Demotech’s Decline and What It May Mean for the Florida Home Insurance Market | Bankrate

The summer of 2022 has been uncertain for millions of Florida homeowners. Increased fraud, excessive litigation and worsening weather conditions have left Florida’s property insurance market vulnerable. With the news that 27 of Florida’s property insurance companies may be facing a financial rate downgrade, Florida homeowners brace themselves for the possibility of scrambling for a new study in the middle of what scientists predict will be an active hurricane season.

The Florida Senate held a special session in May to address issues in Florida’s property insurance market, and as a result passed Senate Bill 2D. Although the contents of the bill are promising, Florida homeowners are facing another new problem, as the financial reporting company Demotech announced at the end of July that they could reduce the costs of 27 Florida insurance companies.

Bankrate examines what this low rate of financing means for Florida homeowners so they can better prepare for the uncertain future ahead.

Key points

  • 27 insurers in Florida are facing bankruptcy from the company Demotech.
  • If your loan goes through Freddie Mac or Fannie Mae, your homeowner’s insurance company can’t be rated lower than A, or you have mandatory insurance.
  • Florida has announced that it is suspending the provision of insurance through state-sponsored citizens to meet the requirements of Freddie Mac and Fannie Mae.
  • Bankrate spoke with Demotech President Joe Petrelli, who says that the download information was released prematurely, and that the characters mentioned are just the beginning.

What is cash flow?

Financial evaluation and rating agencies such as AM Best, Standard & Poor’s (S&P) and Demotech rate insurers based on their financial strength, which is called capital or fixed capital (FSR). An insurance company’s FSR reflects its ability to pay the premiums.

Although it is important that the insurance company can pay the debt when needed, the costs of your insurance company can also affect your credit. If your loan is backed by Freddie Mac or Fannie Mae and your insurance company is rated by Demotech, the company must have an FSR of A or higher. If not, you run the risk of forced insurance.

Which Florida insurance companies are underwriting?

Since the process is private, it is not possible to know which companies are involved until the download is official. As it stands, Demotech can lower the FSR of 27 Florida insurance companies.

On August 1, 2022, Demotech downgraded the FSR of United Property and Casualty Insurance (UPC) from A to M. In addition, Demotech removed the FSRs of Weston Property Insurance and FedNat. In addition, Weston Property Insurance he declared that he had no money on August 4, 2022. In most cases, discharge can be the first step to bankruptcy.

Bankers Specialty Insurance and First Community Insurance (shared with parent Bankers Insurance Group) had their ratings revoked on August 3, 2022. In response, Bankers Insurance Group spun off their business in Florida.

What is being done to slow the decline in ratings?

As a stopgap measure, it is Florida Office of Insurance Regulation (OIR) announced that the government-backed Citizens will provide insurance to companies affected by the Demotech downturn. Instead, OIR is using Citizens to certify companies that have been downgraded if they don’t have enough money to pay the bills. According to OIR, this recovery plan should provide relief to homeowners in meeting the insurance requirements of Freddie Mac and Fannie Mae.

It is unclear whether the citizens will be able to cope with the situation. Because many insurers offer non-renewable (or evasive) coverage, Citizens is the only option for many homeowners. In 2021, Citizens saw a 37.7% has increased in the new business and was about one million policy holders from July 2022.

The influx of new businesses and the additional withholding obligation for discounted insurers can be a challenge for citizens.

Mark Friedlander, Director of Corporate Communication for Insurance Information Institute (Triple-I), says,

The country’s residents are financially strong but its reserves appear to be insufficient to deal with major hurricane events. As of July 15, Citizens has $311 billion in exposure but can pay about $11.3 billion in claims.

If the 2022 hurricane season turns out to be as severe as many climate scientists predict, Floridians and homeowners could face unprecedented hardships.

How will the Citizens stopgap affect Florida wages?

Citizens is a non-profit insurance company created by the state of Florida in 2002. State laws allow Citizens to raise funds through premiums and in some cases, statewide assessments.

Florida law requires Citizens to pay for most of Florida’s homeowner’s policies if they suffer damage as a result of a disaster, regardless of whether Citizens has a policy or not. This assessment is sometimes called “hurricane tax,” and can be covered on all auto, condo, renter and home owner policies in Florida. For Citizen customers, this fee is 15% per point. For those who are insured elsewhere, the fee can be up to 2% of the total amount you pay.

If Citizens end up in deficit after giving claims payouts to downgraded companies, it is possible that almost all Florida insurance holders pay higher premiums to help rebuild the claims database of the company.

Demotech responds to criticism

On July 21, 2022, Florida Insurance Commissioner David Altmaier issued a letter to Demotech which questioned whether the company was using their methods fairly and consistently.

Bankrate had the opportunity to correspond with Demotech president Joe Petrelli. In response to Altmaier, Petrelli says,

Recently, there has been some unfair criticism of Demotech based on incomplete, untimely, or false information regarding our voting process.

Petrelli also has a problem with showing the download method. He went on to say,

“These signs were a false reflection of our published process and methods of presentation, mainly because they show the first letters as the last, while our process – the same process that we have been using for many years – includes a continuous review of the relevant data.

The audit process is an ongoing process that takes into account various internal and external factors. Demotech uses a variety of factors to create analysis, including the following industry information: the amount and type of reinsurance; quantity of goods; degree of return (debt versus equity and premium); ability to rationalize and maintain grievances; and work environment (legal, legal, climate, etc.).

We continue to review insurance information even after initial letters have been sent, and this process sometimes results in changes that are different from what was originally shown. “

What happens if your insurance company is downgraded?

If your homeowner’s insurance company is downgraded, they must give you 30 days notice. When you get a downgrade letter in the mail, here’s what you need to know:

At this point, nothing is needed

If Demotech is underwriting your homeowner’s insurance company, there is nothing you need to do at this time. OIR states that the Citizens Insurance stopgap will meet the housing requirement.

You can buy new home insurance

If your homeowner’s insurance policy has been dropped, you may want to consider purchasing homeowner’s insurance in Florida. Be aware, however, that Florida’s insurance market is volatile, and it can be difficult to find an insurance company willing to take on new business.

In addition, since Demotech does not announce downgrades until they happen, it is possible to switch from one downgraded company to another in the future. In short, there is no guarantee that you will be in a better place if you change.

What to do if you can’t get insurance

As mentioned, you don’t have to buy new insurance if Demotech takes down your current company. Many Floridians, however, are also receiving non-renewal notices from their insurance companies. If you are not renewing, you must get new coverage before your non-renewal date. Failure to do so will result in termination of coverage and possible consequences from your mortgage company.

If you are having trouble finding an insurance company in Florida that will offer you a policy, you may want to consider Citizens. Citizen is not a take-all company, which means it can refuse to publish. However, he has a history of writing contracts for many Floridians that other companies have turned down.

A very important point

Florida’s homeowner’s insurance market continues to struggle, as evidenced by Demotech’s low interest rates. Initially, it is not known how much this downgrade will affect Florida homeowners but for now, a stop-gap process through citizens managed by the state has been put in place. If you have insurance with a low-cost company, you do not need to buy new insurance (if the company is still solvent).

In fact, this may not be the end of Florida’s homeowner’s insurance crisis in 2022. Mark Friedlander continued,

Compared to previous hurricane markets, which started due to property damage and hurricanes, the current problem is man-made: due to the high number of frauds in the place of the roof and the many cases in which the insurance is issued. It is not the result of extreme weather events.

Until the state enacts effective laws to deal with serious problems — fraud and frivolous crimes — Floridians will continue to pay the price.