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Demotech “not the problem”, reported an “inconvenient truth” – Applied’s Menzies


As a rating agency and scorekeeper of record for insurance carrier financial stability, Demotech is not the problem in the challenged insurance markets, such as Florida, Louisiana, or elsewhere, according to Steve Menzies, Chairman of Applied Underwriters.

florida-insurance-marketMenzies drives home issues the Florida market has been facing and explains that Demotech has been placed in a challenging position itself, as a result of the dysfunctional insurance market dynamic of the state.

“Many insurers, especially the smaller, monoline property carriers, face off in lopsided, almost rigged battles against a trial bar which has become monstrously sophisticated in its use of data technology and unduly influential in creating manipulated legislation,” Menzies explained.

Saying that, “This has placed Demotech, the primary rating agency for property insurers in the coastal regions, in a difficult position of having to report an inconvenient financial truth and has dragged it unwittingly into being a protagonist for an unlikely reform process in the Florida legislature and in other states.”

This “inconvenient financial truth” is that a number of carriers in Florida are just not as well-capitalised, or strong, as they need to be to sustain the ratings Demotech provides.

Something which has raised a backlash from Florida lawmakers, which has led to threatening moves to try and marginalise Demotech as well.

“Demotech as scorekeeper is not the problem in Florida, Louisiana, or elsewhere,” Menzies said. Explaining that, “It is the trial bar’s hegemony over state legislatures and the claims process in general, all leading to a now broken system with untenable economics.”

Menzies lays out the problems facing Florida’s insurance market very simply as:

  1. The limited availability of private market reinsurance protection avalable to insurers for hurricane risk.
  2. Quote, “An aggressive, legislatively enabled trial bar has “played” the laws and the legal system using incredibly unfair and unreasonable mechanisms for their exploitation, such as public adjusters and the assignment of benefits.”
  3. The fact retail insurance rates have been inadequate for years and carriers have been unable to raise them sufficiently to cover the issues created by losses and loss creep which has been driven higher by the litigation issues, which has been “mispricing the actual risks underwritten.”

Menzies noted that his carriers, Centauri Specialty Insurance Co. and Centauri National Insurance Co., which both write in coastal states including Florida and Louisiana, have had their ‘A’ (Exceptional) rating affirmed by Demotech.

“We are committed to sustaining our profitable position in the coastal states, including the Florida market, where we have managed to do better than the weather, including Hurricane Ida and other serious loss events,” Menzies said.

With Florida’s insurance market strains and stresses seemingly continuing to worsen, as rating downgrades and withdrawals have begun, Applied’s Centauri sister companies have been seeing strong demand from policyholders.

Leading Rick Espino, CEO of Centauri to say, “Agents are advised to submit renewals and policy applications as early as possible. We are meeting our quarterly new premium targets very quickly. As the marketplace suffers disruption and lack of availability, we find ourselves receiving a very large increase in submissions.

“While our business in Florida is mostly in the commercial BOP sector, having moved gradually away from the troubled homeowners market there, we nonetheless continue to grow our core homeowners business on the coasts and remain ready to serve our agents and their clients’ needs.”

Menzies comments are pointed, but also represent a widely-held view that Demotech has been in a very difficult position around these mid-year reinsurance renewals, with a special session that seemingly hasn’t delivered fast enough to change the fortunes of carriers that it now has to rate, when many are lacking reinsurance and surplus capital.

Whatever your view on one rating agency versus another, the current environment in Florida has made rating companies very difficult and it does seem Demotech has stuck to its guns and not caved to some of the quite strong opinions.

With the regulator having now arranged a back-stop type guarantee with Citizens, that should help some downgraded, but still viable, carriers to continue operating, it’s vital a view of the health of Florida’s insurance cohort is given, making rating agencies all the more important to the future health of that marketplace.

Read all of our news and analysis on the Florida insurance and reinsurance market.

Also read:

Florida Family insurance companies also downgraded by Demotech.

Demotech downgrades UPC, withdraws FedNat & Weston ratings, affirms others.

Senator Rubio calls for Florida Federal review of dependence on Demotech.

Demotech says Florida insurer ratings to take longer, defends its process.

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