A private agency that scores the financial health of insurance companies is planning on downgrading its ratings for nearly half of the 40 Florida property insurers it grades. The driving reason, Demotech Inc. said, are economic conditions for all insurers following the heavy storm seasons since 2016.
The letter did not specify the companies in peril or the number of policies potentially affected. But property owners insured through the downgraded companies could be required to seek new insurers.
“The economics of the marketplace over the past several years have made it impossible for Demotech to sustain each of the Florida focused (carriers) that we review each quarter at a Financial Stability Rating ... of ‘A,’ (which means) exceptional,” said Joseph Petrelli, president of Demotech, in a letter.
Demotech is one of five major insurance rating companies. It primarily rates smaller insurers that are regionally focused, which includes many of Florida’s property insurance companies. Reached by phone, Petrelli declined to comment further, citing a note atop the letter that said it was meant for a “limited distribution.”
Petrelli’s letter, dated Dec. 20, was addressed to the president of state-run Citizens Property Insurance Co., which has been trying to shed policies from property owners it says should now be able to get insurance elsewhere. Demotech said that a number of factors made it reconsider the ratings for as many as 18 of its rated insurers.
One of the most significant hurdles insurers face, it said, is hefty debt incurred from the storm seasons between 2016 and 2019, which included Hurricanes Irma, Michael and Harvey.
“For some carriers, the dollar amount of debt is burdensome, as well as the interest rate associated with the debt,” the letter said.
The cost of reinsurance — insurance for insurance companies — is also rising and is expected to continue to rise in the future, while capital from investors, Demotech said, is leaving the state. And rates charged to customers are not high enough to cover the actual cost of insuring the properties, the company said.
Many insurers have faced increased costs in overall claims because of a significant uptick in litigation in the past few years related to disputes over the price of repairs for water damage that wasn’t caused by hurricanes, an issue known as “assignment of benefits.”
“The long-term favorable impact of the newly passed legislation are that,” Petrelli said. “Long-term.”
The letter warned Citizens that it may have trouble achieving its goal of culling its pool of 444,000 policyholders because of new policies it may need to absorb from the downgrades. Customers may need to switch carriers if the company servicing their mortgage doesn’t consider a new, lower rating sufficient enough for an insurance policy, said Mark Friedlander, the Florida representative for industry group the Insurance Information Institute.
“As the state’s insurer of last resort, we have no regulatory authority over private insurers, but pay close attention to the market," Barry Gilway, president of Citizens, said in a statement. "We will continue to closely monitor market conditions and are ready to perform our residual duties if called upon to do so.”
The state insurance regulator, the Florida Office of Insurance Regulation, also rates insurers for financial stability.
“Florida is one of the most complex insurance markets in the world,” the agency said in a statement. “OIR is closely and consistently monitoring the financial condition and operational results of the state’s domestic property insurers.”
The downgrades, Demotech said, could be prevented by a number of solutions, including raising rates, working with the state on reinsurance costs, securing lower interest rates on their debt and building up their reserves.
Should the solutions not be implemented in time, however, Demotech plans to downgrade ratings for “two to four” insurers this month “and another 10 to 15” by March.