Planet Money
00:03:37 · Ann Cope, Alexi Horowitz-Ghazi, S0
[00:03:37] S1: Yes. Yes. Dead plant walking. [00:03:39] S2: We retreat to a safe distance before two men in firefighting suits carrying what look like tiny flamethrowers walk over to the mulch pile. Oh, is it? [00:03:48] S0: It's getting close. [00:03:50] S2: I'm really rooting for the plan. I know that's not totally scientifically sound. Then the men aim their little flamethrowers at the ground and set the mulch ablaze. They're lighting it on fire right [00:04:01] S0: now. Yes.
00:04:01 · S0, Alexi Horowitz-Ghazi
[00:04:01] S0: now. Yes. [00:04:02] S2: As to the question of who would go to the trouble and expense of doing all this, the planting and burning dozens of plants and building and destroying a small town's worth of homes and sheds and decks, This destruction lab is not administered by FEMA or any other part of the federal government. It's not a part of South Carolina's firefighting infrastructure or a wing of the construction industry. No. No. This playground of catastrophic mayhem is funded by some of the biggest insurance companies in the world. Hello, and welcome to Planet Money. I'm Alexey Horowitz Gazi. We're living in a time when climate change has made billion dollar disasters into basically a monthly occurrence, and that unprecedented level of destruction and loss has pushed insurers toward a sort of existential crisis. Today on the show, why the insurance industry decided to create crash test dummies for houses, how that research is changing the way we think about building new houses and fortifying old ones against disaster, and what all of this reveals about the ways the insurance industry has been quietly shaping the world around us for over a century.
00:05:20 · S3, Alexi Horowitz-Ghazi, Julie Rochman
Ad[00:05:20] S3: Stay tuned for the following announcements and messages from our sponsors. This message comes from LinkedIn. Owning a small business comes with a lot of challenges and means juggling multiple things at once. It's even harder to do it efficiently. But with LinkedIn, you get all the tools you need to grow in one place. With LinkedIn, simplify your sales, marketing, and hiring so that you can actually run your small business. Learn more at linkedin.com/planetmoneyshow. This message comes from BUILT. Rent and mortgages keep getting more expensive. That's why BUILT created three credit cards designed to offer rich rewards on everything you spend on. You can earn up to 1.25 x points on every housing payment with no transaction fee, which can be redeemed for flights, hotels, a future housing payment, and more. Apply at joinbilt.com/money. Terms apply, subject to approval and eligibility. BILT cards are issued by column NA, member FDIC, pursuant to license from MasterCard International Inc. [00:06:22] S2: Before I started reporting about how climate change is changing the insurance market, I thought about insurance the way a lot of people do, as little as humanly possible. Insurance was something I needed to get a mortgage or drive a car, but then basically put out of my mind. That is until I spoke to one of the people responsible for building that home destruction lab in South Carolina, a woman named Julie Rochman. [00:06:45] S4: So I'm an insurance geek. I always tell people I'm bilingual. I speak insurance and I speak English.
00:06:45 · Julie Rochman, Alexi Horowitz-Ghazi
[00:06:45] S4: So I'm an insurance geek. I always tell people I'm bilingual. I speak insurance and I speak English. [00:06:50] S2: Julie was actually raised in an insurance speaking household where dad was an insurance broker. And after grad school, she moved to DC and ended up falling into the family business. Julie says she was drawn in particular to the property casualty part of the insurance industry, which covers things like commercial and residential property and car insurance. [00:07:09] S4: Property casualty insurance is the oxygen of commerce. Right? We live in an entrepreneurial economy. The whole basis of an entrepreneurial economy is risk taking, and and you have to lay off or spread risk. No one person can handle all of the financial and physical risks involved in most businesses.
00:07:09 · Julie Rochman, Alexi Horowitz-Ghazi
[00:07:09] S4: Property casualty insurance is the oxygen of commerce. Right? We live in an entrepreneurial economy. The whole basis of an entrepreneurial economy is risk taking, and and you have to lay off or spread risk. No one person can handle all of the financial and physical risks involved in most businesses. [00:07:27] S2: The whole modern global economy couldn't have even gotten started without the idea of pooling risk. Julie explains that is when early corporations like the East India Company or Hudson's Bay Company started undertaking these expensive, super risky colonial expeditions across the sea. Investors would front the money to procure ships and fill them with all sorts of goods to trade, but those ships and their cargo went missing or sank pretty often. So a market developed for other investors to assume some of that risk by placing a sort of bet. They would offer to pay a certain amount of money if the ship did sink, and in exchange, they would get a smaller chunk of money if the ship made it. When a ship was slated to set sail, the owners would write up the details on a piece of parchment, and the people who wanted to take on that risk would write their names and the amount of risk they were assuming under the ship's name. This is reportedly where the term underwriters comes from. And all of this business, Julie explains, would be transacted at these bustling coffee houses near the ports, like a place called Lloyd's by the Thames.
00:08:26 · Julie Rochman, Alexi Horowitz-Ghazi
[00:08:26] S4: That's what Lloyd's of London was. It was a coffee house. And so coffee houses where rich people gathered became marketplaces where somebody would say, oh, your ship is leaving tomorrow. What's on it? Oh, it's gold. It's going to the new world to pay for the tobacco and sugar that's coming back. Oh, okay. Some people would insure the gold on the way over. They would share that risk, and then other people might step up, could have been some of the same people, and say, okay. I'll take part of the risk that the products that are coming back make it here safely. And so it was just a way to make sure that everybody, pun intended, stayed afloat. [00:09:02] S2: In The US, Julie explains the modern insurance industry developed around a different kind of risk. [00:09:07] S4: The insurance industry in this country was really born out of fire.