Florida Homeowner Insurers May See Downgrades

Demotech, the agency that is responsible for assigning insurers a financial stability rating (FSR) has warned that more than 40 domestic insurers in Florida will receive a downgrade, mainly due to the deteriorating conditions in Florida’s property insurance market. Another dozen could end up being downgraded in the next few months. 

Demotech President, Joe Petrelli sent a letter to Barry Gilway, who heads up the state mandated Citizens Property Insurance Corp, warning that shrinking Citizens policy count may end up being “more difficult than expected as Demotech would be downgrading several carriers in January, February and March 2020.”

Citizens Property acts as the insurer of last resort in Florida for homeowners who have difficulty finding a policy in the private insurance market. Citizens policy count has been growing over the years as insurers have pulled out of the state due to increased storm activity as well as legal expenses related to fraudulent assignment of benefits (AOB) claims. 

Citizens Property had hoped to reduce their policy count after AOB reform was finally passed by state lawmakers last year. 

Petrelli confirmed in a recent Insurance Journal article that Demotech expects two to four downgrades by the end of January and then another four to six by the end of March.

Petrelli said in the article that the downgrades relate to current market forces as well as carrier specific financial metrics which have created a hazardous financial environment for numerous insurers. Petrelli said that Demotech has reviewed the third quarter 2019 financials of carriers and has requested year-end projections of operating results for almost half of the 40-plus carriers it reviews and rates in the state of Florida. 

“Having provided these carriers with ample time to implement revised business models, secure capital infusions, implement rate revisions, re-underwrite established books of business and utilize other enterprise risk management activities, it is apparent that few have returned to profitability,” Petrelli wrote in the letter to Gilway.

Petrelli’s letter noted that up to 18 out of the 40 plus companies Demotech reviews, “will not produce a level of pre-tax profitability consistent with sustaining an FSR at the A level nor position themselves to do so in the near term.”

Rates Don’t Reflect Insurer Costs

Insurers have accepted rate increases at a percentage change that has not reflected the cost of the risk. This is mainly due to the fact that insurers have decided to request rate increases of less than 15 percent for a number of years. Rate increase requests that fall under 15 percent eliminates the need for a hearing and decision which helps save insurers money but has led to rates not truly reflecting the risk insurers are facing. 

The cost of AOB claims has been a well-publicized issue over the last few years and has led to rising costs for insurers, forcing insurers to pull out of certain areas of the Sunshine State, the issue has been particularly bad in South Florida. While reforms passed last year should help contain these costs in the future, many of the AOB claims could take years to resolve and are still impacting the bottom line of many insurance companies. 

As an example, Edison Insurance Co. was subject to a rate hearing by the state for a 21.9% rate increase it requested for policies with a Feb. 1, 2020 and March 1, 2020 effective date. Officials from the company informed regulators that without the recently passed AOB reforms they would have needed a 38 percent rate increase. 

In addition to AOB issues, recent hurricane losses have made reinsurance much more expensive and, in some cases, difficult to obtain in certain areas. 

A June 2019 report from AM Best found that hurricane losses, AOB issues, and adverse loss reserve development (reinsurance) have made Florida a difficult state for insurers. 

“Rising reinsurance costs have the potential to pressure some of the more thinly capitalized Florida-specific companies in the market,” the report said. “The higher reinsurance costs may give way to greater use of insurance-linked securities and alternative risk transfer mechanisms such as catastrophe bonds,” the report continued. “Insurers will look to expand their programs to include more cost-effective options to expand capacity and provide both company and policyholders with adequate protection.”

What Can Insurers Do?

What options are available to insurers to improve their financial stability and avoid a downgrade? According to the Insurance Journal article, Demotech suggests the following:

• Submission to OIR of a well-documented and thorough filing to “true up” their reinsurance costs
• A marked and immediate decrease in the interest rate applicable to the accumulated debt in their holding company
• Securing actuarially sound rates at the earliest possible date
• Access to sufficient capital to move loss and loss adjustment expense reserves to an adequate level

These options will all take time to put in place and will most likely not head off a rating downgrade in the near future. These downgrades could have a major impact on the Florida insurance market as well as homeowners. Most mortgage lenders require your homeowner insurance company to have a hazard rating of ‘A’ on homeowners insurance policies.

The Federal Association for Insurance Reform (FAIR) said in a recent press release that it is “deeply concerned” about the operating results of Florida-based insurance companies.

“Under certain circumstances, policies issued by downgraded insurers may not comply with federally backed mortgage requirements. Policyholders, insurance agents, lenders and realtors will be scrambling to find insurers acceptable in the mortgage market. This may also result in policies being transferred to government-owned Citizens Property Insurance Corporation, which is not a great option for the state or policyholders,” the FAIR press release said.

FAIR is hopeful that the state legislature will address issues in the homeowner market this year. “Legislative action can favorably impact both the frequency and need for rate increases in Florida’s residential homeowners insurance market. FAIR is asking state regulators and legislators to develop and pass balanced and meaningful reforms to provide relief to Florida’s policyholders,” FAIR said in their recent press release.