$1.5 million in taxpayer money approved for insurance rating agency research

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TAMPA, Fla. — The latest controversy with Florida’s property insurance market comes after lawmakers approved $1.5 million in taxpayer money for the Department of Financial Services and the Office of Property Regulatory insurance companies are looking for alternative ways to financially assess insurance companies.

“If they’re willing to spend $1.5 million of taxpayers’ money to find out if there are other rating agencies, global rating agencies in the market that are interested in rating companies in Florida, all they have to do is pick up the phone and talk to AM Best,” said Jeff Mango, managing director of strategy and communications at global credit rating agency AM Best, at ABC Action News.

On September 9, Florida’s Legislative Budget Committee approved the request for $1.5 million from the Insurance Regulatory Trust Fundwhich, according to DFS, “would enable key stakeholders to research and explore more predictable and reliable financial rating services or alternatives.”

Their concern is for homeowners whose mortgages default on their loans if their insurance company’s financial stability rating is lowered by Demotech.

In August, Demotech withdrew the rating of two property insurance companies: Weston and United Property and Casualty Insurance (UPC). Weston was subsequently placed in receivership and liquidated. The UPC is in a trickle as it plans to pull out of Florida and several other states.

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In the funding request, DFS stated, “Demotech, Inc. has been the only financial stability rating organization willing to rate start-up insurance companies and insurance companies with less than five years of experience. historic operating in the State of Florida. Therefore, these insurance companies have limited options to obtain ratings from an entity other than Demotech.
But AM Best told ABC Action News that wasn’t true.

“There is a misconception in the market and in the media that AM Best has exited the market. We didn’t,” Mango explained. “We continue to assess companies there. We have 14 ratings, home insurance companies in Florida.”

Another statement in the application referring to Demotech’s downgrades said: “Downgrades are also a leading cause of insolvency among insurance companies, as agents may be forced to move their clients out of a business. which has been downgraded.”

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We went to the Insurance Information Institute to ask them about this statement.

“Is the demotion the cause of the insolvency of these companies, or are these demotions due to their financial instability?” asked in-depth reporter Stassy Olmos.

“We recently learned that 27 Florida national insurers are on the Florida Insurance Regulator’s Watch List. This means they have financial issues that are of concern to the Florida insurance regulator,” Insurance Information Institute spokesman Mark Friedlander said.

“The fact that we have so many companies on a watch list, in fact, more than we have ever seen in the past, is a major red flag showing how unstable Florida insurers are,” said he added.

Friedlander said companies rated “A” by Demotech should be grateful.

“We spoke to the heads of some of the other rating agencies and they told us, very emphatically, that Florida companies are undercapitalized and most would not qualify for an ‘A’ rating with their company,” did he declare.

We asked Demotech for a response to the state’s new efforts.

President Joe Petrelli said in a statement that it was “an unnecessary response to a problem that does not exist. The reality is that when Hurricane Andrew devastated the state nearly 30 years ago, the rating agencies involved in Florida opted out – but Demotech stepped up.”

“A research effort on rating alternatives could be accomplished at no cost to taxpayers by reviewing existing seller or repairer guides Freddie Mac and Fannie Mae,” he also said.

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A look at Fannie Mae’s loan website shows there are four agencies they will accept notes from – one is AM Best. While an “A” is required from Demotech, loan providers will accept a B from AM Best.

We asked AM Best why more companies wouldn’t want to be rated by their agency.

“Maybe they don’t think they could potentially get the rating they want, or they just don’t want to approach us because there is an easier path to other rating agencies,” Mango replied.

Mango said an agency’s default stats speak volumes. A company does not respect its rating when it has been the subject of one or more formal regulatory actions against it.

“We have ‘A’ ratings and ‘A-‘ ratings on a 10 year default basis, these companies have only defaulted by 0.1% and 0.6%. And it compares extremely favorably to other local agencies in the market,” Mango said.

We looked up Demotech’s default notes.

Their three “A” levels are as follows:

  • A” default is 2.3%
  • A’ default is 8.0%
  • A default is at 9.1%

Insurance experts have expressed concern that Demotech’s ‘A’ ratings drop directly at withdrawals or ‘NR’ – no rating, without first downgrading to their other two levels at ‘M’ – moderate, or “S” – substantial.

While Friedlander said Demotech had a very different rating methodology than global rating agencies with a broader rating scale, he added, “Changing companies would actually make the crisis here in Florida worse, because all these insurers would then be downgraded.

There are also concerns that the state will use the $1.5 million to determine how it can value companies internally. Friedlander said this method is unknown.

“We have never seen another state have an internal ratings process for insurers. The integrity of your insurance company is so important, and that’s why you need third-party analysis of its financial condition,” he explained.

When the Office of Insurance Regulation created its temporary market stabilization program to financially support companies downgraded by Demotech, the office said it would keep companies in compliance with federal loans. However, when we asked the suppliers if this was true, we received no response.

Friedlander said if this type of reinsurance program was accepted by federal suppliers, they would have said so already. Friedlander added that an in-house rating agency also likely wouldn’t be accepted by federal loan providers.

We asked the DFS and the OIR for an explanation of the use of the funds. DFS referred us to OIR.

An OIR spokesperson said in an email that the research conducted with the $1.5 million would be “another tool in the toolbox.”

“OIR hopes that the information gathered from this research will provide additional data to state leaders and help them continue to develop and implement meaningful real estate market insurance reform,” the spokesperson said. .

The Insurance Information Institute pointed out that state leaders missed the mark at the expense of the taxpayer.

“All the lawmakers who sat on this committee are guilty of making a very bad decision, in our opinion,” exclaimed Friedlander.

“This does not solve the crisis. The reason we have a home insurance crisis in Florida is due to frivolous litigation against property insurers and excessive fraud claims related to roof replacements. It is a permanent problem. It has not been resolved and changing rating agencies will not solve the problem,” he said.

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