Recent developments with Demotech showing that it can take down seventeen Florida insurance companies reminded me of the above from Casablanca. Florida Insurance Commissioner David Altmaier is expected to test the role of corrupt police officer Captain Louis Renault if the film is to be remade.
Altmaier wrote a Florida insurance company preparing a letter of objection to Demotech in which he criticized the investment agency’s actions. The letter said:
The Florida Office of Insurance Regulation (OIR) recently learned that Demotech, Inc. (Demotech) has notified approximately 17 Florida home insurance companies that their Financial Stability Rating (FSR) will be lowered from “A” to “S” or “M”. OIR strongly believes that accounting firms and insurance industry regulators perform two important, but very different, roles. Therefore, we have tried to ensure that Demotech is able to earn its ratings based on the consistent and fair use of its standards. However, as OIR hears more about the letters sent to companies, and considers how this could affect millions of Floridians, countless jobs, and Florida businesses, this type of action should be reevaluated. OIR is being forced to take unprecedented action to protect the Floridians we serve, especially two months into hurricane season. This is an example of the unbiased, independent power of the polling agency and it is trying to empower Floridians and policy makers by trying to block public policy based on their opinions.
OIR has noted that Demotech recently received designation as a Nationally Recognized Statistical Rating Organization (NRSRO) through the Securities and Exchange Commission (SEC) and is now required to publicly submit their rating process. It appears that the affected carriers only received information about this measurement method within the last two days via the download notification they received. OIR has reviewed recent correspondence with affected carriers, received responses regarding discussions between Demotech and affected carriers, reviewed your statements, and noted several discrepancies between these recent decisions and the measurement method posted on Demotech’s website. To ensure that actions are not made randomly and are used appropriately and consistently, OIR has determined that we would benefit from understanding why these differences exist, if Demotech plans to adapt its procedures to accommodate these differences, and if Demotech. plans to allow companies to appeal its decision according to Demotech’s submission.
This letter would be funny if it weren’t so sad. Everyone in the insurance industry questions how Demotech provides legitimate financial advice for Florida insurance companies. Florida insurance companies have backed Demotech. Florida’s insurance regulators seem to disagree with Demotech’s approach until yesterday because Demotech supported unethical measures.
Demotech ratings are not new news. In 2015, we warned that a Tampa Bay Times he asked if Demotech is a company that regulators can trust Citizens, Storms, and Making Sure Your Insurance Company Goes Awry:
“There is no easy answer for policyholders trying to ensure they have the best coverage in the event of a hurricane, but there are three things policyholders should use when researching their insurance company: AM Best, DemoTech, and Weiss Ratings. Tampa Bay Times indicates that one of the companies that evaluates this may be failing as well.
Six insurance companies between 2006 and 2011 that received money laundering orders from Citizens later failed with taxpayers’ money in the hundreds of millions. All six, review articles, were rated ‘A’ by DemoTech.
In 2018, another rating agency questioned Demotech’s ratings. He noted the good relationship between Demotech, Florida insurance companies, and the Florida Office of Insurance Regulation. The Insurance Journal news, Ratings Agency Opens Debate on Financial Strength of Florida Insurershe said among other things:
‘We believe that giving an A rating to a company with very little financial strength is tantamount to consumer fraud,’ said Weiss Ratings founder Martin D. Weiss. ‘If the rating agency is paid money and insurance for the ratings, and if this good policy is protected by commercial or regulatory agencies, we fear that these agencies may also be involved in that fraud.’
“A few months before the failure of Sawgrass Mutual Insurance Co., Weiss assigned a D+ (weak) rating and maintained that warning until the day of the failure,” Weiss said. that the company did not fail because of taking the goods, we feel that our level gave a proper warning to the buyers of the dangers.’
Weiss said the opening of Hurricane Irma and the failure of Sawgrass Mutual raises ‘big questions for consumers and regulators,’ such as why did it happen despite the ratings being approved by Freddie Mac and Fannie May?
Weiss also stated that his ratings are ‘100 percent independent,’ which he says is not the case with Demotech….
Demotech is the all-time King of turning financial grades from A to F in the shortest time imaginable. But this history is not recent. How is it possible for Insurance Commissioner Altmaier not to think that Demotech is offering financial advice to insurance companies that many other agencies find untrustworthy? I suspect they are just surprised that Demotech is banning this. This sadly resembles a game of “musical chairs” where Altmaier is left without a seat – but that has been the risk of relying on Demotech.
The financial failure of insurers is bad for everyone. Policyholders need insurance companies to generate sustainable profits and grow. “The purpose of insurance regulators is to maintain good prices for insurance products, to protect the credibility of insurance companies, to prevent wrongful conduct of insurance companies, and to ensure that insurance is available.”1
The problem is that Florida insurance companies have come to rely on a simple agency to get the coveted A ratings. As I mentioned earlier this week in my post, The Revolving Door Connecting Insurance Regulators and Insurance Companies That They Purport to RegulateInsurance regulation in Florida does not work because of good relations with the companies it regulates.
As we can see in real time, policyholders and insurance companies suffer in the long run when this type of oversight occurs.
This is the real problem of insurance in the insurance market in Florida.
Thought of the Day
Renault: Everyone get out of here immediately! This cafe is closed until further notice. Clear the room, immediately!
Rick: How can you shut me up? For what reasons?
Renault: I was surprised—surprised—to find out that gambling is going on here!
seller: [hands Renault money] Best of luck to you, sir.
Renault: [to croupier] Oh, thank you very much. [announcing to the room] They all come out at the same time!
1 Wikipedia, the free encyclopedia