E28: A Conversation with Tammy Schwartz, CEO of Black Swan Analytics

Nick
Aaaand we're live. We're back with The Coverager Podcast. I am in the Coverager Podcast Studios in Naples, Florida. We're about to go back into quarantine and self isolation kind of feels that way. So I have like COVID hair part two. So I did get like a real hair cut, but I feel like I'm going back to COVID hair. So I think that's just going to be 2020 so you're gonna have to deal with it. On this episode, we're going to talk about a topic that's near and dear to my heart as a person who's really into natural catastrophes and climate related exposures and losses for the insurance industry. In this episode, we're going to talk about wildfire. Tammy Schwartz is my guest and so Tammy, Happy, Happy Independence Day weekend to you.

Tammy S
Hi, thank you. Happy to you. Happy Fourth of July.

Nick
Yeah, it's a pleasure to have you on. Timmy. I start all of these podcasts with an allowing my guests have the opportunity to introduce themselves. So Tammy, why don't you talk about you and your firm?

Tammy S
Ah, excellent. I have kind of a unique history. I call myself an escapee from the insurance industry. After a couple of industry a couple of decades on the carrier side, I've kind of jumped ship and joined the Insurtech firms. Initially, it was just to help the Insurtech companies create a kind of a proposal that the insurance carriers can understand and quickly adopt. And then throughout that, I've kind of developed some expertise and created our own sort of Insurtech.

Nick
Yeah, so name of your firm??

Tammy S
Black Swan analytics,

Nick
okay, which I love and we're going to go into Not a word we use enough and as an as an escapee, which I greatly admire because I'm an escapee as well, you're solving a really big problem. So why wildfire? Why? Why? Why did that become a focus for you?

Tammy S
Largely because of my experience at the Fair Plan. So as the VP of underwriting and operations at the Fair Plan. May, 2017 and 2018...interestingly enough, those were the two worst years in the Fair Plan's history. So I think I was able to see firsthand the devastation of the wildfires of 2017 and 2018, which really hurt the industry but hurt our customers and the people that I spoke to on a daily basis.

Nick
Yep. And so for the for the audience that doesn't understand, can you explain some of the logistics of the California FAIR Plan what makes the California fare plan so much different than a prototypical insurance carrier?

Tammy S
So the I think the main differentiator is that the California FAIR plan is backed by the insurance industry. And so they are the only carrier in California that is immune from insolvency. So they can't go bankrupt. They they can't go insolvent and thier policies will always be good. And there will always be money to pay for however many losses the FAIR plan has.

Nick
Yeah. So I always think of the FAIR plan as the insurer of last resort, which means most of the time, the property owner has searched high and low, or the broker/agent has searched high and low and have come up empty. And they really have no other choice except to put it with the FAIR plan. And there are pros and cons to that. So this is not necessarily talking about the politics of that. But what's interesting is every time there's wildfire issues that occur in California, that that prototypical carrier that's writing business in California may decide to pack up and leave or stop writing in a particular area, or significantly change the coverages that they might be offering, which could make it extremely disadvantageous for property owner to continually be insured with that. But the FAIR plan has to take them so they're, they're likely to have a book of business that's highly sensitive to stuff that insurers typically don't want to be sensitive to. Is that correct?

Tammy S
Yeah, that's definitely the case. In fact, each year, the FAIR plan reminds their customers that they should shop around that there's probably better coverage someplace else if they can find a way to become insurable.

Nick
Yep. So Can you talk about some of the hazard characteristics of wildfire specifically since you were in California, I know, I know we're going to be talking about Black Swan and in a little bit, you know, something more far reaching across the country, but talk about some of the characteristics that make it so difficult to be insurable for the hazard of California wildfire.

Tammy S
Well, for the insurer from from the carrier's perspective, it's difficult for them to determine which policies are more susceptible to wildfires and others and to predict how much loss that's that's going to have. The I think the biggest challenge with wildfire insurances that you have to price it for the long term, so you have to have 100 years of history to figure out where the wildfire's likely to occur. And there's just not, not enough, not a lot of data, historical data to use to predict future wildfires.

Nick
So the name of your firm is Black Swan Analytics, which I love. I'm surprised more people don't understand what that word means. Can you describe what a black swan is?

Tammy S
Yeah, a Black Swan event is basically an event that happens, that's really devastating or really amazing, that you think will never happen. And then once it happens, you're like, Oh, God, we should have seen that happen. You should have seen that coming. And a good example is the Katrina. The event with the failure of the levees, you know, was something that everybody thought this would never happen then after it happened, of course, it would have happened. We've had damage and we've had these recommendations, repairs and hurricanes happen, so you should've seen them.

Nick
So your your firm is, is called Black Swan. So it is, I'm assuming creating a set of analytics that will help prevent Black Swans so it's to help insurers or maybe you go beyond insurers you can clarify for me, get beyond to help them understand these essentially situations where they might be figuratively sitting on a powder keg, and they they don't realize it.

Tammy S
Right. I think the Camp fire in Paradise is a perfect example of a black swan event because they had...this was a community who was prepared to practice evacuating twice a year. The entire community had evacuation plans, they knew where to go. They knew how to get there, they had changed their egress and access routes to accommodate for the entire community evacuating at the same time. They didn't account for telephone poles catching on fire and falling across the road to our egress and also 75 Fire Department vehicles trying to get up the mountain while you know, 800 residents are trying to get down the mountain. Yeah. And 85 people perished in that event. It was the single most destructive wildfire in California's history. And, you know, we knew, we have all of the data, we know what things increase risk in wildfire areas, we know fuel has to be present and an ignition source has to exist. And we know what things exacerbate that loss. But to date, we haven't done anything to really incorporate all of that information and all of that fire science into insurance and I think Black Swan's goal is to make wildfire assessment more transparent and to help people predict the unpredictable and prepare for an unthinkable event like the Paradise fire.

Nick
Yeah, so I was actually surprised when you brought that up how prepared they were. So that that's not something that was readily available in the news. It was mostly, you know, mostly a lot of negative information that's being spread around a lot of clickbait articles about that and how the industry reacted. But this is this was a community that was highly prepared and just still was caught what caught

Tammy S
A couple of key things that people didn't think about ahead of time. The fact that the community by and large used PVC at the spigot so when the fire entered the community and melted the PVC pipes, all of those spigots became open and all of the hydrants then lost pressure. And so all the fire departments holding their hoses and pointing at the fire and then instantaneously all of that water pressure is gone. So and the benzene that was released from the PVC melting actually contaminated all of the city's pipes, and all of the city's water is now not potable. Even today, May 2020, the city does not have water. The residents there can't drink the stuff that comes out and shower in it indoors. It's just, it's ridiculous the impact that it has and how laissez faire, we kind of are with the whole peril in the industry. We've spent much more attention on things like flood and hurricane. And I think it's time that we put that focus on wildfire.

Nick
in hindsight, I like to think from a market perspective that if we can put a price tag on that risk, like the real risk and put appropriate price tag, you get the you'll get an appropriate reaction from the market. And in hindsight from what you've seen, was the insurance that was provided to the property owners of that community, do you think it was appropriate priced appropriately price? Was it subsidized? at all? If you had to reprice it would with the price have been dramatically higher.

Tammy S
Oh, God, yeah. Not even close to appropriately priced. I think that what they're saying publicly is that for every dollar of premium spent or purchased, you know, in 2018, $1.70 cents in losses on wildfire, so for every policy that they sell with wildfire coverage, they lose twice that basically. And if the insurance industry were to be adequately priced, they basically would need to triple their premium. That sounds like an insurmountable thing. But that's to price the wildfire exposure as it exists today. What if we were to mitigate that risk? What if we were to take the information that we can gather from wildfire models and apply that the same way that FinTech applied for you know, the mycreditreport.com to help people improve their credit score? Yeah. What if we provided a wildfire assessment that was kind of a checklist for customers on things to change to reduce their risk, and now all of a sudden, there's less risk and the premiums won't have to be triple? Maybe? You think maybe what they are today is enough if we take the right action.

Nick
Let's talk about that. What would they have to do? And I'm assuming you're talking both about individual property owners and communities?

Tammy S
Yes!

Nick
As well, because given Paradise's location there's probably only so In individual property on a could have done

Tammy S
Right.

Nick
Given what was around it. So let's talk about that. Let's talk about what are some of the mitigative effect mitigative solutions to try to mitigate the effects of wildfire for for some of these communities, and also go into whether this type of mitigation would work in other parts of the country because this is not just a California problem.

Tammy S
Right. So, at Black Swan likes to think of it as a four pronged approach. We actually filed a patent for our wildfire model because it provides the detail in these four categories.

And that is fuel. You need fuel for a wildfire to burn. So one of the things that you can do to mitigate your risk is to reduce the fuel or change the fuel and Ignition sources is the second thing. So we said there were three things that you need for a wildfire to exist and that's fuel, ignition and oxygen. So the second thing that this customer can do to reduce their hazard would be to reduce the ignition sources. You know if there's a campfire outside or not allowing fireworks or not allowing wood burning fire stoves, things of that nature. And then there are other things that you can do to reduce the susceptibility of your house. Things like closing your eaves and changing your roof from wood shake to to metal, for example. And then the other things that you can do to make it easier for the fire department to protect your house. So the hazards can they get in and can they get out? Do they have water available? What type of fire department is it? Are they're dead end roads in the neighborhood? Is it going to be difficult for them to get to your location? Is it possible that they get stuck in someplace where they can do. All of those things impact the loss, you know, the risk of having damage.

Nick
is is it possible for a community like Paradise, that in hindsight, it is essentially uninsurable in that, given its location in such a rural area, that the the risk of the hazard is just always going to be at a such a highly elevated level that the costs with trying to mitigate it might just be too much of a burden for the community view. Do you have do you get that sense at all?

Tammy S
I honestly I don't think I don't think so. I don't think wildfires uninsurable, I think given the current construction, you know, and the current mitigation and the current, you know the proximity to fuel that these houses are sometimes built without construction features that take into consideration the risks that are inevitably going to be coming their way. I think if we did a better job of mitigating and building and protecting and understanding wildfire risk would absolutely be insurable. And I mean by insurable you just want it to be you don't know when a loss is coming, but you know that it can happen. And so it's easy to estimate what's the impact if that happens. And then question is really just what fields

Nick
Do you know if the Paradise community is looking to repopulate the area?

Tammy S
Yes, they are. They're rebuilding and they're selling the homes and if you purchase a home, you have to be willing to repair it and make it fire hardened, a fire safe home.

So how do you do that?

Well, there's I mean,

Nick
I mean, I'm I'm thinking it has to be some sort of like concrete shell, or something like just a wood structure as as much as it's less expensive, just almost seems like you're inviting, like another destructive fire if if one ignites on that particular property, so you would almost want to build the entire structure in non combustible material.

Tammy S
Absolutely, yes. And if you have combustible material that has to be protected by something that's not combustible. So, you know, if you have a frame built house, you need to cover it with stucco, or with bricks so that it's not flammable. And if you have some material that is combustible, you need to make sure that it's not possible for anything that can ignite to get near it. So if you were to have a frame home in the middle of the forest, and you cleared the forest for 500 feet or thousand feet on either side, You know, then you could argue that, you know, maybe now it's not uninsurable. So depending on the area determines how much fuel you have to clear. Yeah, but it's definitely it's not one or the other. It's a combination. And I think, you know, we've come so far with building codes and everything, I think they absolutely have it now, what we need to do with the building structure and the construction types to protect the home.

Nick
When I think of different natural catastrophes, and I think it just, it becomes so obvious when you seen building codes, proper building codes go into effect, it becomes obvious when you can see the difference that the building codes have made. And I point to, and I think the the one natural hazard that's had the most eyeballs on it when it comes to building codes or hurricanes, especially in Florida. And so Florida building codes the home I live in as I walk around it...this home was built in the mid 2000s. The home is obviously masonry or concrete, like it is a fortress. And the way they build it you can tell the entire structure was built to withstand significant wind. It was just built that way. And we've seen with Hurricane Irma and and then Hurricane Michael, which was a category five hurricane that made landfall in the panhandle, which is slightly different building codes than southern Florida. You see how much of an impact building codes make when it comes to the ability for the community to bounce back from it. And I feel like almost every other type of peril has suffered a little bit. It's just it's just they're almost like a decade or two behind, catching up to what Florida has done with building codes. Where do we stand with building codes? When it comes like, I would guess that the state of California is probably at the leading edge in in drafting more progressive building codes, but where do we stand? And where do we need to go when it comes to building codes in California, but across the country when it comes to wildfire?

Tammy S
I mean, that's a really good question. Because we've in 2009, and 2012, we changed building codes. And they basically are what we need them to be to protect from wildfire. But they're only affecting new builds. There's no enforcement and no retro fitting or anything on structures that existed before the new codes were established. And what kind of complicates things more is that there aren't any benefits to consumers to retrofitting their home for wildfire from an insurance perspective. And I think here's where wildfire is very different from Hurricane because hurricane you can fix your home and make it hurricane proof. And I think you know, as long as it's built to establish a Cat 5 hurricane, it should be able to withstand a Cat 5 hurricane and the neighbor's property really has no bearing on the survival of your home. In wildfire, it's not that case. And so you can do everything you need to, to harden your home and protect it from wildfire. But if your neighbor is growing brush for a hobby, you're gonna have a problem there. And so I think the challenge here becomes how do you get your your neighbors to mitigate? How do you how do you motivate the entire community to mitigate together and I think insurance is really built from a different perspective where we're always thinking about spreading the risk. And if you look at a neighborhood that has high wildfire risk, most carriers are going to want to insure a very small percentage of that Really, in fact, if there's any saturation at all, they'll start non renewing to keep their penetration below 10% if possible. But with wildfire that might not be the smartest, might not be the smartest strategy. Because if you can get the entire community to mitigate, if you insure nine out of 10 of those homes, and nine out of 10 of them mitigate and the chances of that community burning from a wildfire is greatly diminished.

Nick
From from a mitigative standpoint, you've brought up a few things now. So we're talking older structures that aren't at the modern building code, but there's stuff that they can do. Right, so you talked about metal roofs, I'm assuming clay roofs would suffice as well.

Tammy S
Yes. Yes. Tile, concrete.

Nick
So preventing the embers from entering the eaves right. So there know that there are very inexpensive catchers, I don't know what they call them Ember catchers that can prevent the embers from entering the home, from the eaves. There's brush clearance, right when I start adding those things up. In my mind, I'm thinking that's not that expensive. And I, you know, I brought up insurance as a sort of signaling tool in the marketplace to kind of tell you, this is what the risk is there. I'm a fan of potentially using insurance as the as the tool that can potentially create the appropriate credits. Where were those things almost the the mitigation almost pays for itself in reduction of insurance premium. Why is the industry not doing this? Or are they?

Tammy S
Well, so great question. A couple of things, some of the things that they could do...I mean, I saw firsthand in paradise when I went up there with the Western Fire Chiefs Association and toured the area and looked at homes next to each other where one had burned to the ground and the other one had sustained minor damage. And the home that sustained minor damage had metal screens. They had the vents of below the eaves had been screened with like 1/8th inch screen instead of 1/4 inch screen. The landscape had been cleared, they had no overhanging trees, there was no they had a patio and overhead have a window in it that had cracked and burn. But none of the other windows cracks ominous and they had dual pane windows as well. So some those are some of the things that were introduced in code in 2009 that customers can do to retrofit their homes to improve the protection. The problem is that the carriers aren't necessarily going To know that you've made those improvements. Okay, so the data that's available to carriers, isn't at the level of detail of what type of window do they have? Or what type of screen do they have? Or how big is the screen on their window? Or do they even have screens? And so that's one area of opportunity where I think there's a, you know, when carriers sell a policy when a customer signs up online, and they want to get a quote for their insurance policy, they don't want to spend an hour and a half answering questions. And so carriers have, you know, over the years made the number of questions that they have to answer smaller and smaller and smaller. And now the when faced with the concept of having to ask 13 or 20 more questions to figure out the customers wildfire risk, you know, they're not really willing to make the process that much more complicated for 100% of the business when it really only affects 20 to 30%. Yes,

Nick
yeah. It it almost requires a slightly not even a tweak something a little bit more than that to the business model. Like there. There's data there. How do we collect it? And it all it almost seems to me like Tammy, this would be an ideal situation for the community itself to sort of pool pool their resources together. Similar to how homes in Alabama, I communities in Alabama pooled their resources together to get to IBHS fortified home status to get the wind credit, it almost seems like there's an opportunity for the community to say, listen, we understand what what's going on here. But if we we need a simpler way in an efficient way, an effective way to collect and gather all this information. and feed it to insurance companies. But if you're gonna do that, you might as well not go one by one. One property by one property, you might as well pull it all together and try to create like economies of scale for the community itself. Have you heard of anything? anyone trying to do that? Or, or am I off base and there's something that I'm missing?

Tammy S
No, you definitely hit hit the nail on the head there. There are communities that have organized and gotten together and figured out what it takes to become what's called a Firewise community. They take all of the steps. I spent about $60 grand to get a community wide preparation plan, they implement the plan and then the Firewise folks certify that they've met all the requirements and then they become a designated Firewise community. And so carriers can identify Firewise communities and offer discounts to all of the homes that are inside of the Firewise community, however, companies that have done that have found that it's not profitable because all of the well, for several reasons they think because all of the homes in there aren't Firewise. And so, you know, they're still having losses. I think just because it's Firewise doesn't mean it's not going to have losses, it means it has a reduced exposure to loss. And it's not just not black or white. You know, it's gray. To what extent has the community mitigated and how did they account for that in their pricing or their underwriting?

Nick
Yeah, and so that gets to Black Swan Analytics. So who are you working with and how are you working with them?

Tammy S
So it's funny cuz I thought you were going to say whoever you're working for, because that's the question we ask ourselves all the time.

Nick
Sure. That's essentially the question.

Tammy S
Exactly right. So we started off wanting to help carriers adopt the right wildfire models. And we've come to realize that carriers aren't necessarily interested in being right. They just don't want to be wrong. And so they don't have to be the smartest, they just have to be smarter than the next guy. And as long as that's the catalyst for change, the insurance industry is always going to lag. And so at Black Swan, we realize that it's gonna make a lot more sense to go to the customer, because the customers want to reduce their risk. They want to control the exposure and they're begging for more information. So our wildfire model will tell the customer these are the 20/30/40 things that contribute to your wildfire risk. These are the 20 things of yours that are really causing the exposure and of those here are the things that you can do to reduce your risk and if you've done so and if you're interested, we'd be happy to let your carrier know what your true wildfire exposure is. Provide them with our recommendation mitigations proof that you've taken the necessary actions. If you can't get your underwriter to reconsider the information that we're providing, we'll reach out to the Department of Insurance for you and request their assistance. So interestingly enough, there's legislation being proposed that will preclude carriers from non renewing customers who have taken all of the steps that they can possibly take to harden their home. And so I think those are the things that are going to be required to kind of force the change as what's the statute changes and forces carriers to consider that information. Customers will be more motivated to take those steps, and then they'll be recognized.

Nick
Yeah, there's definitely going to have to be some sort of give and take. But to me the the insurance carrier it just seems too juicy to not try to introduce into this because it it like I said it could literally pay for itself. Right you do mitigative mitigative effort, it reduces the risk, the risk is reflected in the premium, that reduction in the premium essentially is financed.

Tammy S
Right? From an carriers perspective right now, reducing risk is, it's not easy for them. They don't have policies all in one area, right? they've done their best to spread them out, you know, profusely across the state and so they can't, yes, easily.

Nick
Okay, but I'm gonna push back on this because I read your white paper. And I got excited reading your white paper, because on the first page, right in the introduction, as an executive at the California FAIR plan you had specifically mentioned how surprised you were at these carriers that were non renewing due to wildfire risk. And yet, according to your estimate, these are not high risk properties. These are actually low risk properties, which means they've they completely misjudged that all together and so that's that's one having worked at a carrier now and you as well who get sort of the, the sludge post carrier when it shows up at the California FAIR plan, because all of the carriers didn't want it. There's a, I think there's just a native innate inability for the carrier to tap their head and rub their bellies at the same time, right? They're trying to run this business, but in order to run this business, they need an incredible amount of information. But the customer doesn't want to give them an incredible amount of information. So they're willing To make it easier for the customer to get in, but that has now negated their information edge. Right. And so they actually, when I read that I was just like, the carriers actually don't know what they're doing.

Tammy S
No, no, that's a good point. And you know, it's cyclical, right? And so they'll go the other way right now. It's, so they used to be heavily underwriting, and then they started leaning more towards pricing. And now when pricing is starting to show its shortfalls, I think they're gonna head again towards underwriting. And I mean, as you see the market pulled back right and the capacity diminished, carriers are forced to start reducing exposure in high risk areas. Now everybody defines a high risk area differently, but most carriers are limited to zip code basis. So because of technology and their ancient systems, they can't identify any geography with any differentiator other than territory or zip code, and most of them have fewer territories, or zip codes. So the smallest definition would be zip code. And oftentimes this information comes from their reinsurer. He says, You need to reduce your exposure in zip code, let's just say 90210. And, and the insurance company says, Okay, I need to reduce it by 30% in 90210, what's the fastest, easiest way to do that? And they decide to nonrenewal all policies that are multiples of three. Right? If it's a 90210, it's a multiple of three, it gets non-renewed, so they can't non-renew everything. And they can't decide what's non- renewed. So they pick some method of getting rid of a percentage of those customers. But

Nick
the the flip side to that as you're as you're talking, the flip side to that is that obviously creates an enormous opportunity. Right there. They're literally non renewing high quality business. Like not not let's use 90210 because that's Beverly Hills. So if they're non renewing in Beverly Hills, that means a carrier that's coming in, that's looking for market share, can actually get a hold of low risk fire business in prestigious areas and get that market share probably pretty easily if those properties end up having to go to the FAIR plan.

Tammy S
Yes, but they have to be better at identifying which policies are low risk than income. Yes. Right. And so I think that's where the issue is, until a model comes out that incorporates all of the risk factors that need to be included. Even the new carriers aren't going to be able to say, you know, I want these three policies out of 90210 because the models aren't. Most models will tell you this neighborhood is bad or this zip code is bad. There aren't really any models out there that will tell you this house within this neighborhood is bad. And I think that's where we need to get.

Nick
Yeah, And that's where you are. Right. That's where we are. That's the promise of Black Swan Analytics, correct?

Tammy S
Yes. You want more data? We, we asked about 40 questions. Yes. I think the provider that asked the most questions right now is at about 10 or 11.

Nick
That's stark frankly!

Tammy S
Yeah. And we found the more questions you ask surprisingly, the closer your answer is to correct

Nick
yes, yeah.

Tammy S
Almost like I should have known this

Nick
as as someone who makes a living, using and analyzing and living and breathing off of the results that come out of models. I was pleased to read in your white paper, this quote, "when faced with the question of whether to use a model for underwriting or for rating, a good rule of thumb is to price for everything that can be priced and underwrite for everything else". Yeah, can you can you talk about that? Because they're probably probably a lot of people listening this that are in a model centric environment. What do you what do you mean when you say that?

Tammy S
So first, let's talk about what we're able to price, right? If we're able to price the means we should be able to price it accurately. So if we can price something accurately, it means there are enough of those risks that are similar, that we can watch their performance over time, and estimate what their expected performance is going to be. And if we can be accurate about that, then that's a good segment to price. If you if you identify risks that don't fit into those groups, and they maybe fit into a category with very few other risks, it becomes very difficult to predict what that price should be because you don't get enough data to kind of get at volume where you can be what's called statistical credible. And so the basically, imagine you have all of your risk coming in, and you're putting them in buckets, and you can only put them in a bucket if the bucket is gonna get full. And so let's say you can fill eight buckets, well, that's going to give you eight price points. And so with the other two policies that don't fit in any of those eight buckets, you're just gonna have to look at them and underwrite and just really scrutinize and decide individually for each one, whether they're something you want to write or on knowing that there's a lot of risk in those two because either there aren't enough of them or their performance is really volatile. So just takes too many years to kind of get it right. I think a good example is, you know, we can predict expected wildfire losses in areas where there are a lot of homes and a lot of history. But if you look at, you know, you build a new home in the middle of Sierra Nevada National Forest, you know, chances are, you're not, you're not going to feel real good about your ability to price that thing. And so maybe you you be better off looking at it through underwriting, you can introduce risk mitigation, so you can tell the customer will take this if you do these three to five things to kind of reduce your exposure because now it's starting to look a little bit more like bucket number seven. So, I think for the most part, we try to create as many buckets as we can. We have to recognize not everything is gonna fit in a bucket and we need to know what to do with those

Nick
I love the way that you describe that. And because it's, it's, there's too much of a...how do I phrase this? I see this in flood, where a lot of folks that I'm competing with all, they all want the low risk business. And there's not enough of it for everybody. And the activity of going after it means that you're not going to be able to fill your bucket. And it also means it's not going to be any margin there because everyone's going to reduce their price. And so it's, as you described, it's gonna be very easy for things to go wrong. Because if you can't fill the bucket with what you're perceiving to be the low risk stuff, you you may not be able to hit the number in the right way. And so you could you could have a, just a misfortune of a loss that kind of throws them All out of whack. And it's not the low risk bucket that you thought it was. Right. And if

Tammy S
you think about buckets, the kindness of good segue into, you know, ISOs model has 30 buckets. But really, if you if you were to run your book of business through ISOs model, you would find that 70% of your business fits in 1 bucket! 7 out of 10 policies are going to go into bucket number one. And everything else is going to go into nine other buckets. So what are the odds that you're going to have enough information in those nine other buckets to be able to price them correctly? You know, it's greatly diminished because you've got so many policies in bucket number one, and with 70% of your risks in one bucket, the chances of all of those risks being the same, it's almost impossible. at the FAIR plan, we did some extra digging and we found that the cash category of risk that has, it's called the category zero fireline. It's a zero, but it doesn't mean zero risk, it just means it's the lowest score that they have. But we were able to identify an extra category that ISO uses that they provide it to the carrier, but they don't incorporate it into the Fireline score. And if you look at a combination of those things, you can create what's called a true zero. Well, the FAIR plan filed it as what they called a true zero with the Department of Insurance. And they were able to show that about half of those zeros have zero risk, which means the other half didn't. And so half of the zeros really should be paying some premium and half of the zeros shouldn't. And so just by introducing another factor, they were able to create greater homogeneity and increased premiums on people who they have thought were zero risk. But, you know, by charging 50% of your customers 15 to $18 for wildfire, you don't have to charge the ones with high risk $10,000. Right, because you can spread that risk in a much more meaningful way. So it became a really important differentiator.

Nick
I want to thank my friend, Bob Frady, for making sure I got that question into the agenda zero versus true zero. So, so now we know and I'm wondering, how does your model handle...we've spent almost the entire recording here talking about residential properties. What about commercial properties?

Tammy S
So commercials interesting. You know, they have the same exposures, right? It's all the same stuff causes wildfire in commercial, because the premiums are so high, they're able to spend a lot more money on underwriting expense and so If a commercial policy comes through with a $20,000 premium, the underwriter can actually sit aside for an entire day and look at that policy and assess all of its exposures and include all of these things that contribute to fire science. So they can look at the eaves and they can look at the fuel and they can include all of those things in their underwriting and make the right selection. In personal lines, we haven't had that capability simply because the premiums are too low. And the underwriting expense so controlled because of the competitive marketplace, that identifying the risk has to kind of be instantaneous and automated. And so personal lines needs a very quick, very cheap way of assessing risk and commercial they don't really have that same challenge and you don't find as many commercial buildings in wildfire areas, as you do personal lines. And when you do, those buildings have taken great, made great effort to mitigate their exposure. So you know they've got the external sprinklers and because their business is worth so much it makes sense to them to build in the mitigation. When you look at a $5,000 piece of property on the homeowner, I you know, it's not really feasible for them to install a 10,000 gallon water tank just be open just from a cost basis. It just can't take the same mitigation that commercial can.

Nick
Yeah, I'm in a in a prior job podcasting. When I actually got to interview a retired MIT engineer who built who was building, designing and looking to industrialize external sprinklers and I thought there was so much potential there. Have you seen or heard heard of anyone attempting to do that where there are external sprinklers that can be turned on the resident can leave. And it basically creates a fine mist fog surrounding the home that basically becomes like a shield. As embers are trying to land on it. It's just like soaking the home. Any thoughts on that?

Tammy S
That's one thing that they do. They're actually doing that and there are other things that they could do like they have fire retardant. So there's a wildfire in the area. They'll spray this fire retardant over all of their property and their home, and it will protect it from catching fire. Yeah, at the FAIR plan. We had a couple customers call and try to report that as a claim, because they spent $3,000 writing all of their stuff to protect from the fire and it didn't come. So now they're $3,000 out, they got no more no more flammable material for the next wildfire but their house wasn't damaged. There isn't a loss was the cover so it wasn't covered

Nick
Wasn't covered, but it should be covered.

Tammy S
I don't know.

Nick
I think to me, to me, Tammy, that seems like the perfect opportunity where you have should a flag go up like a Red Flag Warning, and the property owner does the right thing. Right though the inset now you have an alignment of incentives between insurance carrier and property owner, they both want no fire. And they go through that extra expense effort for no fire. I think within the policy there should be built in if you do if you take these steps, you will be reimbursed for it. But I have a feeling we're going to be talking offline about this.

Tammy S
Well, you could do that. But it would make the policy a lot more expensive. I think one way that the industry has kind of tried to address that is with parametric insurance. So they say if there's a wildfire and it's designated, I mean they do it with hurricanes and stuff. But hypothetically, we could do it with wildfire and say, if there's a wildfire that hits anything in your zip code, we'll reimburse you for the cost of spreading your flame retardant. So that could be a separate policy that they buy to kind of protect them against using that stuff haphazardly, because we don't want them to have it and not use it. Right. They're afraid of using it without needing to perish. So I I definitely see your point.

Nick
It's the, to me, it's like that's the the the central problem we're actually trying to solve in insurance is alignment of interest.

Tammy S
Yes.

Nick
And so since the beginning of insurance, there's been the components of fraud and other things. So we've, you know, we've introduced concepts like deductibles and other ways to to, it's, you know, it unfortunately, that's why there's a lack of trust between policyholders and carriers is over time there has been that conflict. Right. bad actors have done certain things in the insurance companies have had to respond. And in other ways. This is that seems like the one area where it's like we're both on the same side here. So let's, let's do the right thing. But I think this that's going to be a conversation you and I have offline. But this is this was a fantastic, hopefully for the audience. They got a really good one on one on wildfire. And some of the things that are happening, and can we make that white paper available to to the audience if they feel like,

Tammy S
Yes, I can. Can I just send it to you, or do you want me to post it?

Nick
I will figure it out.

We'll figure out a way. So for those that are listening, we'll give you access to that. The Black Swan Analytics, white paper on wildfire. We'll make it available in the show notes somehow. And along with connections to Tammy, to Black Swan, the transcripts all of that, please, please subscribe. If you're on, we're on YouTube and the audio version is on all of the common podcasting sites. So please subscribe. But other than that, we're still in pandemic mode. So, I'm going to exit out by reminding you do the smart thing where your masks, wash your hands, disinfect, be a good citizen. It's not that big a deal. It's really not that big a deal. So we can all do this. So please do that. And to my guest Tammy Schwartz of Black Swan analytics. Thank you so much for coming on, and educating us on wildfire.

Tammy S
Thank you, Nick. It was a pleasure. Okay, we're gonna take my COVID hair

Nick
We're going to have competition. We're going to have competition. Thanks. Thanks so much Tammy.

Tammy S
All right. Take care.

Transcribed by https://otter.ai