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Florida committee approves $1.5 million in taxpayer money to research homeowners insurance rating agencies

Insurance industry experts said it's a waste of taxpayer money for a solution that will only worsen property insurance problems in Florida.
Homeowners insurance
Posted at 6:01 AM, Sep 22, 2022
and last updated 2022-09-22 17:51:37-04

TAMPA, Fla. — The latest controversy with Florida’s property insurance market comes after legislators approved $1.5 million of taxpayer money for the Department of Financial Services and Office of Insurance Regulation to research alternative ways to financially rate insurance companies.

“If they're willing to spend $1.5 million of taxpayers' money to find out if there's other rating agencies, global rating agencies in the marketplace that are interested in rating companies in Florida, all they had to do is pick up the phone and talk to AM Best,” Managing Director of Strategy and Communications at Global Credit Rating Agency AM Best Jeff Mango told ABC Action News.

On Sept. 9, Florida's Legislative Budget Commission approved the request for $1.5 million dollars from the Insurance Regulatory Trust Fund, which DFS said would “allow key stakeholders to research and explore more predictable and reliable financial rating services or alternative solutions.”

Their concern is homeowners with mortgages defaulting on their loans if their insurance company’s financial stability rating is downgraded by Demotech.

In August, Demotech withdrew ratings for two property insurance companies: Weston and United Property and Casualty Insurance (UPC). Weston then went into receivership and liquidation. UPC is in a runoff as it plans to pull out of Florida and several other states.

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In the funding request, DFS stated, “Demotech, Inc. 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.”
But AM Best told ABC Action News that that’s not true.

“There's a misconception in the marketplace and the media that AM Best has left the market. We haven’t," Mango explained. "We continue to rate companies down there. We have 14 ratings, domicile Florida insurance carriers."

Another statement in the request referring to Demotech’s downgrades stated, “Downgrades are also a leading cause of insolvencies among insurance companies since agents may be obligated to move their customers out of a company that has been downgraded.”

Homeowners insurance

We went to the Insurance Information Institute to ask them about this statement.

“Is the downgrade what is making these companies go into insolvency, or are these downgrades because they're financially unstable as it is?” In-depth reporter Stassy Olmos asked.

“We recently learned that 27 Florida domestic insurers are on the watch list of Florida's insurance regulator. What that means is, they have financial issues that are of concern to Florida's insurance regulator,” Insurance Information Institute spokesperson Mark Friedlander said.

“The fact that we have so many companies on a watch list, in fact, more than we've ever seen in the past, is a major red flag showing how unstable Florida insurers are,” he added.

Friedlander said companies with an 'A' rating from Demotech should be grateful.

"We have talked to executives at some of the other rating firms and they have told us, very emphatically, that companies in Florida are undercapitalized and most would not qualify for an 'A' rating with their firm," he said.

We asked Demotech for a response to the state's new efforts.

President Joe Petrelli said in a statement that it’s “an unnecessary response to a problem that does not exist. The reality is that when Hurricane Andrew devastated the state nearly 30 years ago, the rating agencies involved in Florida chose to step away – but Demotech stepped up."

“A research effort on rating alternatives could be accomplished at no cost to the taxpayers by reviewing existing Freddie Mac and Fannie Mae sellers or servicer guides," he also said.

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A look at the Fannie Mae loan website shows there are four agencies they’ll accept ratings from — one is AM Best. While an 'A' is required from Demotech, the loan providers will accept a B from AM Best.

We asked AM Best why more companies wouldn’t want to be rated by their agency.

“They may not either think they could potentially get the rating they want, or they just don't want to approach us because there's an easier path to go to with other rating agencies,” Mango answered.

Mango said an agency’s default statistics speak volumes. A company defaults on its rating when they have had one or more formal regulatory actions against them.

“We have ‘A’ ratings and ‘A-’ ratings on a 10-year default basis, those companies have only defaulted 0.1% and 0.6%. And that compares extremely favorable against other local agencies in the market,” Mango said.

We looked up Demotech’s default ratings.

Their three 'A' levels are as follows:

  • A” default is at 2.3%
  • A’ default is at 8.0%
  • A default is at 9.1%

Insurance experts have expressed concern with Demotech’s ‘A’ ratings dropping straight to withdrawals or ‘NR’ - no rating, without first downgrading to their other two levels at ‘M’ - moderate, or ‘S’ - substantial.

While Friedlander said Demotech has a much different rating methodology than global rating agencies with a wider scale of ratings, he added, “Switching firms actually would make the crisis worse here in Florida because all of these insurers would then be downgraded.”

There’s also concern that the state may be using the $1.5 million to figure out how they can rate companies internally. Friedlander said this method is unheard of.

“We've never seen any other state have an internal rating process for insurers. The integrity of your insurance company is so important, and that's why you need a third-party analysis of its financial position,” he explained.

When the Office of Insurance Regulation created its temporary market stabilization program to financially back companies that were downgraded by Demotech, the office said it would keep companies in compliance with federal loans. However, when we reached out to ask the providers if this was true, we did not receive a response.

Friedlander said if that sort of reinsurance program was accepted by the federal providers, they would have said so by now. Friedlander added that an internal rating agency would likely also not be accepted by federal loan providers.

We asked DFS and OIR for explanations on the use of the funds. DFS referred us to OIR.

A spokesperson for OIR said in an email that the research done with the $1.5 million will be “another tool in the toolkit.”

“OIR is hopeful the information gathered from this research will provide additional data to state leaders and assist them with continuing to develop and implement meaningful property market insurance reform," the spokesperson stated.

The Insurance Information Institute stressed that state leaders missed the mark at the taxpayer’s expense.

“All legislators who sat in that committee are guilty of making a very poor decision, in our opinion,” Friedlander exclaimed.

“It's not solving the crisis. The reason why we are having a home insurance crisis in Florida is because of frivolous litigation filed against property insurers and excessive fraud claims related to roof replacements. This is an ongoing problem. It has not been resolved, and changing rating agencies is not going to fix the problem,” he said.

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