Florida seeks rating scapegoat for its property insurance problems

Lawmakers in Florida are pushing for a new rating agency, or alternative of some description, to come into the state and measure insurance carrier financial adequacy, with a proposal to hire a consultant to evaluate alternative options for providing ratings to insurers.

A Joint Legislative Budget Commission meeting in Florida this week is expected to consider a proposal to spend $1.5 million on consultancy that would evaluate options for property insurers to get adequate financial ratings, according to a report from Action News Jacksonville.

Of course this all relates to Demotech and Florida lawmakers and regulators dislike of its commentary on property insurers and the state’s property insurance marketplace.

Demotech, a rating agency and in many ways the scorekeeper of record for insurance carrier financial stability in the state of Florida,had warned numerous Florida property insurance carriers that they may have faced a ratings downgrade on July 26th, a move that resulted in a backlash from Florida’s state Insurance Commissioner and CFO.

Lawmakers and regulators were railing against the idea of property insurers losing their ability to write business in the state that would be accepted by mortgage Fannie Mae and Freddie Mac, lashing back at Demotech and calling its process and methodology into question.

Demotech’s rating process took a lot longer than expected this year due to the changing legislative environment, Florida’s attempts to stabilise the insurance space with additional reinsurance type facilities, and also the reinsurance market’s lack of appetite for risk in Florida that made it particularly challenging at the renewals and hindered some insurers from being able to secure a sufficient program in the usual timescales.

But, in the end, Demotech only downgraded one insurer and withdrew ratings for two others, with these carriers all seen as unsustainable and since having shuttered in some cases, perhaps justifying Demotech’s rating moves.

But the lawmaker and regulator backlash against the rating agency seems to be continuing, with this proposal for a consultant to study the rating environment and suggest alternatives that could help insurers retain adequate ratings.

The proposal comes from the Florida Department of Financial Services, which CFO of the state Jimmy Patronis, one of those that railed against Demotech, leads.

The proposal states, “Historically, Demotech, Inc., a private financial stability ratings organization, has been the only financial stability ratings organization willing to rate start-up 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.

“On July 20, 2022, the Department of Financial Services (DFS) and the Office of Insurance Regulation (OIR) learned that Demotech notified seventeen Florida-based property insurance companies of its intent to downgrade their financial stability ratings. When assessing the validity of Demotech’s stated concerns, OIR noticed several discrepancies between their recent rating decisions and the rating methodology posted on Demotech’s website. Ultimately, Demotech only downgraded one company and withdrew the ratings of two others at the time of this amendment.

“Demotech’s business practices appear to have caused confusion and concern for Floridians regarding the Florida insurance market. 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.”

Also explaining that, “The Department of Financial Services is requesting an additional appropriation of $1,500,000 in the Contracted Services category from the Insurance Regulatory Trust Fund to competitively procure consultant services as authorized in s. 287.057, Florida Statutes, to explore alternative methods and develop options for admitted property insurance companies to acquire a financial rating satisfactory to federal mortgage standards.”

The Governor has recommended the work be undertaken and it seems this is likely to pass at the upcoming hearing on September 9th.

The proposal reads as if all that is required to solve the dysfunction of Florida’s property insurance market, in the view of lawmakers, is to install a different rating provider.

The proposal fails to discuss the potential need for more legislative reform, or for additional measures to crackdown on the rampant property claims fraud that continues to plague Florida’s insurance market.

It’s perhaps telling about how Florida has ended up where it has, in terms of insurance market dysfunction and the resulting reduced appetite of the reinsurance and capital market to take on risks from the state, if this is the first focus of lawmakers in the wake of perhaps the most challenging Florida renewal season ever (for its insurers).

Artemis spoke to Demotech’s President Joe Petrelli to get his views on this proposal.

“Evidently the Florida legislature believes that the challenges facing the residential property insurance and personal injury protection are due to the ratings assigned to carriers which are based, in large part, upon carrier operating result,” he explained.

Adding that, “They do not accept the premise that the root cause is public and legislative policy.”

Petrelli continued, “I respectfully suggest that denial of this magnitude will not assuage the concerns of the reinsurance community and might exacerbate reinsurer concerns.

“Reinsurance is the most critical component of the business models of carriers writing residential property insurance, absent a vibrant, re-invigorated reinsurance community to sustain a viable marketplace in Florida, the cost of reinsurance, cost and frequency of claims are likely to continue to rise.”

It’s true, the reinsurance market will not be given confidence if lawmakers sole focus is to help insurers get an adequate rating, to stop them failing or becoming ineligible for writing policies for mortgaged properties.

It doesn’t instil confidence that the serious issues Florida’s property insurance market has faced are going to get dealt with in legislative sessions in 2023, or beyond.

Helping insurers to retain their ratings is not the answer. Fixing the problems that have depleted capital and surplus so badly and therefore driven rating downgrades and capitalisation challenges would go much further towards restoring the sustainability of Florida’s carrier marketplace.

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