Government eyes change in property insurance standards

The Joint Legislature’s budget committee is expected to consider next week a proposal to spend $1.5 million to hire a consultant to look at options for achieving adequate financial standards for property insurers.

Such standards are necessary in part because mortgage-industry giants Fannie Mae and Freddie Mac have to insure their homes with financially sound companies. If insurers lose satisfactory ratings, homeowners may be forced to seek other coverage.

State insurance regulators scrambled in July after ratings agency Demotech said it threatened to downgrade 17 insurers because of widespread financial problems in the property-insurance market. Demotech ultimately downgraded one company and dropped its ratings for two companies, according to a proposal to go before a legislative panel next week.

Insurance Commissioner David Altmeier and state Chief Financial Officer Jimmy Patronis have publicly questioned Demotech, with Patronis criticizing the agency in letters to the heads of Fannie Mae, Freddie Mac and the Federal Housing Finance Agency.

“If (Fannie Mae and Freddie Mac) license a large number of Florida insurers based on one company’s questionable ratings, it will create financial chaos for millions of Floridians,” Patronis wrote.

The Department of Financial Services, which Patronis chairs, has submitted a $1.5 million proposal to the Joint Legislative Budget Committee, which meets Sept. 9 and has the authority to make mid-year budget decisions. The results of the consultant’s work will be forwarded to Gov. Ron DeSantis and the Legislature for consideration in the 2023 legislative session.

“Demotech’s business practices appear to have created confusion and concern for Floridians regarding the Florida insurance market,” the opinion states. “Demotech’s methods and questionable cuts have a serious impact on millions of Floridians, and immediate action is needed. The spending authority provided in this budget amendment will allow key stakeholders to explore and explore more predictable and reliable financial rating services or alternative solutions.”

Demotech President Joseph Petrelli defended the company’s methods in July, saying the company has rated Florida insurers since 1996.

“Demotech has worked diligently to be a positive force in the recovery and delivery of Florida’s residential property insurance marketplace during Hurricane Andrew,” Petrelli wrote in a six-page letter to Altmeier, referring to the 1992 hurricane. “Since 1996, Demotech has consistently applied its rating system and appeals process to all rated insurers. Our process does not guarantee the financial success of every carrier, nor does our process guarantee FSR (Financial Stability Rating) at the level carriers want or need.

The rating issue comes at a time of turmoil in Florida’s property-insurance market, as carriers drop policies and seek higher rates due to financial losses. Five insurers have filed for bankruptcy since February, and major carrier United Property & Casualty Insurance Co. announced last month that it was pulling out of the homeowners market.

United’s assets and liabilities were among 17 companies targeted by Demotech, which downgraded the company after downgrading it.

After United Property & Casualty’s initial decline, on Aug. 2 the state Bureau of Insurance Regulation put the company into a new freeze program to ensure it would continue to provide coverage for homeowners.

The program uses the government-sponsored Citizens Property Insurance Corporation as a financial backstop for private insurers. Citizens played the role of insurance to ensure that claims were paid if insurers went bankrupt.

The program is designed to satisfy Fannie Mae and Freddie Mac in such situations. It uses exceptions in the Fannie Mae and Freddie Mac standards when insurers are responsible for paying claims if they go belly-up.