Demotech downgrades and what they might mean for the Florida property insurance market
The summer of 2022 has been one of uncertainty for millions of homeowners in Florida. Rampant fraud, excessive litigation and a worsening climate have sent the Florida property insurance market into a tailspin. With news that 27 of Florida’s property insurance companies may be facing a financial rating downgrade, Florida homeowners brace themselves for the possibility of scrambling for new coverage in the middle of what scientists predict to be an active hurricane season.
The Florida Legislature held a special session in May to tackle the issues in the Florida property insurance market, and as a result, they passed Senate Bill 2D. Although the provisions in this bill are promising, Florida homeowners face another new potential hurdle, as financial rating firm Demotech announced in late July that they are likely to downgrade the financial rating for 27 Florida homeowners insurance companies.
Bankrate has investigated what these financial rating downgrades mean for Florida homeowners so that they can best prepare themselves for the uncertain future that may lie ahead.
What is a financial rating downgrade?
Financial analysis and ratings agencies like A.M. Best, Standard & Poor’s (S&P) and Demotech assign ratings to insurers based on their financial strength, called financial ratings or financial stability ratings (FSR). The FSR of an insurance company indicates its historical ability to pay out covered claims.
While it’s essential that an insurance company can pay out claims when needed, your insurance company’s financial rating could also affect your mortgage. If your mortgage is federally-backed by Freddie Mac or Fannie Mae and your insurance company is rated by Demotech, that company must have an FSR of A or higher. If not, you run the risk of force-placed insurance.
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Which Florida property insurance companies are being downgraded?
Since this process is confidential, knowing which companies are affected is impossible until the downgrade is official. As it stands, Demotech may downgrade the FSR of 27 Florida property insurance companies.
On August 1, 2022, Demotech downgraded the FSR for United Property and Casualty Insurance (UPC) from an A to M. Demotech signaled that it would withdraw UPC’s FSR, and in response, UPC withdrew its business from Florida, Texas and Louisiana on August 25, 2022. UPC stated that they plan on withdrawing from New York, as well.
Additionally, Demotech withdrew the FSRs for Weston Property Insurance and FedNat. Weston Property Insurance then declared insolvency on August 4, 2022. Often, a rating withdrawal can be the first step toward bankruptcy.
Bankers Specialty Insurance and First Community Insurance (which shares the parent company Bankers Insurance Group) had its ratings withdrawn on August 3, 2022. Like UPC, Bankers Insurance Group then pulled its business out of Florida.
What is being done to address the rating downgrades?
As a stopgap measure, the Florida Office of Insurance Regulation (OIR) announced that state-backed Citizens would provide reinsurance for companies affected by Demotech’s downgrades. In essence, the OIR is using Citizens to insure downgraded companies if they do not have enough funds to pay for covered claims. According to OIR, this reinsurance plan should provide relief for homeowners by satisfying Freddie Mac’s and Fannie Mae’s insurance requirements.
Whether Citizens can handle the extra strain remains to be seen. Because so many insurers are issuing non-renewals (or fleeing the state altogether), Citizens is the only option for many homeowners. In 2021, Citizens saw a 37.7% increase in new business and had nearly one million policyholders as of July 2022.
This influx of new business and the added responsibility of providing a financial stopgap for downgraded insurers could prove problematic for Citizens.
Mark Friedlander, Director of Corporate Communication for the Insurance Information Institute (Triple-I), says,
Citizens is financially solid but its reserves appear to be inadequate for incurring significant storm activity. As of July 15, Citizens has $311 billion in exposure but only has the ability to pay about $11.3 billion in claims.
If the 2022 hurricane season proves to be as severe as many climate scientists predict, Citizens and Floridian homeowners alike could be facing unprecedented hardship.
How will the Citizens stopgap affect Florida premiums?
Citizens is a not-for-profit insurance company created by the state of Florida in 2002. State law allows Citizens to obtain funding through policyholder premiums and in some circumstances, a statewide assessment.
Florida law requires that Citizens impose fees on most Florida homeowners policies if they experience a deficit due to a catastrophe, regardless if Citizens holds the policy or not. This assessment is sometimes called the “hurricane tax,” and it can be levied on all auto, condo, renters and homeowners policies in Florida. For Citizens customers, this fee is capped at 15% per policy. For those insured elsewhere, the fee can be up to 2% of your total premium.
If Citizens ends up in a deficit after providing claims payouts to downgraded companies, it’s possible that nearly all Florida residents with insurance will pay a higher premium to help rebuild the company’s claims reserves.
Demotech responds to criticism
On July 21, 2022, Florida’s insurance commissioner David Altmaier issued a letter to Demotech that questioned whether the company applied their methodologies in a fair and consistent manner.
Bankrate had the opportunity to correspond with Demotech president Joe Petrelli. In response to Altmaier, Petrelli says,
Recently, there has been unfair criticism of Demotech based on incomplete, premature, or misleading information about our ratings process.
Petrelli also takes issue with the portrayal of the downgrade process. He went on to say,
“These characterizations were an inaccurate depiction of our published process and rating methodology, most significantly because they portrayed preliminary letters as if they were final, when our process – the same comprehensive process we have used for years – involves a continual review of relevant data.
The ratings process is an ongoing effort that takes into account a variety of internal and external considerations. Demotech uses a variety of factors to develop ratings assessments, including the following company information: quantity and quality of reinsurance; liquidity of assets; degree of leverage (liabilities compared to equity and premium); ability to properly estimate and reserve for claims; and operating environment (regulations, litigation, weather, etc.).
We continue to review insurer data even after preliminary letters are sent, and this ongoing process sometimes results in a different rating action than initially indicated.”
What happens if your property insurance company is downgraded?
If your homeowners insurance company is downgraded, it is legally required to give you 30 days notice. If you receive a downgrade letter in the mail, here’s what you need to know:
For now, no action is needed
If Demotech downgrades your homeowners insurance company, there is nothing you need to do at this time. The OIR states that the Citizens Insurance stopgap will meet mortgage requirements.
You can shop for new property insurance
If your homeowners insurance company is downgraded, you can try to shop for new Florida homeowners insurance. Be aware, however, that the Florida property insurance market is challenged, and it may be hard to find an insurance company willing to take on new business.
Additionally, since Demotech doesn’t announce downgrades until they happen, it’s possible to switch from one downgraded company to one marked for a downgrade in the future. Simply put, there’s no guarantee that you will be in a better position if you switch.
What to do if you can’t find insurance
As stated, you should not have to shop for new insurance if Demotech downgrades your current company. Many Floridians, however, are also receiving non-renewal notices from their property insurance companies. If you are being non-renewed, you have to obtain new coverage before your non-renewal date. Failure to do so will result in a lapse of coverage and possible consequences from your mortgage company.
If you are having trouble finding a property insurance company in Florida that will offer you a policy, you may want to consider Citizens. Citizens is not a take-all-comers company, which means they can deny coverage. Still, they have a history of writing policies for many Floridians who other companies have rejected.
The bottom line
The Florida homeowners insurance market continues to hobble along, as evidenced by Demotech’s financial rating downgrades. Initially, it was unknown how these downgrades would affect Florida homeowners but for now, a stopgap measure through state-run Citizens has been imposed. If you are insured with a downgraded company, you should not have to shop for new insurance (provided that the company is still solvent).
In reality, this stopgap measure is not likely to be the end of the Florida homeowner’s insurance crisis of 2022. Mark Friedlander went on to say,
Compared to past turbulent markets, which were caused by hurricane property losses, the current crisis is completely man-made: a result of rampant roof replacement fraud schemes and excessive litigation filed against insurers. It is not the result of catastrophic weather events.
Until the state passes effective legislation to address the core issues — fraud and frivolous litigation — Floridians will continue to pay the price.
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