Florida sets up temp reinsurance plan to hedge against rating downgrade threats
The move will give insurers facing rating downgrades the ability to meet exceptions offered by federal lenders.
The Florida Office of Insurance Regulations (OIR) is setting up a temporary reinsurance arrangement through Citizens Property Insurance Corp.
The arrangement is being established to mitigate disruptions from potential Demotech rating downgrades, which could make impacted insurance companies fall short of rating requirements set by Fannie Mae and Freddie Mac.
Both federal lenders offer exceptions to financial rating requirements for “an insurer that is covered by a reinsurer who assumes, by endorsement, 100% of the insurers’ liability for any covered loss payable, but unpaid by the insurer, by reason of insolvency,” OIR reported. Should a participating insurer becomes insolvent, the Florida Insurance Guaranty Association will become responsible for the statutory duties and pay any claims set forth in the statute.
OIR reported the arrangement with Citizens will mitigate any reason for lenders to require replacement policies, or force place coverage, based on a rating downgrade.
“OIR’s greatest priority is ensuring consumers have access to insurance, especially during hurricane season; and because of the uncertainty with the status of Demotech’s ratings, we’ve been forced to take extraordinary steps to protect millions of consumers,” Florida Insurance Commissioner David Altmaier said in a release. “This innovative arrangement satisfies requirements set by the secondary mortgage market. In the event we need to implement this temporary solution, consumers will not need to seek coverage elsewhere, agents will not need to move policies, and lenders can have confidence that these insurers continue to meet the mortgage qualifications.”
17 insurers facing downgrades
This news follows Demotech notifying 17 Florida property insurance companies that they face potential rating downgrades that would place the insurers below federal lenders’ requirements.
The notices drew swift rebukes from OIR and Florida Chief Finical Officer Jimmy Patronis, who referred to Demotech as a “rogue agency,” in a letter to Freddie Mac and Fannie Mae. 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.”
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