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Tuesday, August 16 2022

Florida’s crumbling homeowners insurance market is exposing one of the state’s long-running flaws: its reliance on a single company to certify the majority of the state’s insurers.

For the last few weeks, state regulators and Gov. Ron DeSantis’ administration have been scrambling to contain the fallout after the state’s primary ratings agency, Ohio-based Demotech Inc., warned of downgrades to roughly two dozen insurance companies, according to the state.

The downgrades would have triggered a meltdown of the state’s housing market, a pillar of Florida’s $1.2 trillion economy. Without the ratings, a million Floridians could be left scrambling to seek new insurance policies, possibly triggering a housing crisis in the middle of hurricane season and months before the November election.

State regulators believe they’ve staved off a disaster, at least temporarily, but the episode has observers questioning how it was handled and how the state could be so reliant on a single company few have ever heard of.

“If this was a movie title, it would be ‘The Sum of all Fears,’ ” said Sen. Jeff Brandes, R-St. Petersburg, who has been warning for years that the state’s property insurance market was heading toward collapse.

The DeSantis administration cobbled together a short-term fix to allow insurers to stay afloat by using state-run agencies to back them up. And it went after the ratings agency, Demotech, and its president and co-founder, Joe Petrelli, calling it a “rogue ratings agency” and urging federal officials to disregard the company’s actions.


The drama is just the latest problem as the state experiences its biggest insurance crisis since 1992′s Hurricane Andrew.

In the last two years, insurance policies for more than 400,000 Floridians have been dropped or not renewed. Fourteen companies have stopped writing new policies in Florida. Five have gone belly-up in 2022 alone. The record, set after Hurricane Andrew’s devastation, is eight in one year.

The latest was Coral Gables-based Weston Property & Casualty, which leaves 22,000 policyholders — about 9,400 in South Florida — scrambling to find new insurance companies.

Costs have also skyrocketed. In 2019, when DeSantis was sworn in, Floridians paid an average premium of $1,988. This year, it’s $4,231, triple the national average, according to an Insurance Information Institute analysis.

In several ways, today’s problems have their roots in the decisions lawmakers and regulators made after Andrew, experts say.

The storm reshaped Florida’s insurance landscape, forcing several companies out of business and others to flee the state. With homeowners struggling to find coverage, the Legislature created the state-backed Residential Joint Underwriting Association — essentially a precursor to today’s Citizens Property Insurance — to insure homes that couldn’t be covered by private carriers.

The program quickly became one of the largest insurers in the state, and concerns grew that it was taking on too much risk. State officials provided incentives for companies to take over its policies, and a number of new, smaller insurers got in line.

The new insurers faced a problem, however: They were unable to get a financial stability rating from a qualified ratings agency. Homeowners with federally backed mortgages, such as Fannie Mae and Freddie Mac, are required to have highly rated property insurance companies protecting them.

State insurance and banking regulators, plus Fannie and Freddie, looked to various ratings agencies for help. Only Demotech was willing to rate the new insurers. The company, based in Columbus, Ohio, was founded in 1985 by Petrelli and his wife, Sharon Romano Petrelli. Its “A” rating was approved by both Fannie and Freddie.

Since then, Demotech has been the primary ratings agency for Florida-based insurers, which dominate Florida’s market and which pay Demotech to rate their financial strength. Although other ratings agencies, such as New Jersey-based AM Best, provide ratings for some insurers, no one has stepped in to compete with Demotech.

Without Demotech, Florida would not have an insurance market, said Kevin McCarty, the state’s insurance commissioner from 2003 to 2016.

“Regardless of whether you agree with them, they serve an invaluable service to the state of Florida and across the wider economy,” McCarty said.


Florida’s reliance on smaller insurers has caused homeowners to ride out a series of booms and busts ever since.

Smaller insurers are mostly able to survive Florida’s hurricanes because of reinsurance — essentially, insurance for insurance companies. When a storm hits, an insurer might be on the hook for a few million dollars, while the reinsurer pays the rest.

But the smaller companies in particular are vulnerable to increases in the cost of reinsurance. A series of storms in 2004 and 2005 wiped out a number of insurers and drove up the cost of reinsurance, putting firms in a pinch. Several have also gone out of business because of mismanagement or incompetence.

In the last few years, insurers and state regulators have blamed excessive lawsuits for their woes, and Petrelli has been an outspoken critic of the Legislature’s inaction to curb litigation.

He has cited statistics from Florida’s insurance commissioner that from 2016 to 2019, Florida accounted for between 7.75% and 16% of the nation’s homeowners’ claims but between 64% and 76% of the nation’s litigated homeowners’ claims. Critics say insurers’ problems are more complicated.

DeSantis called a special session of the Legislature in May to pass insurance reforms focused on stabilizing the market and reducing lawsuits, but Petrelli said it wasn’t enough.

On July 18 and 19, Demotech sent private notices to at least 17 Florida insurers, according to state officials — almost half of the companies it rates in Florida — warning that the insurance environment was worsening and that without corrective action, the companies faced a ratings downgrade. (Demotech has not said how many companies received the warnings.)

A ratings downgrade of that magnitude would create shock waves. Fannie and Freddie back about 62% of all residential mortgages, according to the Florida Association of Insurance Agents.

Demotech’s “A” rating and above, which indicates a 97% certainty a company could afford all the claims from a 1-in-130 year hurricane, is approved by Fannie and Freddie, while its “S” rating, the next step down, is not.

A reduction from an “A” rating would force homeowners to find a new insurance company — and fast. Otherwise, the bank holding the mortgage could “force place” a homeowner with whatever insurance company they can find, which is usually far more expensive and offers less protection. That could include placing a homeowner with what’s known as a “surplus lines” insurer, which doesn’t need state approval for their rates. They can charge whatever they want.

“Getting force-placed insurance is terrible for a homeowner. You’re paying double the premium and getting half the coverage,” said Paul Handerhan, president of the consumer-oriented Federal Association for Insurance Reform, based in Fort Lauderdale.

Many homeowners would likely end up with Citizens, placing more risk with the state-run insurer that already covers nearly 1 million policies. (Its peak was 1.4 million, in 2011.)

Demotech, in large part, blamed the Legislature’s inaction for the changes.

“In Florida, the unwillingness or inability of the Legislature to address longstanding disparate, disproportionate levels of litigation, and increasing claims frequency has resulted in a level of dysfunction that renders our previous accommodation inapplicable,” several of the letters state.

DeSantis’ office coordinated a swift and public attack on Demotech.

In letters to federal housing authorities on July 21, Chief Financial Officer Jimmy Patronis called Demotech a “rogue ratings agency.” Florida Insurance Commissioner David Altmaier wrote that it was an example of “inconsistent, monopolistic power of a select rating agency and is trying to exert coercive influence over Floridians and policymakers in an effort to thwart public policy according to its own opinions.”

Even U.S. Sen. Marco Rubio waded into the fray, asking the Federal Housing Finance Agency to reexamine its dependence on Demotech.

Petrelli said he had no warning and no conversations with state officials before the letters were sent to federal officials and the news media. He said the correspondence with the companies was the normal course of business, part of regular, ongoing conversations with companies about their financial status that they’ve been doing every quarter since 1996.

The level of rancor was “unprecedented,” Petrelli said, but it did not change how it rates companies. In recent weeks ratings were downgraded for four companies and ratings were withdrawn from four more, including Weston.

“It did not deter us,” Petrelli said.

Mark Friedlander, communications director for the industry-backed Insurance Information Institute, said the response was unlike anything he’d ever seen. Ratings agencies are supposed to be neutral third parties that rate companies without influence, he said.

“It was definitely, in our opinion, stepping over the line,” Friedlander said of the state’s response.

On the other hand, Petrelli “has pushed himself further into the limelight by publicly engaging in political theater,” the Florida Association of Insurance Agents said in a memo distributed by the Office of Insurance Regulation.

The association’s memo wondered whether the state’s insurers should move on from Demotech. It also raised longtime criticisms that Demotech often downgrades a company just days before it goes insolvent.

“That often begs the question, ‘Does a Demotech rating mean anything or provide the intended peace of mind to agents, consumers, and lenders?’ ” the memo stated.

Petrelli said companies keep their “A” rating as long as possible precisely because the “S” rating is not accepted by Fannie and Freddie, despite Demotech’s numerous attempts to get them to accept it.

When a company gets an “S,” he said, “unfortunately, they drop off the edge of the cliff.”


Notably, the Office of Insurance Regulation’s letter did not dispute that Florida insurers were failing. The office has its own watch list of 27 companies under “enhanced monitoring.”

Patronis’ letter also suggested insurance companies needed to find a new rating agency, but Friedlander said that likely wouldn’t help. The New Jersey firm AM Best has stricter requirements than Demotech, he noted.

Six days later, the state announced a solution should the companies’ ratings be downgraded.

Florida’s plan is to let insurance companies that are financially stable but just missing that “A” rating from Demotech, to keep operating and covering people’s policies.

If they go under, homeowners’ claims would be covered by the long-running state program known as the Florida Insurance Guaranty Association, which covers the first chunk of claims for any failed insurance companies. Citizens would foot the bill for anything over the limit of $500,000 for homes and $300,000 for condo units.

Handerhan called it a “very creative, very elegant, very consumer-centric” solution.

But will it satisfy the federal mortgage holders?

Despite repeated emails and calls over the last week from the Herald/Times, representatives from Fannie Mae and Freddie Mac didn’t offer an answer. The Florida Housing Finance Agency didn’t respond to Rubio, either, according to his office.

An Office of Insurance Regulation spokesperson said they’re “confident” the solution will be acceptable.

Friday, August 05 2022

Earlier today, the Florida Office of Insurance Regulation (OIR) announced its plan to establish a temporary reinsurance arrangement through Citizens Property Insurance Corporation (Citizens). This innovative reinsurance program would be available to insurers facing a rating downgrade from Demotech, and it would allow such insurers to meet an exception offered by Fannie Mae and Freddie Mac, thus avoiding a situation where lenders would require policyholders insured by these downgraded insurers to find replacement coverage.

This unprecedented action by the OIR allows Florida's insurance consumers to maintain their insurance coverage, and it should put agents' minds at ease, knowing that they will not be required to move policies during the current hurricane season. FAIA would like to sincerely thank Governor Ron DeSantis, Chief Financial Officer Jimmy Patronis, and Insurance Commissioner David Altmaier for their swift response and leadership on this issue.

For more detailed information on the temporary reinsurance program, please read the OIR news release below:

Florida Establishes Temporary Reinsurance Arrangement for Insurers Facing Potential Financial Stability Rating Downgrades

Jul 27, 2022

Tallahassee, Fla. - Today, the Florida Office of Insurance Regulation (OIR) announced a plan to establish a temporary reinsurance arrangement through Citizens Property Insurance Corporation (Citizens) in the event of disruptive financial rating downgrades from Demotech, Inc. This unprecedented solution would allow insurers to meet an exception offered by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and ensures Floridians can maintain coverage during hurricane season.

“OIR’s greatest priority is ensuring consumers have access to insurance, especially during hurricane season; and because of the uncertainty with the status of Demotech's ratings, we’ve been forced to take extraordinary steps to protect millions of consumers,” said Insurance Commissioner David Altmaier. “This innovative arrangement satisfies requirements set by the secondary mortgage market. In the event we need to implement this temporary solution, consumers will not need to seek coverage elsewhere, agents will not need to move policies, and lenders can have confidence that these insurers continue to meet the mortgage qualifications.”

Fannie Mae and Freddie Mac require that property insurance policies for properties with a mortgage backed by Fannie Mae or Freddie Mac must be written by an insurer meeting financial rating requirements.

Fannie Mae and Freddie Mac each offer an exception to the financial rating requirements for an insurer that is covered by a reinsurer who assumes, by endorsement, 100 percent of the insurer’s liability for any covered loss payable, but unpaid by the insurer, by reason of insolvency. In the event that a participating insurer is declared insolvent, the Florida Insurance Guaranty Association shall carry out its statutory duties under Part II of Chapter 631, Florida Statutes, and pay claims as set forth in the statute.

As a result, OIR, in conjunction with Citizens, has formed a program that meets the exceptions to the Fannie Mae or Freddie Mac guidelines. Therefore, there should be no reason for lenders to require a replacement policy, or force place coverage based solely on the ratings downgrades. This temporary arrangement would allow insurers to remain viable, to continue providing coverage for Floridians and helps keep policies out of Citizens.

Last week, OIR requested that Demotech provide additional information regarding their rating methodology to justify these downgrades. OIR received a response from Demotech, however, the response did not provide a timeline for ratings. The sudden loss of an acceptable Financial Strength Rating would have a significant and adverse impact on Florida’s insurance consumers, insurers, agents and property insurance market. OIR is remaining committed to protecting Floridians and the property insurance market under this plan.

Wednesday, August 03 2022

By order of the Office of Insurance Regulation (OIR), with support from the Governor’s Office and the Chief Financial Officer's office, Citizens is ready to assist carriers in the event of a rating downgrade by Demotech. Carriers that are in compliance with all provisions of the Florida Insurance Code may enter into an arrangement by endorsement with Citizens.

This arrangement prevents the need for policies to be rewritten with Citizens. This is applicable when the mortgage on the insured dwelling is owned by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).

Under the arrangement, if a carrier becomes insolvent, Citizens will pay the balance of all unpaid covered property insurance claims above the FIGA limit.

Each Endorsement with a carrier will expire no later than June 1, 2023.

No action is required on the part of agents or the policyholders.


Monday, August 01 2022

Florida’s insurance commissioner announced today that his office has found an “unprecedented solution” to the looming property insurer rating crisis – let Citizens Property Insurance Corp. provide a level of reinsurance to companies in case they are downgraded, at least temporarily.

Insurance industry advocates called it “innovative” and an “elegant solution.” And Citizens officials have agreed to the arrangement.

“We’ve been working closely with stakeholders, from OIR, the governor’s office, and the CFO over the past several days and are on board with OIR’s plan,” said Citizens’ communications director, Michael Peltier.

The Florida statute governing Citizens authorizes the state-created insurer to enter into quota-share agreements with other insurers for hurricane coverage and other eligible risks. Having that in place will now let carriers take advantage of an exception in otherwise strict federal home lending rules, the OIR said in a statement.

The Florida insurance market was thrown into an uproar last week when rating agency Demotech sent letters to 17 Florida property insurers, warning that they will soon face financial strength downgrades. Demotech has since said it will hold off on the ratings until further notice.

The downgrades are problematic for Fannie Mae and Freddie Mac, the quasi-governmental secondary mortgage-lending corporations. Without strong ratings, the lenders won’t back mortgages, which could have forced thousands of Florida homeowners to seek new coverage or be moved into expensive force-placed policies, state regulators have said. But Fannie and Freddie both offer loopholes to the rating requirements if the insurer is covered 100% by a reinsurance endorsement for any loss payable, the OIR said.

“OIR, in conjunction with Citizens, has formed a program that meets the exceptions to the Fannie Mae or Freddie Mac guidelines,” the OIR statement reads. “Therefore, there should be no reason for lenders to require a replacement policy, or force-place coverage based solely on the ratings downgrades.”

The Florida Insurance Guaranty Association would remain responsible for paying claims for any insolvent carriers going forward, up to its statutory limit. But the OIR plan appears to let Citizens cover liabilities above the FIGA limit.

“This innovative arrangement satisfies requirements set by the secondary mortgage market,” OIR said. “In the event we need to implement this temporary solution, consumers will not need to seek coverage elsewhere, agents will not need to move policies, and lenders can have confidence that these insurers continue to meet the mortgage qualifications.”

The announcement quickly raised questions around the industry, including concerns about how long would the arrangement will remain in place; and if it proves workable, would that mean financial ratings are no longer needed? If the mortgage requirement is the chief reason for financial stability ratings, perhaps regulators have found a new way to meet the unique needs of the Florida market.

The ultimate impact on Citizens was not made clear Wednesday. Commissioner David Altmaier’s office said in the release that the arrangement will help keep Citizens from assuming more homeowner policies. The 20-year-old corporation, established to be an insurer of last resort, is growing by more than 30,000 policies a month and is on track to be the largest property insurer in the state with at least 1.2 million policies in force by year’s end.

But taking on ceded policies from some struggling private insurers could ultimately affect Citizens’ exposure.

Despite that, the plan is a good one, said Paul Handerhan, president of the Florida-based Federal Association for Insurance Reform. He noted that it is similar to a “cut-through endorsement” that essentially guarantees an insurer’s obligations.

Ratings downgrades likely would not have cost Fannie Mae significantly, but the new arrangement should give the lenders confidence that loans are fully protected, Handerhan said.

Demotech and Florida regulators have not named the 17 carriers facing potential downgrades. Several reported to be on the list have declined to comment.

A number of companies rated by Demotech have made major changes this year to try and manage the turbulent Florida waters. This week, Southern Oak Insurance notified agents that it had instituted a $250,000 coverage limit, and will only write structures built in 2022. The carrier, which covers about 1% of the Florida market and holds $134 million in direct written premium, also said it would no longer write policies in 10 counties.

The changes are set to take effect July 30. New quotes meeting the current guidelines must be bound by 6 p.m. on Friday, July 29.

“Thanks to a flourish of positive growth so far this year, we are outpacing our projected reinsurance growth and feel that temporarily limiting our capacity will maintain the level of financial responsibility and exposure management that our policyholders and agency partners know and trust,” Southern Oak’s bulletin reads.

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