Florida enacts temporary reinsurance plan amid Demotech downgrades

The Florida Office of Insurance Regulation (OIR) has made plans to establish a temporary reinsurance arrangement through Citizens Property Insurance Corporation (Citizens) in the event of what it considers to be “disruptive” financial rating downgrades from the regional rating agency, Demotech, Inc.

Demotech recently wrote to 17 Floridian insurers to inform that their ratings may soon be downgraded, as firms struggle to contend with extremely challenging conditions in the state’s property market.

But the OIR has condemned Demotech’s actions as “inconsistent” and “monopolistic”, and says it will push Florida’s insurance market into further turmoil.

For property insurers in Florida, a rating lower than A means that mortgage guarantors Fannie Mae and Freddie Mac will not accept their policies as they require borrowers to maintain insurance protection from A-rated insurers.

But the new reinsurance solution enacted by the OIR would allow insurers to meet an exception offered by Fannie Mae and Freddie Mac to ensure Floridians can maintain coverage during the hurricane season.

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“OIR’s greatest priority is ensuring consumers have access to insurance, especially during hurricane season; and because of the uncertainty with the status of Demotech’s ratings, we’ve been forced to take extraordinary steps to protect millions of consumers,” said Insurance Commissioner David Altmaier.

“This innovative arrangement satisfies requirements set by the secondary mortgage market. In the event we need to implement this temporary solution, consumers will not need to seek coverage elsewhere, agents will not need to move policies, and lenders can have confidence that these insurers continue to meet the mortgage qualifications.”

Fannie Mae and Freddie Mac each offer an exception to their financial rating requirements for an insurer that is covered by a reinsurer who assumes, by endorsement, 100% of the insurer’s liability for any covered loss payable, but unpaid by the insurer, by reason of insolvency.

As a result, OIR, in conjunction with Citizens, has formed a program that meets this exception, meaning there should be no reason for lenders to require a replacement policy, or force place coverage based solely on the ratings downgrades.

OIR stresses that this arrangement will be implemented on a temporary basis while the Florida market endures its ongoing period of volatility, and says it should “allow insurers to remain viable, to continue providing coverage for Floridians and helps keep policies out of Citizens.”

Demotech has extended its review of Florida insurers’ financial strength ratings to give its analysts more time to assess Q1 results in light of the state’s challenging property market conditions, but has been unable to provide a timeline for ratings despite requests from the Florida regulator.

The potentially catastrophic effect of widespread downgrades has already been evidenced by the recent reduction of FedNat’s financial strength rating from ‘A’ to ‘S’, which threw the insurer’s entire future into question and has ultimately led to the resignation of both FedNat’s CEO and CFO as the firm scrambled to offload policies amid a difficult reinsurance renewal period.

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