Florida uses Citizens to stop in the middle of property insurance concerns

TALLAHASSEE – Amid fears that a regulatory agency will undercut many property insurance companies, Florida regulators on Wednesday announced a plan to stop trying to ensure homeowners can be protected.

The plan involves the state-owned Citizens Property Insurance Corp. which works as an interest rate. Citizens can participate in reinsurance to help ensure that claims are paid if the business’s insurers fail.

The arrangement was created to satisfy Fannie Mae and Freddie Mac, the mortgage giants that require mortgages to be insured by companies that have money.

Regulators have been at loggerheads for the past week after the agency Demotech revealed it could downgrade many Florida insurers to a level that would not meet Fannie Mae and Freddie Mac standards. Such a move could lead to what state Chief Financial Officer Jimmy Patronis described as “financial chaos,” as homeowners may have to find alternatives in a tough market.

Related: Property insurers in Florida may face limitations; Patronis warns of ‘financial chaos’

The system announced Wednesday that it will operate differently from Fannie Mae and Freddie Mac, which operates where insurers assume responsibility for paying out if the insurers fail. Government-backed Citizens, which already insures more than 900,000 homes, can provide temporary insurance to companies demoted by Demotech.

“OIR’s (government office of Insurance Regulation) priority is to ensure that consumers have access to insurance, especially during hurricane season; and because of the uncertainty with Demotech’s calculations, we have been forced to take action to protect millions of consumers,” Insurance Commissioner David Altmaier said in a prepared statement.

The announcement came amid a major crisis in the property insurance market, as many carriers shed customers and sought major increases due to the economic downturn. Four insurers have been declared insolvent since the end of February, and thousands of orders a week pour into Citizens, which was created as the last insurer.

Gov. Ron DeSantis called a special meeting in May to deal with property insurance, but problems continue. A report issued on July 1 by the Office of Insurance Regulation, for example, said that 27 property insurers should be “scrutinized” for their money.

The Office of Insurance Regulation last week released Altmaier’s letter which said “approximately” 17 insurers had experienced potential problems from Demotech. Altmaier and Patronis challenged Demotech, questioning, for example, its accounting methods.

Demotech was expected to release an update on Tuesday but postponed the polls. However, Demotech President Joseph Petrelli defended the company’s policies and said it has rated Florida insurers since 1996.

“Demotech has worked diligently to be proactive in resurrecting and nourishing the Florida home insurance industry that was devastated by Hurricane Andrew,” Petrelli wrote Tuesday in a six-page letter to Altmaier, referring to the 1992 hurricane. since 1996, Demotech has been using the reporting and complaint process for all rated insurers. Our practices do not guarantee that any carrier is financially sound, nor does our policy guarantee that carriers’ FSR (financial stability) at the level they want or need.”

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The Office of Insurance Regulation did not elaborate on Citizens reinsurance’s role, and an agency official did not immediately respond Wednesday to a request for more information.

But the plan seems likely to create more economic opportunities for citizens.

Under state law, another organization, the Florida Insurance Guaranty Association, provides money when insurers fail. Under the new system, if the organization reaches its limit of payments, Citizens as a creditor will step in and recover the claims, Citizens spokesman Michael Peltier said.

Citizens have money and buy reinsurance in the private market to help cover claims. But if the money and reinsurance aren’t enough, it can collect additional money from policyholders across the state — a process known as test collection — to pay claims.

By Jim Saunders, News Service of Florida