The Letzeiser brothers Aaron and Ryan are working to improve the antiquated commercial real estate insurance space with their company Obie. They join us this week on the podcast to discuss how climate change has impacted the industry and how data and technology are reshaping the commercial real estate space. In this interview with Justin, they share insights on how owners should balance cost with risk mitigation, get coverage, understand costs, and they talk about the impact insurance has on underwriting. Press play, and pull the curtain back on the commercial real estate insurance industry.

In this episode, we discuss:

  • The current lack of transparency in the insurance procurement process, and how Obie is working to streamline the process for home owners. (3:45)
  • How economic conditions dictate the insurance coverage that consumers need and how COVID is making an impact. (7:45)
  • How Obie is leveraging in-house data to determine the direction of the market and build the best insurance products for real estate investors. (10:15)
  • The process of automating the insurance brokering process through technology. (12:45)
  • Underwriting insurance expenses in today's world. (17:06)
  • How to properly analyze an offering memorandum to understand the previous owner's debt and set realistic expectations for your insurance premiums. (17:40)
  • How data and technology is creating transparency on price quotes and streamline processes for both investors and brokers.  (22:37)
  • Changes in the buying experience, including the willingness to take on more risk to reduce costs. (36:30)
  • Strategies to mitigate climate change, like increasing the use of renewable energy. (41:27)
  • The potential for government insurance programs to assist in disaster zones, and what investors should do with assets in these zones. (46:00)
  • What the insurance space will look like 20 years in the future. (50:25)

Resources:

Climate change has warmed the Earth 2 degrees Fahrenheit.

Hurricane Laura in the Gulf Coast.

Buildings and the construction of buildings account for 36 percent of global energy use and 39 percent of energy-related carbon dioxide emissions annually.

California FAIR Plan.

National Flood Insurance Program (NFIP).

Andrew Yang's proposal to move people to higher ground.

Transcription:

(2:12) Justin Alanís: Aaron and Ryan Letzeiser. Thanks for joining me on the podcast today.

(2:15) Aaron Letzeiser: Thanks, Justin.

(2:16) Ryan Letzeiser: Thanks for having us.

(2:17) Justin Alanís: Excited to have you guys on. I've told the audience a little bit about what you guys do at Obie and also a little bit about your backgrounds. But I'd love to know just starting maybe out with the really basic question. Why did you guys decide to build an insurance product for commercial real estate?

(2:33) Ryan Letzeiser: Yeah. I think probably the impetus of this really started with my background. This is Ryan. I started my career in real estate private equity. Ultimately, I worked at a really big funder of an organization that had kind of every technology advantage at their fingertips. And then subsequently, towards the latter half of my career, moved to a much smaller shop in the multifamily sector and noticed that there was a pretty sizable void in terms of tech availability to these folks. And also that they had a lot of third-party integrations on the expense side of the balance sheet. Ultimately, what we wanted to get to was a way for landlords to have a little bit more transparency into the insurance process, and also find ways in which we can eliminate some line item expenses. Especially during COVID times right now where you're seeing a lot of folks that are on the the residential side, there's eviction moratoriums or on the office of retail side where people are getting rent abatements, and those those CAMs and pass-throughs are ultimately falling in the laps of the landlords.

(3:44) Justin Alanís: Yeah, so insurance represents a big line item on the P&L of these investors, of these property owners. And people tend to think about it as a fixed expense, right? When you even underwrite as an asset manager in my previous life, we would talk about our variable expenses and then we'd talk about our fixed expenses. And insurance would always fit into that fixed expense category. And it's kind of one of those things where we would get our insurance broker. We would go out. We would get a policy. Eventually we got an umbrella policy from I think Farmer's at some point, and it would shift risk or it would blend risk across the entire portfolio. So how do you guys then differ from a traditional insurance broker? And how does Obie work for these property owners?

(4:27) Aaron Letzeiser: Yeah, great question. I empathize with your previous experience as an asset manager. Ryan and I, we have our own small portfolio of multifamily and Ryan obviously spent a ton of time in this space. And for us, it was always a black hole, right? I mean, you are constantly are in this back and forth in email. Even some of these folks had fax machines and provided a lot of this property data, and then ultimately the broker gets it. They have to compile it and then they send it off to a carrier, right? And then ultimately, the price that you get back, you're kind of over a barrel to take it because as you know the lender's requiring insurance on the property. And you really don't get a lot of transparency or control. It's probably one of the line items that you have the least amount of control into. And so that's ultimately what we wanted to change, especially given how large of an expense that it is on your P&L. And so really what what we wanted to do with Obie was really try to streamline that information. So taking in as little information, making our clients do the smallest list that they can. All the other information about these properties is publicly available data. And so we pull in those other publicly available sources. We compile all of the information that's needed on these assets. We format it in the way that every individual carrier requests it, which makes it very easy for them to plug it into their underwriting model. And then we actually put together a pretty cool, machine learning based system where we're getting risk appetites from the different carriers. So there are carriers that they might want to do catastrophic apartments down in Florida and there's some that don't. Traveler's right now doesn't want to do that. They don't want to do habitational. They're gonna price it, but they're gonna price it risk adjusted. And so we put together a system where we're taking in the risk appetite guides for each one of these carriers on a regular basis. And so as soon as our clients hit 'Get Quote', the system will actually recognize the type of asset that it is, the type of risk it sits in, and then it will match it up for the carriers that really want to write that type of risk. And so ultimately, our clients are then getting the best prices that are available on the market today.

(6:20) Justin Alanís: So what I'm hearing is that you guys are a marketplace for insurance coverage for commercial real estate properties. Your demand comes from landlords or real estate owners, and the supply comes from insurance carriers, and you guys make it easy. Well, number one, there's a super manual process that exists today in the industry where as an asset manager, I go out, I compile spreadsheets and information. And then on the broker side, they're compiling information around the asset and various other pieces of information. You guys have created workflow product, and also data products to basically streamline all of that process. And make sure that all that data kind of lives in a singular platform. Then that information, as soon as they hit 'Get Quote', or even on a renewal basis, you guys are sending it out to the most likely carriers who will ultimately underwrite that risk, and put a price forward to these property owners so that they can look at every single quote on an apples-to-apples basis. I'm guessing that that's really powerful because in my previous experience, even looking at things on a quote unquote, apples-to-apples basis was really hard, right? My insurance broker would go out and they would get quotes from many different carriers and you say, well, how do I compare these? How do I make sure that all of the risk I'm assuming is in-line with the cost that I'm taking on as a property? Did I summarize that accurately? And on that last part, cost versus risk, how do you guys assign that in the platform?

(7:45) Ryan Letzeiser: Yeah, I think you hit the nail on the head. And I really believe that external economic factors really dictate what is most important to the consumer given the time. We really try and focus on both but depending on where we're at in the lifecycle of acquisition, dispositions, or renewals is going to dictate what you're looking for. So pre-COVID era, we could not get things to investors fast enough. So we really spent a lot of time making sure that that process was fluid and seamless in an effort to get quotes back from carriers as fast as possible. We strive to do quoting and have something that is potentially viable in 72 hours. We've done quotes for folks that are almost viable in three hours for... We did an 1,800 unit apartment portfolio in Florida in a little bit north of three hours. And a lot of this has to do with this automation. Now, what we're finding in COVID era is people are becoming very price sensitive. Now these pass throughs are being consumed by the landlord. We're worried about NOI. We're worried about debt coverage ratios, a number of other things that the lenders are looking at. It becomes a pretty big change and we can spend time focused on expanding our carrier network to make sure we're getting the best pricing. So as we have more volume and more states, we're getting newer and newer, especially carriers, that will write business for very specific geographic locations. Ultimately, those folks know the risk really well and we can price it accordingly. We've seen price adjustments upwards of 40 percent for people, just kind of depending on who you are and who you're able to shop with.

(9:32) Justin Alanís: So as any good marketplace, you're starting to expand your coverage on the supply side, which then brings new demand in. And I'm guessing it's probably the demand that leads to the additional supply. So you get owners in various markets that you may not cover today. Then you go out to a series of underwriters in that market, and you bring them new potential insurance policies that they can underwrite. And you try to then marry it up and match it. How do you guys balance kind of going straight down the fairway with a product that you know, suppliers that you already have part of your ML model, and the demand where you kind of know that this is where the majority of our demand sits versus starting to expand outwards like that, like you're talking about into different markets and different suppliers? How do you guys balance that as a company?

(10:14) Aaron Letzeiser: It's really based on what market demand ultimately looks like. And also, the nice thing, and you'll know this as well, it's very easy for us to get an indication of where the markets going and where investors have an appetite based on economic conditions. And so it's really easy for us to now say, last 10 years have been great for multifamily, right? And so we've primarily focused on that segment of the market. Specifically folks that have 3, maybe 400 million in assets under management, but there's now been a large drive, especially over the last 6, 8 months, and this was starting before COVID of this accumulation of single family rentals. And so as we have started to collect a significant amount of data on the policies and the assets that we already have, it's given us an opportunity now to start building our own insurance products. And that's ultimately where we think this is headed. It's being able to start looking at the data we have with these other third party carriers and saying, okay, where's the market going and what are the safest assets that we can get into to ultimately start building our own insurance products that are specifically tailored to real estate investors and to a specific asset class. So it's not necessarily a carrier that'll write across, maybe the entire multifamily vertical or maybe across commercial as a whole. We really want to start putting together products either on our own or with partners that are specific to these types of assets that will match where the market is going. And ultimately, that's going to give investors the best price that they can get.

(11:44) Justin Alanís: Yeah, so you guys are streamlining the process on the supply side now and creating your own products, so that you guys become the broker and the actual insurer itself, thereby going full stack, right? When you can go full stack, you can lower the price to the consumer as well, and so that's ultimately a net benefit to them. You talked a little bit about the SFR market, and I'm guessing that in order to go down market, and maybe I'm wrong, but I'm guessing you started higher in terms of average asset prices. You talked about 2 to 300 million or 3 to 400 million total insurance policy and portfolio value, but then you also talked about SFR. It's a big jump from 3 to 400 million to a 1 million dollar property. You have to have certain economies of scale and tech infrastructure in place in order to accommodate insurance policies at that level, I'm guessing. So are you guys there yet? And what's the process? And what do you guys need to have in place in order to go for even further down market to help the kind of average consumer instead of the business consumer?

(12:46) Aaron Letzeiser: Great question. So for us, you're right. I mean, what we ultimately wanted to do was to provide our clients with a good streamlined, transparent, and fast insurance process and build them tools around that. And to complement that, we also needed to start taking what normal insurance brokers would be doing and automating that through technology. And so for us at this point, the the system is set up so it's the exact same process. If you have a duplex or if you have 200 units, it's the exact same process on our end that each one of our clients works through. And so the system now is nicely set up to be able to support those folks, whether you're just jumping in. You're going to do your first fix and flip, all the way up to folks that have 3 to 400 million in assets under management. And, as most people know if they buy their first rental, they get the real estate investor bug, and that SFR fix and flip becomes a duplex, which becomes a 4 unit building and then suddenly they've got a couple of multifamily buildings under their belt. And so we want to be able to support our clients through that entire lifecycle. And I think the system at this point has been set up nicely enough to be able to handle that.

(13:57) Justin Alanís: Yeah, that's great to hear that you guys are going down market, helping kind of the more small and independent landlord segment of the market. That's certainly where I think this podcast is focused, helping those types of landlords, although I'm sure we get audience from all the different segments of the market, but that's really where we're focused. And so I think one of the big things that's misunderstood in insurance or maybe not widely known is that every year you actually have to replace or renew your insurance policy, which creates complexities. And a lot of headache if it's super manual, and you're going to your insurance broker every single time, but it also creates a residual income flow to you guys where you're brokering these insurance products every single year, which is a really interesting thing about your business, right? Because you can live with that consumer over time or that business over time. But on the renewal process, how often do companies and or consumers go with their existing insurer? And how often do you guys switch them off of their existing insurer onto a new insurance product? And what creates and causes that change to happen?

(15:01) Aaron Letzeiser: The industry average renewal rate is actually around 80 to 85 percent. And that's really ,as both you and your listeners will probably know and Ryan and I know really well having come from this space originally, is that insurance is a massive pain, right? It's black hole. It's the thing you got to do once a year. You're usually paying it in full and upfront. It's a hit to the P&L and you want to forget it and move on to your next thing. And so ultimately, that makes it easy for your incumbent insurance broker to keep you around. But on our end, that's really not the type of relationship we want to have with our clients. We want people to feel very empowered. That's why we're ultimately building our own insurance products because we want to really put them in the driver's seat. That way, if we change deductibles, if we change the price, change the limit, ultimately our clients are going to know what the premium is going to be and what the impact on it is going to be. So that they're the ones ultimately driving that process. And so our renewal rate is actually up to about 98 percent. With several clients we actually have negative turn on that because they're continuing to add new policies, which is ultimately going to grow their portfolio within our own company. So, I would say on bringing over new clients, it's about bringing transparency. I think Ryan and I approach this from the right way. Not as much from an insurance broker, although that is my background, but more so from a real estate investor and understanding what those key drivers are that are actually really important to real estate investors, especially on the on the small SFR side or multifamily. For every thousand dollars, you're saving somebody you're adding about 20,000 dollars in value on pro forma. And so how can we work with these clients? How can we provide transparency and understanding about what their goals are? Maybe somebody's looking at potentially doing a disposition over the next year, which means that maybe it's not a good idea to actually package up the insurance for all 10 assets, right? Maybe you want to pull out the one that you're going to go through a thrift sale with to make sure that the premium on that specific asset is as low as possible in order to make your pro forma look great. And so approaching it from that standpoint has been very successful in moving folks over.

(17:06) Justin Alanís: Makes total sense. And I think that gets into this idea of underwriting these assets and that's something I definitely wanted to talk to you about. How do people today underwrite their assets using insurance expenses? How did they figure out what insurance expenses they should underwrite? In today's world with COVID, with climate change, and everything happening across the spectrum, how can people know what insurance is? I'm guessing it's changing daily right now, so how do people typically underwrite towards those assets today?

(17:39) Ryan Letzeiser: The one thing I always caution everybody on is when you get that offering memorandum, you really take a deep dive into what the previous owner had in terms of debt, who the lender was, and who they were just as an owner in general. And make sure that the broker that is in charge of selling the property is not selling a fairy tale. And ultimately, that's where a lot of hangups can occur, especially if you're going into a new geography and you don't understand what the insurance risk appetite looks like. Really understanding that, hey, this guy had a hard money lender, they had very limited insurance requirements. You're going after a Fannie or Freddie loan. They have a ton of insurance requirements from terrorism to higher requirements on property. And seeing whether or not those things actually add up or whether or not the deal is even feasible. Because when you start looking at let's say Florida where we've seen 20, 30 percent year-over-your jumps in last couple of years, the weatherman comes out in March and says it's going to be a horrible hurricane season. Well guess what? The people that are listening the most are the insurance carriers. And you really got to be on your A game in terms of understanding where it was versus where it's going and how that actually impacts you when you want to do a disposition 3 or 5 years out fromf when you're currently acquiring the property. So again, we strap on our investor hat and really try to make sure that our customers are engaged with the previous owner and the owner's broker to understand where they're at. So when they go out and they make that offer and they go hard on cash, that there's no surprises when the insurance pool comes back. And it's sometimes 20 percent higher than you thought it was going to be.

(19:30) Justin Alanís: Yeah. To your point, when you capitalize that extra expense, it reduces the overall value of the property literally instantaneously. So you got to get it right. And so can customers come to your product today and get a really good idea of how to underwrite their insurance expenses in their underwriting model?

(19:49) Aaron Letzeiser: Yeah, we do that for clients all the time. The challenge is always for every client that until somebody goes hard on cash and actually has that LOI accepted, the carriers aren't going to spend a ton of time underwriting that deal. So normally what we can give folks is a quick and dirty indication on what we think it might be. And we much like any other broker can do our best on that front and we also work pretty hard to try and get that as close as possible. Because if we're over on our estimation and somebody goes somewhere else, then it looks like we're not going to be competitive. And if we're under then it looks like we were giving out a coupon rate during the acquisition in order to try and get the business. So again, it comes down to really understanding and usually for most folks all we need is an offering memorandum. We offer a white glove service for insurance and acquisition review. And so folks normally just dump in an offering memorandum and then we take a look at it. We look at who the previous owner is. I mean as Ryan said, if you're buying something from Blackstone or Brookfield right, they have insurance rates that we could never touch because of just how big they are. And so you're going to get this Disneyland version of what the last 12 months looks like on the insurance. And of course the broker's then going to take that and he's going to move it forward on pro forma. And so really working towards that and giving people a realistic expectation is what we try and do. That way people can make a very informed decision. We had an apartment deal actually outside of Orlando. The previous owner was buying it actually from a large institutional client. They were paying about 80,000 dollars a year in insurance. And even just from the initial indication it was going to actually be around 100,000. Even with our most competitive carriers that are out there, every single one of those carriers said they would never be able to touch 80,000 with a with a 10 foot pole. And just by giving them that indication, they still wanted to move forward on that deal. But then you're not going to get surprised when you're starting to move forward through the closing process and get a quote that's going to be a little bit higher than what was on the pro forma.

(21:51) Ryan Letzeiser: And I'll jump in really quick too. We're also saving all of the quote level data that we're getting, and we have over the last 18 months since we've been doing this. Oviously, the more customers we have, we will begin to ascertain pretty sizable data models that will allow us to better project forward insurance costs in terms of previous year to future year cost, as well as be able to give people instant indication. And we need a sizable data model in order to do that, but it is on the horizon. We're making sure that our database and the structure that we have is highly architected in a way that we see being able to give instant indications on the horizon.

(22:37) Justin Alanís: Yeah. Super important point right there, which is that tech and data can become the great equalizer. You guys talked about this a little bit. You guys are, I mean, essentially you're an insurance broker today at least and eventually you'll be the actual insurer. But you're an insurance broker and sometimes brokers incentives can be misaligned with the actual clients, especially when they're quoting prices, right? We see this all the time. As a very simple example, in the home selling process, you go out to a series of brokers, they say, yeah, we think that you can sell this for 1.3 million. And you say, wow, they think that we can sell it for higher Well, they're doing that because they want to get the listing. And so there's always this fine line between setting expectations for what you can actually get in terms of price versus what you can actually get in price. And that's where data information and technology I think come in and create this super transparent layer, so that customers know that this is coming from empirical data. This is coming from real information rather than them trying to get my business. It shows you also on the other side that if somebody's coming and getting insurance estimates on a certain market, and then they're not converting right away or at a high level, then you guys know hey, we need to work on our insurance estimates for this part of the market in this segment of the market. And so I'm sure that's something that you guys are working with, as you said, in terms of automating that whole experience, and then using the data to understand where your weaknesses are even as a company.

(24:04) Aaron Letzeiser: Oh, exactly. Even to your point there can't be those misaligned incentives. And it's not to the fault of your typical insurance broker. It's that the fundamental economics of running an insurance brokerage make it very challenging on that second year, especially in renewals. So you might have a broker that gets the 70-30, maybe 60-40 split in their favor on the first year. And so in order to win that business, they're going to go out to 7 to 10 carriers, even if they have to do the manual work of filling out 7 to 10 different carrier forms in order to be able to go out and get those quotes. But on renewals they know that not only other splits reversed, so now maybe they're only making 30 or 40 percent on that renewal and they know that statistically they've got a 80 to 85 percent chance of you signing with whatever quote you have. They might only go out to maybe one or two other carriers besides the incumbent carrier. And again, the calculation that they make is that they go after new business because that's where the money is. And unfortunately, that folk is in a position where you might be... Most of these carriers, they're not going to quote things out until usually 30 to 60 days prior to the renewal. And so your broker is going to go out maybe 30 days before. They're going to get quotes. They follow that normal procedure. And then they're going to present them a couple of days prior to renewal. And unfortunately, just because of how antiquated the insurance space is and how manual that process typically is, there's no time then for you to be able to go out and say, hey, can you get 2 or 3 more quotes? Could you see what else might be out there? You're under the gun of of the lender as well and you need to be able to show that you have coverage, starting that first day of renewal. And so again, it creates this sour taste in your mouth about insurance. And so for us on our end, the system is going to send it out to all the carriers that it matches with irregardless of the opportunity. If it matches with 10 different carriers that we can send it out to in Florida, the system is going to do that automatically. And where we make our margin is the fact that we've taken a lot of what your normal insurance broker would be doing in terms of the paperwork side, and we've automated that through technology. And so now our brokers can really spend time with the actual client, understanding now what their goals are. Are they looking to increase NOI across the property? Are they looking to go through a disposition? Are they looking to potentially increase limits at that point? That's where we can derive value. And maybe then we move to a point where now it's not only being able to optimize your insurance portfolio, but it's also about risk mitigation and where you can spend your dollars. So we have plenty of owners that that have a budget for capex on a yearly basis, and then come to us then and say, listen, we're looking at replacing all the carpets or all the floors, or we're going to redo the roof. And on our end, if you're going to do both, do the roof first because the roof is going to have a material impact on your overall insurance premium. So let's do that first. Let's take a look at what your plans are on that end, and do the things that are ultimately going to save you money on your insurance premium, and then we can start doing the other things. And that's where freeing up the time of brokers becomes more of a consultative and transparent relationship, as opposed to them spending the time in Excel putting together a statement of values that can get sent out to carriers.

(27:13) Justin Alanís: Super interesting. You talked a lot about the difference between what you can automate and what you don't automate today. But I'd imagine that also internally you guys are thinking about not only that, but what can we additionally automate from the brokers work today, right? There's some hand cranking behind the scene. There's nuanced discussions with clients, both consumers and businesses. And those discussions take a different form about risk, about cost, about strategy. At what point does the broker actually not become even important in this dialogue and you guys can capture that information through forms and fields that you bring in, and recommendations and chatbots and all the other types of technologies that you can bring in to create an intimate experience, but maybe even free up your broker's times even more. Right now for example, how much on a per broker basis, how much volume can they accommodate and where do you think it can get to with even more technology?

(28:09) Aaron Letzeiser: Yeah, excellent question. So we look at a lot of these insure-tech plays that have really popped up over the last couple of years. Much like most industries the brokers several years ago looked at a Lemonade or a Hippo as kind of this fake insurance carrier that wasn't actually going to make it. And I think if you look at those those types of platforms, they have done a lot in terms of being able to automate much of the service and much of the questions that most of our clients have. Now I don't think especially on the commercial insurance side, you're ever gonna get rid of the broker. The folks in our office that are insurance brokers, they're super knowledgeable about the actual intricacies of the terms and conditions within your insurance policy. And so you're always going to need somebody that's going to be able to answer the detailed questions about your policy. But to be able to get a certificate of insurance, to be able to change the mortgagee clause because you went out and reified it, to be able to get information about what your premium is, when the renewal dates are, or to add an additional insured. That's all stuff that technology can ultimately play a significant role in and companies like Lemonade and like Hippo have done an excellent job of filling that gap in with technology, which again allows their employees to be able to work on providing real substantial value to their clients. And I think if you look at these companies, most insurance brokerages can really only do anywhere from like 7 to 900,000 in premium per employee. We're approaching well over 2 million per employee right now. You look at these larger tech enabled platforms, and they're getting up to like that 5 or 6 million dollar in premium per employee level. And that's where we want to go because I think the value on the insurance side can then be spent on those other things that a bot or technology can't do, which is looking at an offering memorandum looking at it and saying, okay, this is a property owned by Boston properties or it's owned by Brookfield and so we want to make that adjustment as we consider making an offer on this asset.

(30:06) Justin Alanís: Makes a ton of sense. Talked about going from 2 to 5 to 6 on a per employee basis. And I also want to know, how do you comp your brokers today? Because ultimately the brokers role in the traditional mortgage broker industry is also one in where they are responsible for acquiring clients. I'd imagine that a lot of that is offloaded from these mortgage brokers that sit within Obie to the corporation. You guys are our recruiting clients. You guys are running ads. You guys are doing sales. You guys are doing channel partnerships and referrals. And so the brokers are typically paid based on that kind of entire experience, finding the client and running the entire process, getting the insurance kind of end to end. At a technology company like Obie, you can break that up, right? You can acquire the customers as a corporate entity. And the broker can then service the client most appropriately with the specialized expertise that they have, supplemented and complemented by technology to give them quote unquote superpowers. And so does the payment structure and the payment model then change associated with the way that you guys employ brokers versus to the traditional mortgage brokerage industry?

(31:14) Ryan Letzeiser: Yeah. We definitely are seeing a pretty stark difference in terms of what an Arthur J. Gallagher is paying their brokers versus... We don't even call our guys brokers. We call them risk advisors, because really at the end of the day, that's what we want them doing. So their compensation structure and at least the way we see a lot of things moving forward is a salary plus compensatory bonuses based on the amount of premium they're closing based on the amount of leads that we are bringing to them and putting in their lap. And really, what we're seeing is a noticeable change, especially during COVID, where the relationship and the steak dinner and the golf outing are not occurring as much as they used to, or not nearly as frequently. And that's eating into that relationship. That one to one that you're seeing. And people are becoming more open to utilizing technology as a way of brokering their insurance products. You've seen a lot of this kind of starting to come out of the woodwork on the personalized side between home and auto, where there's a lot of aggregators that are coming out now. And you're seeing basically the Expedia to travel agent kind of situation occur. And as that begins to bleed into the commercial space, the expectation is, oh, well, I went online, and I utilize Zebra to get my home and auto. Why can't I do it for my apartment portfolio or my office portfolio? And I think the consumer's just changing dramatically at a speed that we can't even comprehend now, where they are open to engaging with a cold outreach email. Where most of these were just handoffs between folks that know a guy who knows the guy and all of a sudden he's your insurance broker. So, the shift is in process, and it's occurring rapidly right now. Just unfolding in front of us.

(33:19) Justin Alanís: Yeah, it's clearly accelerating. We've seen the same trends as it relates to COVID. And it opens you guys up and opens a lot of companies up to new opportunities. And the people who are thinking about that right now and embedding that into the existing experience are going to be the huge winners, right? We saw Zoom yesterday jumped 34 percent. Their profit, I think increased by like a couple hundred percent. So we're seeing it take off. We're seeing the acceleration. It's happening. It's condensing it down from what it would have been 10 years ago into maybe a year. And I think that has profound impacts actually on real estate because real estate's a real asset that usually requires you to go put your eyes on it, understand it, underwrite it, by actually putting boots on the ground, going and looking at the units. But over the last 10 years, we've had this technological shift that has happened with things like virtual touring with Matterport, inspection applications, now insurance applications. And brokering also probably needs to shift and it's having a profound impact, I think especially on existing networks, and the way networks and interactions are changing. And in real estate, we have an older audience typically, or older ownership group. One of the things we laugh about is like, if you see a bunch of Hotmail, especially in this small mom and pop ownership group, if you see a lot of Hotmail and Earthlink email addresses, we know that we've got the right email addresses, right? And so these are people who historically hadn't been inclined to actually use technology, and now they're being forced to do it. They're actually engaging in Zoom calls. They're going and applying for things online and the old relationships that they have harvested and harnessed over the past multiple decades are melting away. And it represents a huge amount of opportunity for companies like Obie who then rely less on relationships and those steak dinners, which are way overrated anyways, and much more on process and systems and data and technology to create a really great customer experience.

(35:08) Ryan Letzeiser: Yeah, at the end of the day, I think what we want to show people and what we've done, we saved one customer over 150 grand in their portfolio. There isn't a steak dinner on Earth on pro forma that can add his pocket with A, the material impact of the yearly premium and B, the value of the assets on pro forma. He can buy his steak dinner at that point by himself 100 times over. I think the shift is underway and especially when people become price sensitive and in trying economic times that you really begin to see a sizable value shift and what's important to you. At the end of the day, I truly believe we do sell a commodity product, but we want to give the customer the best experience they could possibly have with something that they usually dread acquiring. So, we can take the pain out of it, utilize technology to make their lives better, save them money, and I think any company that's focusing on this on the customer side is ultimately going to really win.

(36:22) Justin Alanís: 100 percent. You talked a lot about shift, but there's obviously a huge shift going on with COVID in terms of technology adoption and efficiency and everything we just talked about. But it also sounds like it's shifting the consumers mindset towards maybe cost reductions, because they are taking on a little bit more hurt on the revenue line items, and they need to find more expense savings. And so that brings them to a place like Obie, and it might also allow them to think about sacrificing on risk, right? In a situation like this with COVID, do I risk a little bit lower insurance coverage in order to get lower insurance premiums? And and how is that taking shape right now? Have you guys seen that people are willing to take on more risk to get reduced costs?

(37:04) Aaron Letzeiser: Oh, absolutely. And I think even to yours and Ryan's point, as the demographic of owners starts to shift into this generation of folks that really have grown up with an iPhone and have an expectation of using data to drive decision making. More so than ever in probably the last 6, 8 months, we've had folks saying hey, you know what, what kind of data points go into this? How is this premium kind of derived? Where can we take calculated risks based on historical data just across the board in order to potentially increase that decible. Maybe I don't need a 2,500 dollar deductible. Maybe I'm comfortable with 10,000 because it's ultimately going to save me 5 or 10 grand. We see this really across the board from most of our clients these days, that that's where their biggest concern is, and how can we how can we help them by utilizing data to make those informed decisions?

(37:56) Ryan Letzeiser: We do a bunch of different flood coverages, and we are utilizing data to show them just based on how much they want to pay in a deductible, what the chances of having 6 inches of water looks like in the next 10 years. What is the percentage? Is it 1 percent? Is it 20 percent? And when you give them that data, you can allow them to be empowered in making their own decision on what their risk tolerance actually looks like, instead of this opaque box that kind of surrounds them that says, well, you could take a 25,000 dollar deductible, but it might flood. Nobody's actually explained, well, it's only a 1 percent chance of you having 6 inches of water. Are you willing to do it at that point? Again, it's all in the risk that the the owner is willing to have, but it allows them to make very, very informed decisions.

(38:49) Aaron Letzeiser: And really the lenders are the ones that tell you, hey, you have to have flood coverage, right? And then the deductible can't exceed 100,000 dollars, right, which is a huge deductible. And so you have so much room there then to be able to say alright, well do I want 100,000 dollar deductible? What are the chances? Now we're finally at a time where there's so many data driven platforms on property information that can be very, very useful in several aspects of the conversation about owning or acquiring an asset, specifically in insurance. As Ryan said, you could be in a flood zone, but statistically the university level data might tell you that your specific location within that flood zone probably only has maybe a 5 percent chance of flooding in the next 20 years. And so, do you want to utilize that data to say, I can save maybe 20, 30,000 dollars on my premium if I go with a 50,000 dollar deductible, or a 25,000 dollar deductible? And that really can have a huge impact during a cash crunch when you're trying to at least maintain NOI during potentially turbulent times.

(39:58) Justin Alanís: So you give information to consumers to allow them to weigh the risk and the benefit of the reduced cost and allow them to basically create their own risk profile in their mind. And underwrite that on their side to be able to understand, is this savings worth the additional potential risks? And so that's really, really powerful from a consumer standpoint. It opens up a lot of opportunities for them to understand this better, to reduce costs, and to understand where their risks really lie. And, again, going back to shifts though, and we've kind of skirted around the issue of floods and all the other risks that happen to properties, but climate climate change is one of the biggest shifts that we are undergoing as a society right now. It's happening. We've had several degrees of warming already happen. We've had Hurricane Laura just decimate the Gulf Coast. We've got tornado alley in the Midwest that has picked up more frequency. We've got earthquakes in California, which is obviously not climate change related, but then we got the fires in California. Also in places like Australia. And then we've got all these factors with climate change, potentially increasing things like crime around urban centers with break ins and maybe creating more high risk properties in those areas. And so how are you guys thinking about this right now? How are insurance companies thinking about this? How are they underwriting to this? Are they doing it quickly enough? Are the new insurance policies representative of the risk over a 20, 30 year period? And how are you guys thinking about it as a business?

(41:27) Ryan Letzeiser: I would say Bill Gates has been very pointed in his discussions where he had said if you think Coronavirus is bad, wait until you see the next 60 to 70 years of climate change and what it's going to do. And I believe that there are a lot of people that are listening. Both insurance carriers as well as investors. And I think, how do we begin to make sizable impacts from potentially putting solar panels on the roof to ways of not only being environmentally impactful, but also still, most everybody that is an investor is very much capitalist and focused on generating money and wealth. How can we do both in tandem is an important question that I think I personally ask myself a lot? And then I truly believe that a lot of other industries, including real estate and insurance, are asking themselves, what does this actually do for us over the next 10 years and 20 years? And how is it going to materially impact our ability to do business on a day to day basis? It's going to come to the forefront. If it's not already in people's mind, I truly believe that in the next 24 to 36 months once we once we down cycle fromthe virus, it's the next thing on the horizon.

(42:54) Justin Alanís: Yeah, it has got to be solved at so many different levels. And it's interesting that buildings and property owners actually account for I think the last I saw was like 10 to 12 percent of overall climate change impact. If you think about the energy that buildings use, the inefficiency that they use, there's so much that can be done at the building level to help curb climate change. Number one, I want to understand, is this an existential risk to the insurance industry, or is it just one in which the insurance industry in general might just avoid an area where they say, hey, we're no longer doing insurance in Napa and Sonoma, because the fire risk is just too high there. We've already seen that, haven't we?

(43:34) Aaron Letzeiser: Oh, absolutely. I mean even right now, I have an office to a multifamily conversion, which I think is, as a side note probably going to start to become a little bit more common, but that's going on in Oakland, California right now. And the carrier is under a bind restriction due to the fires that are going on. And fortunately, the carrier's still going to operate out there, but I haven't been able to bind anything in California in the last 2 or 3 weeks. And that ultimately impacts deals, right? If you have a construction loan, if you need to get started, if you are doing an acquisition, and you need to get insurance, you can't right now due to this. And that has a huge, huge impact on how people are running their businesses. And I think carriers, it's not lost on them. The overall insurance market in the United States is absolutely massive. Especially on the commercial and the habitational side. And you're right. It's going to be a mix of two things. One, they're just going to have to price policies that are risk adjusted based on the fact that they think they might know about how the weather might be next year, but based on just the full unpredictability of how things have gone over the last couple of years, you're going to start having these huge, huge premiums. And again, if those carriers decide, hey, this isn't for us, they're just going to start to move inland. And we've seen that as you pointed out. I mean, there's plenty of carriers that were in Northern California that just really aren't going to write that anymore. The fire risk is too unpredictable, it's too prevalent. And they can make just as much if not more with loss ratios, by starting to move into other states and really putting their effort towards those other locations. And so we're certainly seeing that happen. It's a good thing in that it provides an opportunity for other carriers that have a lot of dry powder to try and take the risk of covering things in a flood zone or covering things in a fire or in a hurricane john. And so, it's certainly going to dramatically I think change the industry and how it's going to look and what opportunities are really available for folks over the next couple of years.

(45:35) Justin Alanís: Right on cue. I've got a fire engine out my window. I'm actually in the Oakland hills, so I know this story all too well and we hear this often out here. They are on high alert, and so I get it. I totally understand it. My home here in Oakland Hills, we've got to do FAIR plan, which is a government backed insurance product, at least I think that's what it is. And so do you see the government stepping in and taking a broader role in these really high risk areas, these flood zones, these fire zones that traditional insurers just say, I'm not touching this thing?

(46:09) Aaron Letzeiser: Yeah. If that's ultimately the way things go, then yeah, the government's going to have to the one that steps in. But I mean, that's also a scary proposition. Right now the few kind of products and at least the one most prevalent is the National Flood program that exists out there for a lot of these things you can't otherwise place with a private flood market. And so it is something that that the government might have to start to get involved in and at that point as a broker, I really start to lose a lot of the relationship based leverage that we have with these different carriers in order to try and bring premium down. It becomes very factual. It becomes very much, these are characteristics of the building and this is your price. And if you're going to continue to be an investor or an owner out in these zones, that's twisting your arm into a position where you have to comply otherwise, you have to divest from that asset, move through your disposition, and move on to something else. Because otherwise, at some point these costs are going to substantially impact your balance sheet to a point where some of these assets just might not be as attractive as they once were. And there's plenty of other opportunities around the rest of the country that people can put their their money into.

(47:19) Ryan Letzeiser: Yeah. I mean, we've heard about Oakland, Bay Area, San Francisco, things being sold that sub three and a half cap. You start seeing super impact to insurance pricing. You're gonna have to see massive cap rate expansion. There's just no way around it. The assets not that attractive when you see the cap rates go up, and you also see NOI decrease as well, and it's got its compounding factors that make things really hard to invest in at that point. So it's definitely a struggle. You're seeing a lot of that in California and Florida right now, the Gulf Coast, with assets and catastrophic risk zones.

(48:07) Justin Alanís: Yeah. In some ways, it's what capitalism is meant to do, right, which is it's meant to be efficient. And when the government comes in like this, and tries to create insurance policies, it continues to allow people to invest in and live in really dangerous places. And ultimately becomes a potential burden on the government if houses or buildings are constantly burning down in specific areas, and then having to be rebuilt. And so it has a whole host of issues associated with that. But ultimately, maybe what this does is it drives people out of these different places. Kind of to what Andrew Yang talks about, right, which is like, let's start moving people from the coasts. Let's bring them inland. Let's put them out of flood zones. You heard of Mayor Pete talking about how he had to enact the thousand year flood zone warning in his town twice in 5 years. And so these things are happening time and time again. Politicians are starting to understand it, but it's moving at seemingly a glacial speed compared to the way that climate change is moving. So it'll be really interesting to see how the whole industry adapts and changes to what's happening right now. And how the government starts to respond to this, and how it changes immigration and investment patterns across the country. It's going to have profound implications, I think, and it's something definitely to keep an eye on closely. And this in my opinion, is where insurance and the ability to insure becomes one of the biggest factors, as you guys talked about, in the underwriting process, the buying process, and whether or not you should be buying in a particular area because of the risk associated. Not just today, but what it's going to look like in 20, 30 years as climate change accelerates and just gets really, really bad. And so it's something that should be in my mind, top of mind for everybody out there. This has been a really interesting conversation around this climate change aspect. And in fact, across the entire conversation, we got into a lot of really interesting topics. But I'd love to ask you guys, where do you see the industry, insurance industry and kind of the property ownership industry, but specific to insurance being in, let's say 20 years. Look out 20 years from a technology perspective and where Obie will be in 20 years, or what you think kind of the Holy Grail is here, but also in terms of how climate change will impact things and what we might see in 20 years associated with the insurance industry.

(50:23) Aaron Letzeiser: Yeah, I think we can ultimately take a page from where the personalized industry has moved. Even getting home, auto, or life insurance over the last 5 to 7 years has changed dramatically, and I think will ultimately take a page from that. Now commercial and multifamily and habitational assets are going to be a little bit more complex. But if you're talking 10, 20 years, I mean, even I think in 10 years, you're going to have a place where landlords are going to be able to go on and enter a couple of pieces of data and ultimately get an instant quote. And really, at the end of that, much like you have on a Lemonade or a Hippo or some of these other platforms, you're going to be able to change the deductible. You're going to be able to change the limits. Maybe you'll be able to shop it across several different legitimate carriers that otherwise only insurance brokers would have access to. I think that's ultimately where the market is heading. And I think that the investor is finally going to have transparency and ownership over what is probably one of their largest line item expenses. Now, alternatively there's going to be a large impact, I think, especially over the next 20 years with what climate change is going to do. I think we can take signs from what's happening today, and where scientists think we're ultimately going to go. But, it could be worse, right? As you said, I mean, there's thousand year flood plains that have been flooded twice in the last several years. And so, it's gonna be really interesting to see how this ultimately plays out. Does the government get involved? Are there new carriers that pop up that's trying to find creative ways of driving margin to be able to cover these folks and take that type of risk bet in these catastrophic risk zones? So ultimately, I think it'll be interesting to see on the climate change end. And hopefully we'll get to a point where much like today you can you can log on to a website and enter a couple of pieces of data and get a homeowner's policy or renters policy or a car insurance policy in five minutes. I'm very hopeful and optimistic that that's where we're going to be, even in the next 10 years. I'm confident that Obie is going to be the place ultimately that real estate investors are going to go to be able to get insurance products. And we're going to continue to build additional features on that to address all the other aspects that come with having that insurance policy, whether it's adding in your lender, grabbing certificates of insurance, adding in your property manager, maintenance.There's so many folks that really gets added into that process with that same data payload, and we can continue to use that information to drive value for our clients.

(52:48) Justin Alanís: Great final answer. A couple of last points. The actual amount of carbon emissions and contribution of climate change I said was 10 to 12. I was way off. It's actually like 36 to 39 percent globally that buildings contribute to climate change. And it feels to me like insurance should maybe play a role there, right? Like if they're insuring against things like climate change, then it seems like maybe they should deliver more effective and cost efficient policies if you as a building owner are doing things to curb climate change. If you're putting solar in. If you are electrifying. If you're motivating and incentivizing your tenants to be more efficient from a climate change and a load standpoint, from an electricity standpoint and getting off of carbon emissions. Maybe insurance should create those incentives embedded in the product itself. So this is my last question. Have you guys seen any of that yet? Are you guys thinking about doing anything like that? Is there a cause for good here that you guys can introduce into your software?

(53:46) Ryan Letzeiser: Yeah, we've looked at a number of things where we might be able to make a material impact on what people are paying for. We have looked at how Lemonade has run their business and had a nonprofit component. Ultimately, we'd love to be able to get into a situation where we can provide access to certain things as our platform continues to grow in order to mitigate some of these environmental concerns. I think really at the end of the day, you look at the built world as a whole, and the insurance market. If they want to, atleast on the carrier side survive, they need to start making their own material impacts on building construction materials. Buildings that have any kind of environmental impact associated with them from permeable pavers and concrete and making sure that water runoff and a lot of the damage that's normally caused by floods could be mitigated just through different construction practices all the way on up to reduction in carbon emissions, so you're fighting it from kind of both ends. And then on our side, as we look towards this instant product where we're going from brokerage to insuree, we're looking deeply into IoT devices, leak detection and utilizing non-grid energy in order to power some of these devices. So, there's a number of things that we look at are on our definite horizon that can help us mitigate claims, as well as empower landlords to be able to have material impact on the environment.

(55:24) Justin Alanís: Yeah, and maybe the government will eventually come in and create incentives for you guys to offer these types of programs to the landlords and consumers on your platform as well. Let's hope, right? Because that's how ultimately we're going to solve this crisis, is with really solid and fundamental government legislation that supports and incentivizes companies like you guys to offer things like that. And for the consumers to adopt things like that, and for the businesses to adopt programs like that because they're getting insurance savings and or tax savings associated with implementing these efficiency measures. Guys, this was a great conversation. I want to thank you so much for all your insights, and I know Obie is going to be a, it already is a really successful company. And I'm really excited to see what you guys are going to do in the future. Thanks for being on the podcast today. Really appreciate it.

(56:09) Ryan Letzeiser: Yeah, thanks for having us.

(56:11) Aaron Letzeiser: We appreciate it.

Thanks for listening! Make sure to: