Reinsurance News

Demotech delays Florida insurer rating revisions, responds to ‘factually inaccurate’ reports

26th July 2022 - Author: Luke Gallin

Rating agency Demotech has elected to extend its rating revision of property insurers in the State of Florida, and has responded to what it calls “factually inaccurate” comments made by the state’s officials.

demotech-logoLast week, it was reported that Demotech, which has operated in the Florida property insurance marketplace since 1996, had written to 17 insurers in the region warning that they would likely see their ratings downgraded from A on July 26th, 2022.

The letter explained to carriers that they do not meet the requirements to sustain an A “unsurpassed” or “exceptional” financial strength rating under Demotech’s methodology, highlighting the depth of challenges engulfing the state’s property market.

In response, Florida state leaders accused Demotech of discrepancies in its ratings process and argued that the rating agency did not allow discussion or appeal, and has failed to give the recently enacted special session reforms a proper chance.

David Altmaier, Commissioner of the Florida Office of Insurance Regulation, described Demotech’s actions as “an example of inconsistent, monopolistic power of a select rating agency,” adding that the company “is trying to exert coercive influence over Floridians and policymakers in an effort to thwart public policy according to its own opinions.”

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For officials in the state, the concern is that a substantial or moderate downgrade means carriers are unable to underwrite business in the secondary mortgage market as GSEs Fannie Mae and Freddie Mac require borrowers to maintain insurance protection from A-rated insurers.

This, argued officials, could create more chaos in the Florida property market, placing policyholders at risk of defaulting on their mortgages, resulting in hundreds of thousands of additional policyholders finding themselves insured with Citizens, the insurer of last resort, or having to look for new policies.

Now, on the day Demotech’s rating revision process was scheduled to cease, the firm has revealed that this is no longer the case, as it “will be taking additional time to review information and consider the issues affecting the companies operating in Florida,” with the rating revisions to be announced “when we have completed all relevant discussions with rated entities.”

Commenting on reports that it sent out letters to 17 rated clients warning of a potential rating downgrade while allowing no discussion or appeal, Demotech says that this is “factually inaccurate, as we have conducted discussions with all who requested a discussion, allowing them to state their case and further understand our rationale.”

“Furthermore, we encouraged them to submit clarification or additional relevant information if they so desired. In several cases, this has led to us considering a different rating action. This is the same procedure that we have utilized since being invited to participate in Florida in 1996,” continues the letter, which was shared with our sister-site, Artemis.

Defending its position, Demotech notes that since 1996, it’s been “consistent in our review and evaluation of companies operating in that marketplace,” reminding that it remains “a stabilizing force even as the residential property insurance market has become plagued with litigation, and, some believe, fraud.”

“It is incongruous for an independent rating agency to be expected to discuss rating actions that are not finalized and include conversations and information intended to be private between the rating agency and the rated entity. As it would be injurious and prejudicial to publish rating actions prior to the completion of our process and finalization of our opinion, Demotech will not comment on potential rating changes until our process is concluded. We will continue to follow our rating methodology and remain an independent observer despite outside pressure,” continues Demotech.

The rating agency also alludes to its recent receipt of NRSRO registration from the U.S. Securities and Exchange Commission (SEC), stating that a key part of this status “is the ability and willingness to resist being leveraged or coerced into actions that are inconsistent with established methodology.”

The letter also explains that, “In addition, it should be noted that although our published methodology allows for discussion and appeal of rating decisions, it does not include any requirement for Demotech to provide a remedy or allow a rated entity a certain period of time to correct issues.  It is completely up to the entity to report acceptable financial results, as Demotech, an independent third party rating agency, is tasked only with reviewing and opining on those results.”

Concluding that, “As the current regulatory climate has become hostile and negative and we have and will expend a significant effort creating responses to third party letters, we will be taking additional time to review information and consider the issues affecting the companies operating in Florida. Our rating revisions originally scheduled to be released Tuesday, July 26th will be announced when we have completed all relevant discussions with rated entities.

“We will be releasing all rating changes to the Florida focused insurers concurrently. Until that time, we will not be commenting further on individual companies nor responding to those outside of the rating process.”

While it remains unclear how all of this plays out, what is clear is that the Florida property marketplace is crying out for additional special legislation, something highlighted previously by Demotech and others. By all accounts, litigation and fraud issues are still rife and continue to plague the industry, while an expected above-average level of hurricane activity has the potential to exacerbate the situation ahead of next year’s reinsurance renewals.

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