Florida Regulators, FAIA Slam Demotech for Reported Plans to Downgrade 17 Carriers

Florida’s top insurance regulators and the Florida Association of Insurance Agents on Thursday blasted the Demotech financial rating firm after the organization reportedly notified 17 insurers that they will soon be downgraded.

Demotech President Joe Petrelli said Thursday evening that the Florida insurance commissioner, the state’s chief financial officer and the FAIA had misconstrued his firm’s plans in their strongly worded missives that were released Thursday.

“The OIR letter, the CFO’s letter and the FAIA press release are all inaccurate,” Petrelli told the Insurance Journal. He declined further comment and declined to name the 17 troubled insurers, but promised to provide a fuller explanation by Monday.

Demotech began rating Florida insurers in the 1990s, after powerful Hurricane Andrew hit the state’s southern end in 1992, causing billions of dollars in damages. The storm resulted in several carriers becoming insolvent and some national carriers, which are rated by larger rating firms, fled the state. Now, Demotech has become the dominant rating system for most Florida insurers.

It has carriers over a barrel and is using questionable methodology in its analyses, FAIA and regulators charged.

“After 25 years, Demotech virtually holds a monopoly on issuing financial strength ratings to Florida domestic carriers while being largely unknown/unnecessary in other parts of the country,” FAIA President Kyle Ulrich wrote Thursday in a blog article titled, “Is it time for Florida to turn the page on Demotech?”

“It is abundantly clear that Florida’s property market has been held hostage by unscrupulous trial lawyers, public adjusters, and contractors for years,” Ulrich argued. “Now, the actions of one rating company could add to the list.”

The controversy flared this week after FAIA said it had obtained copies of letters from Demotech to the 17 property insurers, notifying them that their financial strength rating will be downgraded next week, from “A Exceptional” to “S Substantial” or “M Moderate.”

Downgrades are never good news and in some cases have preceded insolvencies or rehabilitation proceedings for insurers. The S rating suggests the carriers still have substantial reserves, Petrelli has said. But it’s not enough for Fannie Mae and Freddie Mac, the quasi-governmental secondary lenders that back the majority of residential mortgages in the United States.

Without Fannie’s and Freddie’s blessings, millions of Florida homeowners insured by those 17 carriers could be required to obtain expensive force-placed policies, CFO Jimmy Patronis said in his letters to the director of the Federal Housing Finance Agency and to the heads of the lending corporations. He urged them to rethink the lenders’ reliance on Demotech insurance ratings.

If Fannie Mae and Freddie Mac “de-authorize a sizeable percentage of Florida’s insurers based on the dubious ratings of one company, it would create financial chaos for millions of Floridians,” Patronis wrote.

Some 115,000 Florida insurance agents also could be exposed to litigation risks, and may not have adequate coverage under their errors and omissions policies, Patronis and Ulrich said.

Insurance Commissioner David Altmaier’s letter to Petrelli, dated Thursday, charged that Demotech has failed to adhere to its own standards in determining the financial ratings. The office has “noted several discrepancies between these recent decisions and the rating methodology posted on Demotech’s website,” Altmaier wrote.

Ohio-based Demotech has previously indicated that targeted carriers can appeal and provide further financial information and perhaps obtain additional capital. But insurers have told OIR that Demotech is now unwilling to consider additional information and access to capital infusions, the commissioner’s letter said.

The timing and the tenor of the agents’ and regulators’ outrage surprised some in the Florida insurance industry. Petrelli had suggested in May that several carriers could be downgraded this year, thanks in part to the continued costs of fraudulent roof claims and excessive claims litigation. He also sent open letters to Florida’s governor and others, noting that legislation approved in May had not gone far enough to help some companies.

Perhaps it was the sheer number of insurance companies that could be in trouble that set off the alarm bells this week. Ulrich declined to comment other than the sentiments included in his blog post.

Others in the industry have warned for months that many insurers are in trouble, especially after reinsurance prices rose by as much as 50% for some companies. Four carriers have been deemed insolvent so far this year and 12 have stopped writing new business.

“Everyone knew this was coming,” one industry source said Thursday.

The Office of Insurance Regulation, in fact, recently released a market stability report that indicated that 27 insurers – more than half of the active carriers in Florida – have been placed on a watch list. Due to several factors that suggest the companies are facing financial difficulties, the OIR referred the companies to its newly created insurer stability unit for “enhanced monitoring,” as required by recent legislation.

Still, the FAIA said a new approach is needed.

“Is now the time for insurers, lawmakers, and regulators to look for a more stable and predictable alternative to Demotech?” Ulrich asked.