Rating agency Demotech has warned an additional 17 Florida property insurance carriers that they may have their ratings downgraded on July 26th, a move that has resulted in a backlash from Florida’s state Insurance Commissioner and CFO.
Demotech sent a letter to some 17 Florida insurers on Tuesday, telling them they are unlikely to retain their all important A ratings.
Demotech said that their A ratings were likely to be downgraded on July 26th, and that the insurers are likely to be downgraded to S (substantial), or M (moderate).
A substantial or moderate rating would be insufficient for the Florida property insurers to write business in the secondary mortgage marketplace, and with a rating below ‘A’, mortgage guarantors Fannie Mae and Freddie Mac won’t accept their policies any more.
Which could throw the Florida property insurance marketplace into a new level of turmoil, with downgraded insurers finding it hard to survive and the potential for hundreds of thousands of additional policyholders to find themselves insured with Citizens, the insurer of last resort, or having to look for new policies.
Demotech asserts that the 17 insurers do not meet the requirements to sustain an ‘A’ financial strength rating, hence the need to downgrade them.
The Florida Insurance Commissioner David Altmaier has fought back vociferously, accusing Demotech of discrepencies in its process and of not giving the recently enacted special session reforms a chance.
He challenged Demotech to prove the downgrades are being fairly made and also questioned why more time for a right of reply or response wasn’t being given.
However, when it comes to time, these ratings are already significantly delayed and property insurers in Florida have had weeks to ensure their reinsurance is arranged and that their capital levels are sufficient to sustain ratings.
There was always a chance some wouldn’t make it, it seems the backlash from the state has been triggered by a realisation of the scale of the systemic problems Florida’s property insurance market faces.
Consider the fact that while Demotech rated these carriers, other rating agencies such as AM Best aren’t so active in the state. While they do rate a number carriers there, sources and market commentary has always suggested that many of the challenged players in Florida would not be able to achieve a sufficient rating under the AM Best methodologies.
So, the state has had ample notice of the thin ice the Florida insurance carriers have been skating, ice that has become increasingly thin over recent years and has in some cases cracked under the weight of higher reinsurance pricing.
On the reforms, which Demotech has always said were insufficient, a view widely held by many in the industry, how much time should be given for them to take effect?
The latest reports from CaseGlide show that Florida’s P&C insurers continue to experience high-levels of litigation, including assignment of benefits (AOB) and the run-rate suggests this won’t tail off particularly quickly.
Should a rating agency allow carriers to continue writing business and servicing customers if they are thinly capitalised, not meeting its rating requirements and still facing a burden of litigious claims?
Florida Insurance Commissioner Altmaier does not mince his words in the letter to Demotech, saying, “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.”
He also questions why this talk of rating actions comes nearly two months into hurricane season. But, of course, Demotech would have liked to have completed its rating reviews long ago, but the legislative work in Florida and the challenges insurers have been facing at the reinsurance renewals, all served to drag out the process.
The real question that needs asking is who is capital adequate and financially strong enough to survive over the long-term.
It shouldn’t just be a case of trying to get insurers through another hurricane season, when a single storm could wipe out the thinly-capitalised.
Imagine a scenario where a significant hurricane hits Florida, exhausting all the carriers reinsurance and driving failures, while others would struggle to recapitalise or rebuild reinsurance towers. That could be catastrophic for the states homeowners and is exactly the scenario a financial rating process tries to prevent occurring, by testing carriers and ensuring the public know how strong they are financially.
CFO of the State of Florida, Jimmy Patronis, also has strong views, which he shared with the Federal Housing Finance Agency and the leadership of Fannie and Freddie.
He calls Demotech a “rogue rating agency” saying that the GSE’s have inadvertently empowered it.
He asks the GSE’s to “consider your reliance on Demotech as the primary ratings agency for rating the strength of Florida’s domestic insurance market.”
Asking for the GSE’s to give time for Florida’s leadership to find an alternative ratings body.
The question is, what would another rating agency do?
As said above, we understand that many carriers in Florida could fail to get the necessary ratings they might need under an AM Best assessment and we imagine that might be the same were other agencies to look into their financial strength.
Demotech has spent years gaining an understanding of the Florida property insurance market and any agency that came in and concluded these carriers ratings were adequate might be risking significant reputational damage.
The industry has come to trust Demotech’s view on carriers and if anything some might say it’s been a little too lenient over the years and more insurers should maybe have failed, not any less.
Patronis also warns that should these 17 insurers lose their ratings and face failure or losing policyholders, it could create “financial chaos for millions of Floridians” and also expose over one hundred thousand agents to litigation risks as well.
Realistically though, Demotech is not going to be the cause of financial chaos.
It’s downgrading of 17 insurers might trigger chaos, but that crisis has been in the making for years.
In reality, the blame for any chaos that occurs should stand firmly at the feet of those that have repeatedly failed to support measures to properly reform the Florida insurance marketplace and wipe out litigation there.
Quite what happens next is anyone’s guess. Demotech will have a right of reply to the letters from the Insurance Commissioner and Florida’s CFO, but it seems unlikely it will change its rating approach just to help weak insurers continue to do business, that’s not its job.
It looks like Florida’s property insurance crisis may be worsening, before it gets any better and we’ll update you as and when any further information emerges.
As an aside, it’s also interesting to note that the Florida Office of Insurance Regulation (FLOIR), so the Commissioner’s home, said in a report this week that it has placed some 27 insurers in Florida under enhanced monitoring, suggesting the number of insurers considered at-risk may be even higher than the 17 Demotech warned may be downgraded.