Florida Regulators, FAIA Slam Demotech for Reported Plans to Downgrade 17 Carriers


Florida’s top insurance regulators and the Florida Association of Insurance Agents on Thursday blasted the Demotech financial rating firm after the organization reportedly notified 17 insurers that they are going to soon be downgraded.Demotech President Joe Petrelli said Thursday evening that the Florida insurance commissioner, the state’s chief financial officer and the FAIA had misconstrued his firm’s plans of their strongly worded missives that were released Thursday.

“The OIR letter, the CFO’s letter and the FAIA press release are all inaccurate,” Petrelli told the Insurance Journal. He declined further comment and declined to call the 17 troubled insurers, but promised to supply a fuller explanation by Monday.

Demotech began rating Florida insurers within the Nineties, after powerful Hurricane Andrew hit the state’s southern end in 1992, causing billions of dollars in damages. The storm resulted in several carriers becoming insolvent and a few national carriers, that are rated by larger rating firms, fled the state. Now, Demotech has change into the dominant rating system for many Florida insurers.

It has carriers over a barrel and is using questionable methodology in its analyses, FAIA and regulators charged.

“After 25 years, Demotech virtually holds a monopoly on issuing financial strength rankings to Florida domestic carriers while being largely unknown/unnecessary in other parts of the country,” FAIA President Kyle Ulrich wrote Thursday in a blog article titled, “Is it time for Florida to show the page on Demotech?”

“It’s abundantly clear that Florida’s property market has been held hostage by unscrupulous trial lawyers, public adjusters, and contractors for years,” Ulrich argued. “Now, the actions of 1 rating company could add to the list.”

The controversy flared this week after FAIA said it had obtained copies of letters from Demotech to the 17 property insurers, notifying them that their financial strength rating will probably be downgraded next week, from “A Exceptional” to “S Substantial” or “M Moderate.”

Downgrades are never excellent news and in some cases have preceded insolvencies or rehabilitation proceedings for insurers. The S rating suggests the carriers still have substantial reserves, Petrelli has said. But it surely’s not enough for Fannie Mae and Freddie Mac, the quasi-governmental secondary lenders that back nearly all of residential mortgages in america.

Without Fannie’s and Freddie’s blessings, hundreds of thousands of Florida homeowners insured by those 17 carriers might be required to acquire expensive force-placed policies, CFO Jimmy Patronis said in his letters to the director of the Federal Housing Finance Agency and to the heads of the lending corporations. He urged them to rethink the lenders’ reliance on Demotech insurance rankings.

If Fannie Mae and Freddie Mac “de-authorize a sizeable percentage of Florida’s insurers based on the dubious rankings of 1 company, it could create financial chaos for hundreds of thousands of Floridians,” Patronis wrote.

Some 115,000 Florida insurance agents also might be exposed to litigation risks, and will not have adequate coverage under their errors and omissions policies, Patronis and Ulrich said.

Insurance Commissioner David Altmaier’s letter to Petrelli, dated Thursday, charged that Demotech has didn’t adhere to its own standards in determining the financial rankings. The office has “noted several discrepancies between these recent decisions and the rating methodology posted on Demotech’s website,” Altmaier wrote.

Ohio-based Demotech has previously indicated that targeted carriers can appeal and supply further financial information and maybe obtain additional capital. But insurers have told OIR that Demotech is now unwilling to think about additional information and access to capital infusions, the commissioner’s letter said.

The timing and the tenor of the agents’ and regulators’ outrage surprised some within the Florida insurance industry. Petrelli had suggested in May that several carriers might be downgraded this yr, thanks partly to the continued costs of fraudulent roof claims and excessive claims litigation. He also sent open letters to Florida’s governor and others, noting that laws approved in May had not gone far enough to assist some firms.

Perhaps it was the sheer variety of insurance firms that might be in trouble that set off the alarm bells this week. Ulrich declined to comment aside from the feelings included in his blog post.

Others within the industry have warned for months that many insurers are in trouble, especially after reinsurance prices rose by as much as 50% for some firms. 4 carriers have been deemed insolvent to this point this yr and 12 have stopped writing latest business.

“Everyone knew this was coming,” one industry source said Thursday.

The Office of Insurance Regulation, in reality, recently released a market stability report that indicated that 27 insurers – greater than half of the energetic carriers in Florida – have been placed on a watch list. Resulting from several aspects that suggest the businesses are facing financial difficulties, the OIR referred the businesses to its newly created insurer stability unit for “enhanced monitoring,” as required by recent laws.

Still, the FAIA said a latest approach is required.

“Is now the time for insurers, lawmakers, and regulators to search for a more stable and predictable alternative to Demotech?” Ulrich asked.


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