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State Offers Plan for Insurance Rating Problems

The Fla. agency that backs policies after an insurer bankruptcy will work with Citizens to keep state insurers solvent if Demotech ever again threatens to lower ratings.

TALLAHASSEE, Fla. – Amid fears that a financial-ratings agency will downgrade numerous property-insurance companies, Florida regulators Wednesday announced a stopgap plan to make sure homeowners can maintain coverage.

The plan involves the state’s Citizens Property Insurance Corp. acting as a financial backstop. Citizens – Florida’s “insurer of last resort” – would take on a reinsurance role to help make sure claims get paid if private insurers go insolvent.

The arrangement is designed to satisfy Fannie Mae and Freddie Mac, the mortgage-industry giants that require homes to be insured by financially sound companies. If Fannie and Freddie decide an insurer falls below their financial standards, any current covered homeowner with a mortgage must switch insurers or accept a force-placed policy.

Regulators have scrambled during the past week after the Demotech ratings agency indicated it could downgrade some Florida insurers to an acceptable level for Fannie Mae and Freddie Mac. Chief Financial Officer Jimmy Patronis described that as “financial chaos,” if homeowners have to find other coverage in the troubled market.

The plan announced Wednesday would use an exception in Fannie Mae and Freddie Mac standards. It applies when reinsurers – basically insurance policies for insurance companies – take responsibility for paying claims if insurers go insolvent. State-backed Citizens, which already insures more than 900,000 homes, would temporarily provide such reinsurance for companies downgraded by Demotech.

“OIR’s (the state Office of Insurance Regulation’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,” Insurance Commissioner David Altmaier said in a prepared statement.

The announcement came amid large problems in the property-insurance market, as many carriers have dropped customers and sought major rate increases because of financial losses. Four property insurers have been declared insolvent since late February, and thousands of policies a week pour into Citizens, which should only be an insurer of last resort.

Gov. Ron DeSantis called a special legislative session in May to address the property-insurance system, but problems have persisted. A report issued July 1 by the Office of Insurance Regulation, for example, said 27 property insurers were subject to “enhanced monitoring” because of their financial conditions.

The Office of Insurance Regulation last week released an Altmaier letter that said “approximately” 17 insurers faced potential downgrades from Demotech. Altmaier and Patronis were critical of Demotech, questioning, for example, its ratings methods.

Demotech had been expected to release ratings changes Tuesday but postponed the decisions. Nevertheless, Demotech President Joseph Petrelli defended the company’s methods and said it has rated Florida insurers since 1996.

“Demotech has worked diligently to be a positive force in the resurrection and sustenance of the Florida residential property insurance marketplace that was devastated by Hurricane Andrew,” Petrelli wrote Tuesday in a six-page letter to Altmaier, referring to the massive 1992 hurricane. “Since 1996, Demotech has consistently applied its rating methodology and appeal process to all rated insurers. Our process does not guarantee every carrier’s financial success, nor does our process guarantee carriers an FSR (financial stability rating) at a level that they desire or require.”

The Office of Insurance Regulation did not provide a detailed explanation of Citizens’ reinsurance role, and an agency official did not immediately respond Wednesday to a request for additional information. However, the arrangement appears to potentially create additional financial exposure for Citizens.

Under state law, another agency, the Florida Insurance Guaranty Association, pays claims when insurers go insolvent. Under the new arrangement, if the association reaches its claims-paying limit, Citizens as a reinsurer would step in and cover claims, Citizens spokesman Michael Peltier said.

Citizens has cash and buys reinsurance on the private market to help pay claims. But if the cash and reinsurance are not enough, it can collect additional money from policyholders throughout the state – a process known as collecting assessments – to pay claims.

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