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Demotech’s downgrades and what they could mean for the Florida property insurance market

By on August 25, 2022 0

The summer of 2022 has been marked by uncertainty for millions of homeowners in Florida. Rampant fraud, excessive litigation and a deteriorating climate have sent the property insurance market in Florida into a tailspin. With news that 27 of Florida’s property insurance companies could face financial rating downgrades, Florida homeowners brace for the possibility of a rush for new coverage amid what scientists predict be an active hurricane season.

The Florida Legislature held a special session in May to address issues in Florida’s property insurance market and as a result passed the Senate’s 2D bill. While the bill’s provisions are promising, Florida homeowners face another potential new hurdle, as financial ratings firm Demotech announced in late July that it would likely downgrade the financial ratings of 27 insurance companies. Florida owners.

Bankrate has been investigating what these downgrades to financial ratings mean for Florida homeowners so they can better prepare for the uncertain future that may await them.

key ideas

  • 27 property insurers in Florida are facing a possible downgrading of the financial rating of the company Demotech.
  • If your mortgage is underwritten by Freddie Mac or Fannie Mae, your home insurance company cannot be rated below an A, or you risk forced insurance.
  • Florida announced an interim solution of providing reinsurance through state-backed citizens to meet the demands of Freddie Mac and Fannie Mae.
  • Bankrate spoke with Demotech President Joe Petrelli, who said the downgrade information was released prematurely and the referenced letters were actually preliminary in nature.

What is a financial rating downgrade?

Financial analysis and rating agencies like AM Best, Standard & Poor’s (S&P) and Demotech assign ratings to insurers based on their financial strength, called financial ratings or financial stability ratings (FSR). An insurance company’s FSR indicates its historical ability to pay covered claims.

While it’s essential that an insurance company can pay claims when needed, your insurance company’s financial rating can also affect your mortgage. If your mortgage is federally backed by Freddie Mac or Fannie Mae and your insurance company is rated by Demotech, that company must have an FSR of A or higher. Otherwise, you run the risk of forced insurance.

Which property insurance companies in Florida are downgraded?

Because this process is confidential, it is impossible to know which companies are involved until the downgrade is official. As it stands, Demotech could downgrade the FSR of 27 property insurance companies in Florida.

On August 1, 2022, Demotech downgraded the FSR for United Property and Casualty Insurance (UPC) from A to M. Demotech signaled that it would remove the FSR from UPC and, in response, UPC removed its Florida business, from Texas and Louisiana in August. 25, 2022. The UPC said it also plans to pull out of New York.

Additionally, Demotech removed FSRs for Weston Property Insurance and FedNat. Weston Property Insurance then declared insolvency on August 4, 2022. Often a rating withdrawal can be the first step towards bankruptcy.

Bankers Specialty Insurance and First Community Insurance (which shares parent Bankers Insurance Group) had their ratings withdrawn on August 3, 2022. Like UPC, Bankers Insurance Group later withdrew its Florida business.

What do we do to deal with rating downgrades?

As a stopgap measure, Florida’s Office of Insurance Regulation (OIR) announced that state-backed Citizens would provide reinsurance to businesses impacted by Demotech’s downgrades. Essentially, the OIR uses citizens to insure downgraded businesses if they do not have enough funds to pay covered claims. According to the OIR, this reinsurance plan should relieve owners by meeting the insurance requirements of Freddie Mac and Fannie Mae.

Whether citizens can handle the added pressure remains to be seen. Since many insurers issue non-renewals (or flee the state altogether), Citizens is the only option for many homeowners. In 2021, Citizens saw a 37.7% increase in new business and had nearly one million policyholders in July 2022.

This influx of new business and the added responsibility of providing a financial stopgap for downgraded insurers could prove problematic for citizens.

Mark Friedlander, director of corporate communications for the Insurance Information Institute (Triple-I), says:

Citizens is financially sound, but its reserves seem insufficient to deal with significant storm activity. As of July 15, Citizens had $311 billion in exposure, but only had the ability to pay about $11.3 billion in claims.

If the 2022 hurricane season turns out to be as bad as many climate scientists predict, Florida citizens and homeowners could face unprecedented hardship.

How will the citizens palliative affect Florida premiums?

Citizens is a non-profit insurance company established by the State of Florida in 2002. State law allows Citizens to obtain funding through policyholder premiums and, in certain circumstances, a statewide assessment.

Florida law requires citizens to impose a charge on most Florida homeowners’ policies if they experience a loss due to a catastrophe, whether or not the citizens own the policy. This assessment is sometimes referred to as the “hurricane tax” and can be levied on all auto, condo, tenant, and homeowner policies in Florida. For Citizen customers, these fees are capped at 15% per policy. For policyholders elsewhere, the charge can be up to 2% of your total premium.

If citizens find themselves in deficit after paying out payouts to downgraded businesses, it’s possible that nearly every Florida resident with insurance will pay a higher premium to help replenish the company’s loss reserves.

Demotech responds to criticism

On July 21, 2022, Florida Insurance Commissioner David Altmaier sent a letter to Demotech asking if the company applied its methodologies fairly and consistently.

Bankrate had the opportunity to correspond with the president of Demotech, Joe Petrelli. In response to Altmaier, Petrelli says,

Recently, there have been unfair reviews of Demotech based on incomplete, premature, or misleading information about our rating process.

Petrelli also takes issue with the depiction of the demotion process. He went on to say,

“These characterizations were an inaccurate description of our published process and scoring methodology, primarily because they portrayed draft letters as if they were final, when our process – the same comprehensive process we’ve been using for years – involves ongoing review of relevant data.

The rating process is an ongoing effort that takes into account a variety of internal and external considerations. Demotech uses a variety of factors to develop ratings assessments, including the following company information: quantity and quality of reinsurance; liquidity of assets; degree of leverage (liability versus equity and premium); ability to correctly estimate and provision claims; and the operating environment (regulations, litigation, weather, etc.).

We continue to review data from insurers even after preliminary letters have been sent, and this ongoing process sometimes results in a different rating action than originally reported.

What happens if your home insurance company is downgraded?

If your home insurance company is downgraded, they are legally required to give you 30 days notice. If you receive a demotion letter in the mail, here’s what you need to know:

At this time, no action is required

If Demotech downgrades your home insurance company, you don’t have to do anything at this time. OIR says Citizens Insurance palliative will meet mortgage requirements.

You can buy new home insurance

If your home insurance company is downgraded, you can try shopping for new home insurance in Florida. Be aware, however, that the property insurance market in Florida is tough and it can be difficult to find an insurance company willing to take on new business.

Additionally, since Demotech does not announce downgrades until they occur, it is possible to go from a downgraded company to one marked for downgrade in the future. In other words, there is no guarantee that you will be in a better position if you change.

What to do if you can’t find insurance

As noted, you shouldn’t have to buy new insurance if Demotech downgrades your current business. However, many Floridians also receive non-renewal notices from their property insurance companies. If you are not renewed, you must obtain new coverage before your non-renewal date. Failure to do so will result in forfeiture of coverage and possible consequences from your mortgage company.

If you are having difficulty finding a property insurance company in Florida that will offer you a policy, you may want to consider Citizens. Citizens is not a do-it-all company, which means they can opt out of coverage. Yet they have a history of writing policies for many Floridians that other companies have rejected.

The bottom line

The Florida home insurance market continues to hover, as evidenced by Demotech’s credit rating downgrades. Initially, it was unclear how these downgrades would affect Florida homeowners, but for now, an interim measure through state-run Citizens has been imposed. If you are insured with a downgraded company, you should not have to take out new insurance (provided the company is still solvent).

In reality, this interim measure is unlikely to be the end of Florida’s home insurance crisis in 2022. Mark Friedlander went on to say:

Compared to the turbulent markets of the past, caused by property damage caused by hurricanes, the current crisis is entirely man-made: the result of rampant roof replacement fraud schemes and excessive litigation against insurers. It is not the result of catastrophic weather events.

Until the state passes effective legislation to address the core issues — fraud and frivolous litigation — Floridians will continue to pay the price.