for a standardized policy with $250,000 of coverage.  The State of Oklahoma was at the top of the list with an average cost that was 168% more than the national average.  The rest of the top 10 included Nebraska, Kansas, Arkansas, New Mexico, South Dakota, Texas, North Dakota, Kentucky and Montana. [1]  More recent data indicates that Florida, Louisiana and Mississippi may have pushed their way to the top of the list.

Climate Change

The vast majority of people accept that the earth has been warming at a fairly dramatic rate for at least the past 50 years.  I’m not going to get into why it is warming or what we should do about it because that isn’t relevant to this post.  What is relevant is that a warming atmosphere causes faster evaporation and can hold higher volumes of water vapor.  When warm, moist air meets a cold front, the result is typically a storm, and when the air is very warm and very moist the result is a severe storm.

Of course, there have always been thunderstorms, tornadoes and hurricanes but the evidence suggests that the severity of weather events is increasing which means that damage claims are increasing as well.  This chart shows the number of natural disaster events that caused at least a billion dollars of damage.  As touched on above, 2023 set a record with 28 such events, but the growth over the past 40 years is what is probably keeping insurance executives up at night and is certainly one of the factors behind rising insurance rates.  This statistic may be a bit misleading because although it is CPI adjusted, there is evidence that construction and replacement costs have been rising faster than the general rate of inflation.  Total damages were actually relatively modest in 2023 considering the number of events, but damage totals are trending upward as well. [2]

Source: NOAA

Rain storms are common and generally beneficial, particularly for agriculturally oriented midwestern states.  Problems occur when rain falls at a very high rate in a short period of time.  When that happens, virtually any location can have flood damage because the normal facilities and topography that drain away excess water get overwhelmed.  If the prevailing climate theory is correct, then extreme rain events should be getting more common.  That seems to be the case (see the accompanying chart) but weather events are influenced by a wide variety of factors so there is a considerable degree of variability.  

Still, the overall trend line is clearly sloping upward and the end result has been that stormwater engineers have sharply revised what is considered to be a 50-year, 100-year or 500-year storm.  When Hurricane Harvey dumped 4 feet of rain on Houston in 2017, that was estimated to be a 500-year storm.  Eight of ten homeowners who experienced flooding did not have flood insurance, largely because their homes were outside the official floodplain limits.  Those limits, however, are based on rainfall intensities that are badly out of date.  Recent estimates put the likelihood of what used to be a 100-year event in Houston at something closer to a 25-year event. [3] Storm sewer systems in many parts of the country that were originally designed to contain a 20-year storm may now only handle a 5-year or 10-year storm because of increasing rain intensities.

One advantage that the midwest has is that we don’t need to worry about hurricanes or the storm surge that accompanies them.  A recent listing of the most expensive U.S. natural disasters shows that the top eight are all hurricanes (and 6 of those occurred within the past 12 years).  [4]  Again, there is a great degree of variability but there is evidence of increasing frequency and severity.  What is more crucial, however, is that rising sea levels combined with sinking land elevations (due largely to ground water withdrawals) are increasing the amount of damage done by each storm.  It may be that in the future the areas which are most prone to hurricanes (e.g. southern Florida and parts of Louisiana and the Carolinas) will be almost uninsurable by the private market, or will at least have insurance costs that are so high that only the wealthy will be able to afford those locations.

Where We Choose To Live

Rising insurance rates are not all about changing weather patterns, however.  People are often their own worst enemy because they choose to live in disaster prone locations.  Despite the damage potential of hurricanes, almost 40 percent of the U.S. population live in coastal counties. Beachfront housing has always been popular, but now it is more densely developed than ever before and the buildings being built are more elaborate and expensive than ever before.   Thus, hurricane damages are often greater not because the storm is more severe but because the value of property in the path of the storm has increased dramatically.

A study in North Carolina estimated that 75,000 acres of floodplain land was zoned for urban development.  It also found that for every residence in the floodplain that was removed through buy-out programs, 10 new residences were built. [5]  Floodplain regulations are certainly not perfect, but they are a reasonable attempt to steer development away from locations that are likely to be damaged by future floods.  Unfortunately, they are ignored or circumvented in far too many communities.

High profile wildfires have brought us the term “Wildland-Urban Interface” (WUI).  It is defined as the zone of transition between unoccupied areas and human development, and it is particularly susceptible to wildfires in areas that are heavily wooded.  In the U.S., just over 9 percent of the land area in the contiguous 48 states is in the WUI but that area contains 44 million homes (or roughly a third of all housing).  To make things worse, that amount has been growing rapidly both in total population as well as total property value.  Why are we surprised when wildfires take lives, destroy homes and cause billions of dollars in damage?

Ironically, the more people that move into the Wildland-Urban Interface, the more resistance there can be to fire prevention activities.  The controlled burning of understory brush and dead trees that could reduce the severity of a wildfire is often opposed because of perceived dangers and a perceived loss of scenic value.  Finally, the insertion of infrastructure to support development sometimes creates lightly supervised and poorly maintained parcels of land that can become ignition points.  Last year’s Maui wildfire that destroyed Lahaina is now being blamed on a long-ignored electrical easement that was overgrown with brush and tall grasses – the perfect location for a fire sparked by a downed power line to smolder unnoticed.

The Inability to Price Risk

As risks rise, insurance companies want rates to rise as well, and for much of the country that is what has happened.  Property insurance, however, is regulated by each state and there are some states which have not allowed insurance rates to match the changing risk profile, or where risks are changing so rapidly that insurance companies have not been able to keep up.  Florida, California and Louisiana are the most commonly cited examples of this condition and in all of them the private insurance market is showing signs of failure.

Louisiana, for example, is particularly susceptible to hurricane damage because much of its coastline contains very low-lying land.  Roughly half of New Orleans, in fact, is below sea level.  Hurricane Katrina in 2005 caused an enormous amount of damage but that was followed by a period of relative calm that lasted for roughly 15 years.  Development along the coast expanded and insurance rates moderated.  Then in 2020 and 2021, four hurricanes hit the state (Laura, Delta, Zeta and Ida) and problems mushroomed.  Although none were as severe as Katrina, the four storms combined to cause over $76 Billion in damages.  Local and regional insurance companies were particularly hard hit.  Eleven insurance companies serving Louisiana became financially insolvent between July of 2021 and September of 2022, and others simply stopped serving the state because of the high risk. [6]

Louisiana Citizens Property Insurance Corporation is the state’s “insurer of last resort” and as private insurers went bankrupt or left the state, Louisiana Citizens gained thousands of property insurance policies.  In fact, the number of homeowners insured by Louisiana Citizens nearly tripled since Hurricane Laura in 2020.  In January of 2023, a 63 percent rate increase was implemented and the legislature recently allocated $45 Million to the “Insure Louisiana Incentive Program” designed to stabilize the market and encourage new insurance companies to enter the state.  Typical rates for homeowner’s insurance are already nearly 40 percent above the national average and additional increases are likely.

In California the primary risk issue isn’t hurricanes but wildfires – particularly the kind that happen in the Wildland-Urban Interface (which California has a lot of).  The Insurance Information Institute estimates that in 2023 California had nearly 1.3 million homes at risk from extreme wildfires – far and away the most in the country and more than the next nine states combined. [7] 

The California insurance crisis reached new highs in March when State Farm announced that it wouldn’t renew 72,000 homeowner policies, joining Allstate, Farmers and several other insurance companies in either not writing new policies, limiting new policies, or tightening underwriting standards.  These actions are forcing thousands of homeowners to California’s insurer of last resort, known as the California FAIR Plan (Fair Access to Insurance Requirements).  The number of customers the organization insures now tops 350,000 dwelling and commercial policies with $320 Billion of exposure.  The number of customers has doubled since 2019 making the FAIR Plan one of the top five insurers in the state. [8]

Outdated regulations, many of which date back to Proposition 103 which was passed by voters in 1988, are also cited by many insurance companies that are limiting their coverage in California.  Those regulations, and subsequent additions, make it difficult to get adequate rate hikes approved in a timely manner according to the insurance industry.  A package of reforms is under discussion, including allowing both catastrophe modeling of future disasters and the rising cost of reinsurance to be included in rate hike decisions, but there is opposition from consumer advocates.

The problems in Louisiana and California, however, pale in comparison with the situation in Florida.  Since 2019, the average annual home insurance premium has risen from less than $2,000 to roughly $6,000, an amount that is three times the national average.  [9]  Farmers Insurance, Bankers Insurance, and Lexington Insurance (AIG) have withdrawn from the state and Progressive Insurance announced that it was not renewing 100,000 policies.  

Moreover, Florida relies on about 50 small insurance companies to cover close to 70 percent of policyholders.  Many of these insurance companies are rated by just one rating agency – Demotech Inc. – which has been accused of lax standards.  These smaller insurance companies became prominent as national companies either withdrew or scaled back.  Many of them have limited financial resources and insurance experience, so major ratings companies would not rate them.  Enter Demotech which was credited with “salvaging the homeowner’s insurance market” in Florida.  Nearly all mortgage lenders require homeowners to have insurance through a company approved by Fannie Mae or Freddie Mac, which in turn rely upon high marks from rating agencies.  Unfortunately, close to 19 percent of insurers that Demotech rated “A” and above went insolvent between 2009 and 2022. [10]  Where does this leave the Florida insurance market when the next disaster strikes?  Who knows.

To supplement the private market, Florida has its own version of the FAIR Plan known as Citizens Property Insurance.  Citizens is now the largest insurer in the state and Governor Ron DeSantis recently suggested that it has “not been solvent” and might not be able to pay all claims from a major hurricane.  That assessment was disputed by others, but it was enough to prompt talk of a Federal investigation.  The concern with all state run insurers of last resort is that if the private insurance market is unable to effectively price risk, why assume that a state agency is going to do a better job?  State insurance plans may simply be a ticking time bomb that will explode after the next major disaster.

What Can We Learn?

The past few years have been a struggle for property insurers and the future doesn’t look much better.  Natural disasters are becoming more numerous and volatile, people continue to build in hazard prone locations, construction costs continue to climb, property owners are more litigious, and state regulators are under political pressure to keep rate hikes down.  The pace of rate increases might moderate, but insurance costs are not going to come down so we need to adjust to a “new normal” where insurance is a significant line item in the household budget.  Although it may be cathartic to vent about the high cost of insurance, it is probably more productive to learn from what is happening and adjust our actions going forward.

Insurance payouts will likely mutate.  Let’s say your 12-year old roof suffers moderate damage during a hail storm.  Currently, your insurance company is likely to pay for a completely new roof, minus any deductible.  In the future, not only is your deductible likely to be larger, you are likely to get a settlement that reflects the depreciated value of your roof.  Sharing the risk with the homeowner will allow insurance companies to reduce rates and give the homeowner an incentive to seek out a low cost repair as opposed to a full re-roof.  It means, however, that homeowners need to have access to cash to cover a bigger share of unexpected disaster expenses.

Insurance rates must reflect risk.  This might seem so obvious as to be pointless, but unfortunately it is not.  When insurance companies are pulling out of a state or limiting renewals, or when a large number of property owners are being forced into state-run insurance-of-last-resort programs, it means that the private insurance market either cannot determine how to price risk at certain locations or that the state insurance regulators will not let them charge an amount sufficient to cover the risk.  Either situation should be a huge red flag.

Insurance rates will eventually affect migration patterns.  Consider this:  a $100/month increase in insurance costs is equivalent to a $17,000 loss in home value.  A $100/month increase might seem like a lot, but it is on the low side of what is happening in many high-risk locations and for most households it comes directly out of monthly cash flow.  Low- and moderate-income households will feel the pain first, but when they leave town labor rates will rise which will spread the pain all around.  At some point, property values and local economic output will fall and that will be a major reversal for areas which have largely been economic hot spots.  Migrants might not move very far – perhaps just 100 or 200 miles – but that will be enough to rock local real estate markets.

Community resiliency will be a hot topic.  There are a variety of things that can be done to help your community bounce back from a natural disaster, but having good insurance coverage be commonplace is one of the most important.  If property owners can’t rebuild because they were underinsured or uninsured, the entire community takes an economic hit.  Disposable income suffers, property tax revenue suffers, and financial resources are sucked away from the long-term drivers of economic growth.  Communities need to acknowledge the risks they face, advise property owners on how to minimize that risk, and work cooperatively to make whatever physical changes might lower community risk.

Building codes need to address local risk factors.  Building structures that can withstand most natural disasters is not rocket science.  Florida can build homes that stand up to hurricane winds, California can build homes (and home sites) that lessen fire damage, and midwestern states can build roofs that are hail and wind resistant. Adopting codes that require those steps is often unpopular in the short run because they increase the cost of construction, but they might save the community from economic ruin in the long run. 

Engineering will not save us.  Instead of changing where and how we build cities, people often turn to engineered structures to protect them from the next natural disaster.  Such systems can often accomplish a great deal, but they are expensive and prone to eventual failure.  This is particularly true given that natural disasters may be getting more severe and given our human tendency to under-invest in infrastructure maintenance.  Levees get breached, sea walls eventually crumble, and drainage pumps inevitably fail.  Engineered solutions should be considered a short-term band-aid not a long-term plan.

No one likes to buy homeowner’s insurance because it represents a lot of money for something you hope you never need to use.  A home, however, is many households' largest investment and a paid off mortgage is a key part of many retirement plans.  Risking all of that by not having insurance is silly, but rapidly rising insurance costs are forcing people into tough choices.  Insurance costs might end up being the canary in the coal mine that makes us rethink where we live and how we build.

Notes:

Special thanks to State Farm insurance agent Paul Johnson and Lockton Insurance risk analyst Scott Johnson for their insights into the insurance market.

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