State considers shift in property insurer financial ratings; Demotech argues consistency is important

by | Sep 3, 2022

  • State leaders are looking at new options to stop a meltdown of Florida’s property insurance market
  • Downgraded financial ratings of 17 insurers are at the heart of the problem – financially sound insurers are necessary to meet federal mortgage requirements
  • State officials are examining a proposal that could help insurers qualify for adequate financial ratings
  • Demotech, the company behind the ratings, pushed back, saying they have consistently applied financial standards since 1996

TALLAHASSEE — Angry at a ratings agency that raised the possibility of downgrading 17 Florida property insurers, state leaders could be poised to look for an alternative.

The Joint Legislative Budget Commission next week is expected to consider a proposal to spend $1.5 million to hire a consultant that would look at options for property insurers to get adequate financial ratings.

Such ratings are important, in part, because mortgage-industry giants Fannie Mae and Freddie Mac require homes to be insured by financially sound companies. If insurers lose satisfactory ratings, homeowners could be forced to find other coverage.

State insurance regulators scrambled in July after they said the Demotech ratings agency threatened to downgrade 17 insurers amid widespread financial problems in the property-insurance market. Demotech ultimately downgraded one company and withdrew ratings for two companies, according to the proposal going before the legislative panel next week.

Insurance Commissioner David Altmaier and state Chief Financial Officer Jimmy Patronis publicly questioned Demotech, with Patronis sharply criticizing the agency in letters to leaders of Fannie Mae, Freddie Mac and the Federal Housing Finance Agency.

“If (Fannie Mae and Freddie Mac) de-authorized a sizeable percentage of Florida’s insurers based on the dubious ratings of one company, it would create financial chaos for millions of Floridians,” Patronis wrote.

The Department of Financial Services, which Patronis heads, submitted the $1.5 million proposal to the Joint Legislative Budget Commission, which will meet Sept. 9 and has power to make mid-year budget decisions. The results of the consultant’s work would go to Gov. Ron DeSantis and lawmakers for possible consideration during the 2023 legislative session.

“Demotech’s business practices appear to have caused confusion and concern for Floridians regarding the Florida insurance market,” the proposal said. “Due to the concern of the methodologies used by Demotech and the impact that questionable downgrades will have on millions of Floridians, immediate action is required. The spending authority provided in this budget amendment will allow key stakeholders to research and explore more predictable and reliable financial rating services or alternative solutions.”

Demotech President Joseph Petrelli in July defended the company’s methods and said the company has rated Florida insurers since 1996.

“Demotech has worked diligently to be a positive force in the resurrection and sustenance of the Florida residential property insurance marketplace that was devastated by Hurricane Andrew,” Petrelli wrote in a six-page letter to Altmaier, referring to the massive 1992 hurricane. “Since 1996, Demotech has consistently applied its rating methodology and appeal process to all rated insurers. Our process does not guarantee every carrier’s financial success, nor does our process guarantee carriers an FSR (financial stability rating) at a level that they desire or require.”

The ratings issue has come at a turbulent time in Florida’s property-insurance market, as carriers have shed policies and sought large rate increases because of financial losses. Five insurers have been deemed insolvent since February and a large carrier, United Property & Casualty Insurance Co., announced last month it is exiting the homeowners’ market.

United Property & Casualty was one of the 17 companies targeted by Demotech, which downgraded and then withdrew the company’s rating.

After the initial downgrade of United Property & Casualty, the state Office of Insurance Regulation on Aug. 2 put the company into a new stopgap program aimed at making sure coverage would continue for homeowners.

The program involves the state-backed Citizens Property Insurance Corp. acting as a financial backstop for private insurers that get downgraded. Citizens took on a reinsurance role to help make sure claims get paid if insurers go insolvent.

The program is designed to satisfy Fannie Mae and Freddie Mac in such situations. It uses an exception in Fannie Mae and Freddie Mac standards that applies when reinsurers take responsibility for paying claims if insurers go belly up.


  1. Deborah Coffey

    How Republican is this? We don’t like the ratings of Demotech so we’ll fire that company and find one that will make all these companies “appear” financially sound! We don’t like the outcome of the 2020 election, so we’ll hang Mike Pence, take over the Capitol and impeach Joe Biden! We get it.

    • Bruce S

      True! Rather than meaningfully address the significant capitalization deficiencies faced by insurers in the FL marketplace, the GOP elected officials in exec and legislative branches have so far chosen to go cheap (see Special Session) and dirty, attacking the ratings company instead of addressing the real issues.

      • DK

        It makes me wonder if my business begins to fail, will the Tallahassee lawmakers bail it out too? On one hand, if a student takes out a student loan, and struggles to repay it based on economic conditions, that is prohibited socialism, but if insurance companies cannot manage their investments, pay the ceo gazillions for crummy management, the company sinks, and that bail-out is not socialism; not to be out done by the farm bail-out (bit I don’t own a farm), the wall street banks bailout (I do not own a wall street bank), then there was the Fannie Mae and Freddie Mac bailout, and the millions who did not own a home paid to bail those out too, and did anyone forget the medicare fraud committed by our US senator while he was CEO of HCA? It seems okay for the government to bailout billion dollar corporations and let the perps get away with it, but if it comes to helping-out the people, that somehow is a pariah.

  2. dmmorrison

    And Republicans still don’t believe in climate change?

  3. Michael McFadden

    Has the State of Florida looked at AM Best as an alternative rating agency?

    • Bruce S

      The question is whether ANY ratings agency is going to come up with different results than Demotech. It seems doubtful since capitalization for catastrophic loss through reinsurance is the problem in these cases. One would have to reduce the risk exposure to make the numbers work, i.e. shrink the exposure, which seems absurd since one substantial hurricane could produce massive claims in multiple billions. Had the GOP Legislature in its Special Session (or, heaven forbid, in its regular session) listened to the industry and created a $4 billion (or more) reinsurance support fund instead of going cheap with just $2 billion – when they are flush with extra money BTW! – it might have averted much of this part of the prop insurance problem. But cheap and dirty is the way they have chosen to the detriment of every insurance company and their policyholders. I’m sure they have taking orders from their leader here in DeSantistan as with everything else.

    • M1ster Sp0ck

      AM Best is far more stringent than Demotech in its ratings methodology. Most of these companies would not receive anything better than a B rating from AM Best. That’s why Demotech exists in the first place. That is not to say Demotech’s ratings are invalid or useless. In fact, their ratings may be more objective than AM Best, which uses a number of highly subjective criteria in its methodology. Either way, blaming the ratings agency for the horrible legal environment in Florida is disingenuous at best. As long as crooked lawyers and contractors rule the roost in Florida, this collapse of the market will continue.

    • M1ster Sp0ck

      Also, the State does not choose the rating agency. Each company chooses to become rated and by which agency or agencies. Any of these companies could look to AM Best for a rating. They just wouldn’t get the rating they need. The State has nothing to do with it.

      Now, if Vulcans gambled, I’d bet the State will cobble together some sort of bogus state-run “rating agency” that will give all these companies an “A” rating to try to put lipstick on the pig rather than actually fixing the problem. The rating would be completely meaningless but if they could get mortgage lenders to accept it, that’s all they’d care about. Then we can all watch the dominoes fall after the next hurricane.

      • Bruce S

        That does sound like something the King & FL Legislature would try (see OSHA alternative, for example), however that self-designed FL ratings agency would surely get dissed by mortgage companies who are not going to accept it. They’d get left holding the bag if an insurer couldn’t pay on claims. Nope, that ploy won’t work.

    • Jackie Bruster

      A.M. Best would not give most of them a very good rating. Many (most) of them are poorly capitalized.

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