Rating agency Demotech sent a letter to 17 Floridian insurers on Tuesday explaining that they are likely to have their A ratings downgraded on July 26th, a move the Florida Office of Insurance Regulation (OIR) describes as an “example of inconsistent, monopolistic power of a select rating agency”.
The letter warned 17 carriers in the state that they would be downgraded to S “substantial” or M “moderate” as they do not meet the requirements to sustain an A “unsurpassed” or “exceptional” financial strength rating.
For property insurers in Florida, a substantial or moderate downgrade means they’re unable to underwrite business in the secondary mortgage market, with a rating lower than A meaning that mortgage guarantors Fannie Mae and Freddie Mac will not accept their policies as they require borrowers to maintain insurance protection from A-rated insurers.
The concern is that this would push a market already under extreme stress into further turmoil. For carriers, it could be become increasingly challenging to survive and, at the same time, Florida officials warn that it could place thousands of policyholders at risk of defaulting on their mortgages.
After learning of the letter sent out to carriers by Demotech, the OIR’s Commissioner, David Altmaier, has responded, saying that this “is an example of inconsistent, monopolistic power of a select rating agency”, and that Demotech “is trying to exert coercive influence over Floridians and policymakers in an effort to thwart public policy according to its own opinions.”
In his letter to Demotech’s President Joseph Petrelli, Altmaier argues that the reasons given to carriers for the downgrades did not match Demotech’s own financial strength ratings methodology, and questions why these discrepancies exist, and if the rating agency plans to amend its methodology to account for these discrepancies.
Additionally, the letter asks if Demotech intends to allow firms to appeal its decision as allowed for in its posted methodology. And, with the Atlantic hurricane season underway and forecasted to be above-average, in terms of activity, the OIR questions the timing of the letters sent out by Demotech.
It’s important to remember that given the challenges within the Florida property insurance marketplace, these ratings are already delayed, and carriers in the state have had quite some time to ensure that their reinsurance is in place and that capital levels are sufficient to maintain ratings.
It’s also worth noting that A.M. Best, one of the world’s most-known rating agencies is not particularly active in the Florida market, with many saying that more challenged carriers in the state might struggle to achieve and sustain a rating under its methodologies.
So, in a sense, the Florida marketplace has been treading on eggshells for some time, and as reinsurers have retracted from the space amid elevated losses and loss costs, social inflation and rising litigation, all of which has driven reinsurance pricing higher in recent times, it’s become more and more difficult for insurers to sustain their ratings.
The OIR calls on Demotech to perform a more comprehensive review of the proposed ratings given the potential impact.
“Additionally, in the interest of stabilizing the private market and ensuring companies have all necessary information to take appropriate corrective action, we strongly encourage Demotech to clearly communicate its rating standards and methodology prior to these ratings becoming effective. As it stands, Demotech has not provided companies a meaningful path for review or appeal of these ratings and has been inconsistent in its application of its own posted methodology,” reads the letter.
The move from Demotech also sparked a reaction from Jimmy Patronis, Chief Financial Officer of the State of Florida, who wrote to Sandra Thompson, Director of Federal Housing Finance Agency, over concerns that underwriting guidelines at GSEs Fannie Mae and Freddie Mac have “inadvertently empowered a rogue rating agency, Demotech, Inc. to play havoc with the financial lives of millions of Floridians.”
Ultimately, the letter urges the GSEs to reconsider their reliance on Demotech as the primary ratings agency for the strength of Florida’s domestic insurance market, warning of “financial chaos for millions of Floridians”.
Of course, Demotech will feel that it’s just doing its job of ensuring carriers are sufficiently capitalised to continue writing business and service clients. And, with other rating agencies reluctant to operate in the market, something that’s unlikely to change anytime soon given the depth of the challenges, it’s unclear what happens next.
Clearly, if 17 carriers were to be downgraded it would create a chaotic situation, but the reality is that the signs have been there for years, and the alternative is that weak and thinly capitalised insurers will be able to continue to operate.
After all, this is why the special session and subsequent reforms were put in place, although, market participants, Demotech included, warned that these do not go far enough and that more work is required to create a sustainable property insurance market in Florida.
Further, it might not be just the 17 carriers that received a letter from Demotech that are potentially in trouble, as the OIR reported this week that it has placed 27 insurers in Florida under enhanced monitoring.