U.S. Senator Marco Rubio (R-FL) has waded into Florida’s property insurance crisis, adding to calls for a Federal review of the states dependence on Demotech as a rating agency.
Senator Rubio has sent a letter to Federal Housing Finance Agency (FHFA) Administrator Sandra Thompson to add his support to call’s by the State of Florida for FHFA to review its dependence on Demotech in rating insurers in the state.
As we reported last week, CFO of the State of Florida, Jimmy Patronis, wrote to the Federal Housing Finance Agency and the leadership of Fannie and Freddie, callling Demotech a “rogue rating agency” asking the mortgage GSE’s to “consider your reliance on Demotech as the primary ratings agency for rating the strength of Florida’s domestic insurance market.”
Rubio said it is “deeply troubling that a single ratings agency could potentially undermine the financial well-being of millions of Floridians on the basis of a seemingly unaccountable decision-making process.”
“While understanding your duty to safeguard taxpayer dollars, I join the State of Florida in urging you to consider the particularities of this case, review and reassess your reliance on Demotech, and ensure that any action taken by the agency considers the impact on Floridians. I also request what steps the agency plans to take to ensure Floridians’ interests are protected in this process,” he added.
As we reported late yesterday, the state of Florida does appear to have found an alternative, although it is one which puts more catastrophe risk on the shoulders of its taxpayers.
The Florida Office of Insurance Regulation (OIR) announced a plan to launch a temporary reinsurance arrangement through Citizens Property Insurance Corporation, which is designed to support carriers with reinsurance “in the event of disruptive financial rating downgrades from Demotech, Inc.”
The new reinsurance facility that is supported by Citizens, although details of how are lacking, will help insurers meet an exception offered by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which would help to ensure Floridians can maintain coverage during hurricane season.
So Rubio’s letter was perhaps mistimed, as it was published the same day as the OIR’s new reinsurance facility announcement.
But Rubio really lays into Demotech, saying its ratings “appear to be dubiously based on the expectation of future policy change rather than current evidence.”
Rubio added that the Florida legislature has taken “several meaningful steps to strengthen the property insurance market” in recent months, referring to the special session property insurance reforms that were enacted.
“It is deeply troubling that a single ratings agency could potentially undermine the financial well-being of millions of Floridians on the basis of a seemingly unaccountable decision-making process,” he added, while again urging the FHFA to “review and reassess your reliance on Demotech,” ensuring it considers the “impact on Floridians.”
How to unpack all of this?
Well, what’s deeply troubling, to use Rubio’s words, is the fact no-one in Florida’s leadership or legislative appears to want to admit that the special session reforms may not have gone far enough, nor that they may need to do more.
While at the same time everyone commenting on this says they want to protect Floridians, but now with the new reinsurance arrangement from the OIR the Floridian taxpayer could be significantly more on the hook should a major hurricane strike the state this year.
While that was perhaps unavoidable, the fact no information has been provided about how this new reinsurance facility, backed by Citizens, will work, be underwritten, nor how much risk this might put on the Floridian taxpayer in the event of a major loss, such as a 1-in-100 year hurricane, is also troubling.
It does seem the Citizens backed solution could result in a significant burden on taxpayers, as Citizens own financial structure means a major storm can result in assessments being levied, both on its policyholders and any other private market policyholders (so taxpayers in general).
Right now we have no visibility of how much additional exposure is being ploughed into Citizens with this arrangement, whether Citizens might issue financial instruments to support that, or buy reinsurance or catastrophe bonds, or whether this additional Florida property risk is all going to go bare through the hurricane season.
Finally, how long should such a facility remain in place?
It does seem the goal of lawmakers may be to get the FHFA and GSE’s to accept a lower rating as adequate for property insurers to sell cover to owners of mortgaged properties, as there doesn’t seem any other way out than for an improvement in the market conditions and the capital adequacy of the more-challenged carriers.
As we’ve said before, lawmakers mustn’t lose sight of the longer-term and the need to get Florida’s property insurance market into a far better state of health and one that isn’t constantly teetering on the brink of crisis year after year.
It’s likely Demotech needs to be part of that solution and it would serve lawmakers well to try and understand a little more about how the rating process works and how thinly-capitalised some of Florida’s carriers actually are.