$1.5 million in taxpayer money approved to investigate insurance rating agencies

TAMPA, Florida. The latest controversy surrounding 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 Insurance Regulation to study alternative ways of valuing insurance companies.

“If they’re willing to spend $1.5 million of taxpayer money to find out if there are other credit rating agencies in the market, global credit rating agencies, that are interested in rating companies in Florida, all they had to do was pick up the phone and to speak for AM Best,” said Jeff Mango, managing director of strategy and communications at Global Credit Rating Agency AM Best.

On Sept. 9, the Florida Legislative Budget Committee approved a request for $1.5 million from the Insurance Regulatory Trust Fund, which DFS said will “allow key stakeholders to research and explore more predictable and reliable financial rating services or alternative solutions.”

Their concern is that homeowners with mortgages will default on their loans if Demotech downgrades their insurance company’s financial soundness rating.

In August, Demotech withdrew the ratings of two property insurance companies: Weston and United Property and Casualty Insurance (UPC). Weston then went into receivership and liquidation. UPC is in a runoff as it plans to expand out of Florida and several other states.

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In the funding request, DFS noted, “Demotech, Inc. was the only financial strength rating organization willing to rate start-up insurance companies and insurance companies with less than five years of experience in the state of Florida. Therefore, these insurance companies have limited opportunities to obtain ratings from an organization other than Demotech.”
But AM Best told ABC Action News that’s not true.

“There is a misconception in the market and in the media that AM Best has left the market. We didn’t, Mango explained. — We continue to evaluate companies there. We have 14 rated Florida insurance companies.”

Another statement in the request regarding Demotech’s downgrade said: “Downgrades are also a major cause of insurance company bankruptcies, as agents may be required to withdraw their clients from a downgraded company.”

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

“Does the downgrade drive these companies into insolvency, or is the downgrade because they are already financially unstable?” reporter Stacey Olmos asked.

“We recently learned that 27 Florida domestic insurance companies are on the watch list of the Florida Insurance Regulator. That means they have financial problems that are of concern to the Florida insurance regulator,” said Insurance Information Institute spokesman Mark Friedlander.

“The fact that we have so many companies on the watch list, actually more than we’ve ever seen in the past, is a major red flag that shows how volatile Florida insurance companies are,” he added.

Friedlander said companies with an “A” rating from Demotech should be grateful.

“We talked to the executives of some of the other rating companies and they told us very strongly that the companies in Florida are undercapitalized and most of them would not be able to get an ‘A’ rating with their firm,” he said.

We asked Demotech to respond 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 credit rating agencies involved in Florida decided to walk away, but Demotech stepped up.”

“Exploration of rating alternatives could be done at no cost to taxpayers by reviewing existing Freddie Mac and Fannie Mae sellers or service manuals,” he also said.

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A look at Fannie Mae’s loan website shows that there are four agencies they accept ratings from – one is AM Best. While ‘A’ is required from Demotech, loan providers will accept B from AM Best.

We asked AM Best why more companies don’t want their agencies to rate them.

“They either don’t think they can potentially get the rating they want, or they just don’t want to go to us because there’s an easier way with other rating agencies,” Mango replied.

Mango said the agency’s default statistics speak volumes. A company fails its rating if one or more formal regulatory actions have been taken against it.

“We have A and A- ratings based on 10-year defaults, these companies have only defaulted by 0.1% and 0.6%. And it is extremely profitable compared to other local agencies in the market,” said Mango.

We checked Demotech’s standard ratings.

Their three “A” levels are as follows:

  • A” default is 2.3%
  • A’ defaults to 8.0%
  • Default is 9.1%

Insurance experts have expressed concern that Demotech’s ‘A’ ratings are downgraded immediately before withdrawal or ‘NR’ – unrated, without first being downgraded to the other two levels – ‘M’ – moderate or ‘S’ – substantial.

While Friedlander said Demotech has a significantly different rating methodology than global rating agencies with a broader rating scale, he added, “The change of firm will actually make the crisis here in Florida worse because all these insurance companies will then be downgraded.”

There is also concern that the state could use the $1.5 million to understand how they can value companies domestically. Friedlander said the method is unheard of.

“We’ve never seen any other state have an internal rating process for insurers. The integrity of your insurance company is very important, and that is why you need a third-party analysis of its financial health,” he explained.

When the Insurance Regulatory Authority created the Temporary Market Stabilization Program to financially support companies downgraded by Demotech, the Authority said it would keep the companies eligible for federal loans. However, when we reached out to the vendors to ask if this was true, we didn’t hear back.

Friedlander said that if such a reinsurance program had been accepted by federal providers, they would have already said so. We have previously tried to inquire with lenders and have received no response. Friedlander added that a domestic rating agency would likely not be accepted by federal lenders either.

We have also asked for clarifications regarding the use of funds in the SFS and OIR. The SFS directed us to the OIR. An OIR official said in an email that the $1.5 million study would be “another tool in the toolbox.”

“OIR hopes that the information gathered from this study will provide additional data to state leaders and help them continue to design and implement significant reform of the property insurance market,” the spokesperson said.

The Institute of Insurance Information emphasized that the state leadership was underpaid at the expense of taxpayers.

“In our opinion, all the legislators who participated in this committee are guilty of making a very bad decision,” Friedlander exclaimed.

“This is not a solution to the crisis. Florida’s home insurance crisis is caused by frivolous lawsuits filed against property insurers and excessive roof replacement fraud claims. This is a constant problem. It is not resolved and changing rating agencies will not solve the problem,” he said.

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