Responding to public officers who’ve lashed out on the state’s largest householders insurance rankings company over its threats to downgrade greater than a dozen property insurers, a bipartisan group of Florida lawmakers final month supported spending up to $1.5 million to analysis their choices.
Yet some within the insurance business doubt the expenditure will efficiently sort out the disaster inside the non-public home insurance market, with one professional going so far as to name the ask “a great misuse of taxpayers’ money.”
“We have talked to several executives at other ratings agencies,” stated Mark Friedlander, spokesperson for the Insurance Information Institute. “They have told us that most Florida domestic insurers either don’t meet their criteria, or if they did, they won’t qualify for an A-rating from their agency.”
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Friedlander declined to establish the executives, or the companies they work for. But the business skepticism preceded the Sept. 23 announcement that one more property-insurance firm has been declared bancrupt.
State to spend $1.5M on marketing consultant as property insurance disaster deepens
The state Department of Financial Services (DFS) requested lawmakers in early September for up to $1.5 million to rent a marketing consultant who may discover alternate options to Demotech. The Ohio-based company has a decades-long historical past in Florida, however state officers might discover making a public rankings company.
The precursor to this monetary ask was scathing letters fired off in September by the heads of the DFS and Office of Insurance Regulation, or OIR, each state entities tasked with regulating and managing Florida’s insurance market.
Almost two months earlier, in July, DFS and OIR realized that Demotech was wanting to downgrade the rankings of “approximately 17” householders insurers in Florida.
Demotech President Joseph Petrelli, later clarified that this quantity was really 27 corporations. Florida Chief Financial Officer Jimmy Patronis known as Demotech “rogue” in response.
The ominous rankings downgrades did not find yourself taking place, however Demotech did finally revoke the rankings of two insurers and downgraded the score of one other one. Yet the state’s sophisticated and complicated insurance disaster proved to be a troublesome problem to find a fast and easy resolution to the widespread coverage cancellations and insurer insolvencies which were irritating shoppers.
So far this yr, six insurance corporations have been declared bancrupt, with the newest, FedNat Insurance Co., taking place simply days earlier than Hurricane Ian made landfall on the state’s southwest coast, placing additional pressure on an already burdened market. As non-public insurers shed insurance policies, Citizens Property Insurance Corp. — the state’s insurer of final resort — has picked up the slack to attain greater than 1 million insurance policies in August.
“I think when you see something that requires multiple levers to pull, multiple players to do things, that’s when it gets a little bit more complex,” stated Gerry Glombicki, senior director at Fitch Ratings. “Because at the end of the day, what a homeowner wants is an affordable insurance policy from a company that has the financial strength to be around to pay the claim.”
Averting a disaster: Insurance firm rankings matter… Are rankings required?
Florida doesn’t require insurance corporations to get monetary rankings, however entities within the federally backed secondary mortgage market do.
The secondary market is vital within the monetary system. It is the place traders and lenders purchase and promote home loans and typically the servicing rights.
That permits mortgage lenders to write extra business, permitting folks to purchase properties, in addition to for present householders to purchase and promote their properties. Fannie Mae and Freddie Mac dominate this house, the 2 greatest federal home mortgage underwriters, holding 62% of mortgages in 2020.
Why do monetary rankings matter? Property insurance is a must have for mortgages. If an insurance firm has its monetary stability score lowered, Fannie Mae or Freddie Mac might not settle for a coverage on a mortgaged property from that insurer.
In this occasion, that firm’s clients would haven’t any alternative however to go search a coverage from one other firm or their lender might power them right into a coverage. In both case, the brand new coverage may value extra, or present much less protection.
Worst case is it may delay or jeopardize the closing of a property’s buy, or put a property in foreclosures.
Getting a decrease monetary score may imply that an insurance firm can now not get new business, or is put into insolvency and goes stomach up.
“All those mortgages are required to have an insurance company that’s rated by a rating agency at a certain threshold,” stated Paul Handerhan, president of the Federal Association for Insurance Reform (FAIR).
But in Florida, Handerhan stated, the state OIR can also be doing these monetary well being opinions.
“It’s kind of duplicative,” he stated. “They’re saying, ‘Listen, do we have to be so dependent on a third party private rating agency? We’re already doing the work ourselves.’”
Is the issue Demotech’s rankings, or that Florida insurers are weak?
But Friedlander calls this probably $1.5-million plan a waste, and he’s hard-pressed to consider one other company that may do the job Demotech does.
“They (critics) are upset that Demotech is doing its job,” Friedlander stated. “They use the same process no matter where or what company it is.”
Demotech’s Petrelli defended his firm’s work, and position, within the monetary meals chain.
“Ratings provided by Demotech are based on detailed financial data, not the preference of insurers, public officials, or Demotech itself. This is how Demotech has always conducted its business, and how it will continue to do so wherever its ratings expertise is utilized,” Petrelli stated in an announcement.
There are different rankings businesses on the market — resembling Fitch, Moody’s, A.M. Best, to identify a couple of — however these require insurance corporations to have sufficient capital to obtain these rankings, Friedlander stated. Getting decrease rankings will “add fuel to the fire on the home insurance crisis we’re facing today,” he warned.
Fitch Ratings’ Gerry Glombicki famous that his company wouldn’t give some Florida insurers above a triple-B score.
Fitch doesn’t charge any Florida-only householders insurance provider, Glombicki stated, but when it did, “they would be below investment-grade ratings,” that means “in double-B land or lower.”
That suggests a notion that Florida-specific insurers are weaker financially, a view seemingly being confirmed by the variety of insolvencies this yr alone.
Demotech dates again to post-Hurricane Andrew period
Demotech emerged in Florida in 1996, 4 years after Hurricane Andrew laid waste to swaths of southern Miami-Dade County. At the time, 1992 was the worst yr for the insurance business, with Andrew inflicting $18 billion in insured harm alone. The nationwide corporations that when did business in Florida, manufacturers resembling State Farm and Allstate, determined to shed their threat and stopped writing new insurance policies within the Sunshine State. The disaster reached some extent the place lawmakers even handed a six-month moratorium on insurers dropping clients.
Smaller insurers with much less capital stuffed the void, however due to their restricted measurement they could not get a score from the better-known rankings businesses. In addition, the smaller corporations relied on reinsurance — insurance insurance policies they obtained from business giants to shore up no matter capital they wanted.
“These smaller domestic companies are very dependent upon reinsurance to make up that difference in cash,” Handerhan stated, referring to an insurance company’s personal insurance coverage to guarantee it might pay claims when catastrophe strikes. “If you’re a national insurance company that’s been in business for hundreds of years, your dependency on reinsurance is not as great as a company that’s focusing solely on the Florida market, which is very challenging.”
That’s the place Demotech got here in. The rankings company did the painstaking work to analyze these smaller companies, and convey a measure of confidence, credibility and reassurance to the market.
The state DFS famous this of their finances request, saying Demotech “has been the only financial stability ratings organization willing to rate startup insurance companies and insurance companies with less than five years of historical operating experience in the state of Florida. Therefore, these insurance companies have limited options for obtaining ratings from an entity other than Demotech.”
Glombicki famous that insurance corporations of this measurement solely having one score company to go to may trigger frustration for the businesses in addition to regulators attempting to navigate unsure waters of the present market.
“Any time you have just one single point of failure … whatever their actions become, then that can have an ever more outsized effect on that economy,” he stated.
Are secondary mortgage lenders calling the photographs?
Handerhan doesn’t suppose it’s essentially the fault of insurance corporations or Demotech, however of Fannie Mae and Freddie Mac.
“They could have addressed this issue years ago,” he stated.
Handerhan stated a rankings company known as Kroll has its second-highest score, a triple-B — related to Demotech’s S score — accepted by Fannie Mae however not Freddie Mac.
Neither entity accepts Demotech’s second highest score, an S.
“That also creates problems because if you’re an agent, you’re trying to place business. There’s this confusion on whether this triple-B rating is good or not because it’s only recognized by one (entity) and not the other,” Handerhan stated.
Fannie Mae and Freddie Mac solely settle for A rankings from Demotech. An A score implies that the corporate has a 97% confidence degree that it might pay obligations if a 1-in-100-year storm hits. But Demotech’s second-highest degree, an S score, interprets to a 95% confidence degree.
Therein lies the issue, Handerhan stated.
“You’re having otherwise healthy companies potentially going into receivership, not being able to get reinsurance because they’re being viewed as a credit risk, not because of their financial situation, but the fact that the loan servicing industry or secondary mortgage market hasn’t established the recognition of these ratings yet,” Handerhan stated.
Getting Fannie Mae and Freddie Mac to settle for extra rankings hasn’t been a precedence till now, Handerhan stated. He equated it to “dealing with an issue after the horses ran out of the barn.”
“Think about policyholders in the state of Florida, potentially struggling from the COVID response, struggling from inflation, a lot of different economic stressors and then getting hit with that,” he said. “And once they force-place that policy, it just gets added to your mortgage payment. So if you’re on a fixed income, and you can’t afford to pay that mortgage, what happens? They could actually start moving in the foreclosure proceedings.”
Another query is whether or not third-party rankings businesses are wanted when the OIR typically seems to be on the monetary well being of those corporations.
But, then once more, it goes again to whether or not Fannie Mae or Freddie Mac will settle for the rankings from the state or a brand new public rankings company.
“If they don’t recognize it as acceptable, we’re back to the same problem,” Handerhan stated. “It’s not as easy as just the state saying, ‘Hey, we want to start our own rating agency.’”
Hannah Morse covers client points for The Palm Beach Post. Drop a line at [email protected], name 561-820-4833 or comply with her on Twitter @mannahhorse.
