17 Florida property insurers face potential rating downgrade
Florida’s insurance commissioner claims there are discrepancies between Demotech’s recent decisions and its published rating methodology.
Editor’s note (10:55 EST): This story has been updated to include comments from the Florida Association of Insurance Agents starting in paragraph nine.
In a move that would impact millions of Florida policyholders, rating agency Demotech, Inc. has notified approximately 17 property insurance companies in the state that their financial stability ratings are at risk of being downgraded, according to an email from Florida Insurance Commissioner David Altmaier to Demotech President Joseph Petrelli.
Altmaier wrote that Demotech is unwilling to consider additional information from the carriers and will continue with the pending downgrades even if additional capital is secured.
Demotech’s downgrades would move some insurance companies from an “A” rating to “S” (substantial) or “M” (moderate). Federal mortgages require insurance, and the companies writing those policies must meet certain rating requirements. As Demotech is the only rating agency permitted in Florida,
Florida CFO Jimmy Patronis pulled no punches in a letter to the Federal Housing Finance Agency, referring to Demotech as a “rogue agency” that’s been empowered to “play havoc with the financial lives of millions of Floridians.”
Related: Citizens could hit 1.2 million policies this year
Patronis urged the agency to reconsider relying on Demotech as the primary rating agency for the state’s insurance market. He noted that if Fannie Mae/Freddie Mac were to de-authorize a “sizable percentage” of Florida’s insurers based on Demotech’s ratings, it would bring financial chaos to the lives of millions living in the state.
“Not only could Florida families end up being required to accept expensive and inadequate forced-placed coverage from their lender, but a ‘rug-pull’ of this magnitude would expose over 115,000 Florida insurance agents to litigation risks,” Patronis wrote. “Such extreme outcomes are not necessary given the fact that all Florida insurance companies being downgraded were able to obtain reinsurance and are not presently ‘impaired’ or ‘insolvent’ as those terms are defined in the Florida Insurance Code.”
The Florida Association of Insurance Agents (FAIA) reported that if the downgraded ratings go through, many agents in the state will question if they have adequate coverage under their E&O polices, which can include insolvency exclusion provisions.
Further, FAIA contends Demotech has been outspoken about legislative reforms needed to stabilize the market, and has made recommendations to the Florida legislature while threatening downgrades as a means to exert its power in the state.
In a statement emailed to PropertyCasualty360.com, the FAIA wrote: “Many of their (Demotech) previous downgrade warnings against companies, mostly unnamed (in 2017, 2018, 2020, 2021 and 2022) never came to pass. Instead, almost all Demotech rating downgrades are usually only days ahead of a company’s insolvency proceedings. That often begs the questions, “Does a Demotech rating mean anything or provide the instead peace of mind to agents, consumers and lenders?”
‘Compelled to take extraordinary steps’
In the email, Altmaier wrote that in reviewing the notice letters sent to the insurers and other communications between Demotech and the companies, several discrepancies arose between the recent decisions and the rating methodology Demotech publishes on its website.
In addition to questioning if Demotech will give the notified carriers additional time to respond, the email asks if the rating agency intends to more thoroughly describe its appeals process. The email also claims Demotech is now placing more focus on profitability, while discounting the importance of an insurer’s ability to withstand unprofitable years “from a surplus” position.
“OIR is compelled to take the extraordinary step of scrutinizing these unprecedented actions to protect the Floridians we serve, especially two months into hurricane season. This is an example of inconsistent, monopolistic power of a select rating agency and is trying to exert coercive influence over Floridians and policymakers in an effort to thwart public policy according to its own opinions,” Altmaier wrote.
The insurance commissioner also finds that Demotech’s rating methodology isn’t properly considering legislative actions when rating carriers.
“Demotech’s opinion of what policy proposals should be passed, especially in a state it does not reside, is not a fair and consistent approach to rating,” Altmaier wrote. “Did Demotechexpect the positive benefits from recent Florida legislation to happen overnight? If not, does Demotech believe that seven weeks after passage of this legislation is a reasonable timeframe for years of litigation to cease? If not, what other factors did Demotech consider when making the assertion that the claims environment will continue to be unfavorable, given the positive progress the Florida legislature has made?”
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