A new report claims that Florida's property insurance market is full of “low quality insurers,” especially those Florida-based companies that write the bulk of the 7.5 million homeowners and condo insurance policies. It casts aspersions on Demotech, the rating agency that reviews their financial stability.

Former Florida Deputy Insurance Commissioner Lisa Miller sat down with Demotech President Joe Petrelli to get the other side of the story that the report didn't. She also learned that it wasn't low capital and surplus that led to seven company insolvencies, as the report claims, but instead targeted technology-enabled claim instigation.

Show Notes (For full Show Notes, visit https://lisamillerassociates.com/episode-49-when-insurers-exit/)

The report, When Insurers Exit: Climate Losses, Fragile Insurers, and Mortgage Markets was written by researchers at Columbia University, Harvard University, and the Federal Reserve Board and published online prior to being peer reviewed. The report’s abstract describes it as a study of how homeowners insurance markets respond to growing climate losses and how this impacts the home mortgage markets.

“Using Florida as a case study, we show that traditional insurers are exiting high risk areas, and new lower quality insurers are entering and filling the gap. These new insurers service the riskiest areas, are less diversified, hold less capital, and 20 percent of them become insolvent. We trace their growth to a lax insurance regulatory environment. Yet, despite their low quality, these insurers secure high financial stability ratings, not from traditional rating agencies, but from emerging rating agencies.”

The report specifically targets rating agency Demotech, which provides Financial Stability Ratings (FSR) for most of the 50 or so Florida-based property insurance companies, including six of the recent eight carriers to enter the market. The report claims Demotech’s ratings “are high enough to meet the minimum rating requirements” of Fannie Mae and Freddie Mac, which back many home mortgages, but that most of those insurance companies wouldn’t meet government requirements if rated by AM Best, suggesting the companies are financially weak.

“I think the thing to keep in mind is the report is based on what are called counterfactual AM Best ratings of Demotech-rated companies,” said Joe Petrelli, President of Demotech, who described counterfactual methods as those based on “what-if” scenarios. “So I think that, in and of itself, should have alerted people that this was not based on anything real or actual. It was based on counterfactual information. It's like rewinding the world, changing a few crucial details, and then hitting play to see what happens. It's essentially a simulation,” said Petrelli.

Petrelli is an actuary and a 55-year veteran of the insurance industry. He and wife Sharon co-founded Demotech in 1985 and today the agency reviews and rates 460 insurance companies across America. It is registered with the U.S. Securities and Exchange Commission as a nationally-recognized statistical rating organization for insurance companies. Florida regulators approached Demotech in 1995 to become the very first ratings company to review and rate independent, regional and specialty companies that filled the gap left by.... (For full Show Notes, visit https://lisamillerassociates.com/episode-49-when-insurers-exit/)