Demotech Suspends Florida Insurer Rating Criteria

Recent Florida Supreme Court decisions and ongoing abuse in Florida’s insurance market have led ratings company Demotech to announce it is changing the criteria it uses when rating insurers in the state. The decision comes as insurers get ready to announce their 2016 annual reports that could indicate unfavorable results for many.

Ohio-based Demotech — which rates 397 companies nationwide, 57 of which are in Florida — has suspended ratings guidelines it uses in Florida due to what it is calling the state’s uncertain operating environment.

The ratings firm says no Florida insurers it rates are in danger of failing but there are about 10 to 15 that could see downgrades in March, after annual reports are released.

The uncertain operating climate that concerns Demotech refers to Florida’s escalating assignment of benefits crisis that has caused the number of litigated water loss claims to skyrocket over the past few years. In addition, two court cases decided at the end of 2016 — American Home Assurance Co. v. Sebo and Johnson v. Omega Insurance Co. — that Demotech said reversed “industry claims procedures that remain intact in other operating environments” will create unanticipated challenges for insurers.

As such, Demotech said it must now “undertake a review of its protocols to respond to the implicit albeit yet unquantified changes in the operating environment.”

Demotech said it will eventually revise its general guidance but, in the meantime, it is advising carriers individually to ensure they are adequately capitalized to handle unanticipated changes.

Joseph Petrelli, president and CEO of Demotech, said the company has not yet determined what the new ratings guidelines will be, but it will be watching the Florida Legislature when it resumes in March and would take legislation that addresses these issues into account.

Petrelli emphasized, however, that the changes do not mean the ratings company will no longer rate Florida insurers; rather it is looking at each company individually and providing guidance on how each insurer can prepare financially for the impact that increased claims could have on its surplus.

“We are still rating companies and doing everything that we currently do,” he said. “But [Florida insurers] now operate in a jurisdiction where the situation has changed. We don’t want to operate with one hand behind our back, and too many things have changed for us to use the same ratings guidance.”