Some Florida real estate insurance carriers to suffer financial rating downgrades

Insufficient rate increases to cover weather damages and changes to settlement procedures will lead to rating downgrades for many real estate insurance carriers, the firm that issues the ratings said.

Demotech President Joseph L. Petrelli recently told Insurance Journal that it’s too soon to provide his company’s Financial Stability Ratings (FSR). By reviewing year-end 2019 financial statements and the current state of the Florida residential property insurance market, Demotech sets each carrier’s FSR.

Very few carriers are likely to fail, he said. But many will see downgrades in their financial ratings.

Petrelli told Insurance Journal that numerous factors created an environment he calls the "island of Florida" in reference to the residential property insurance market.

Demotech began monitoring the impact of natural disasters, judicial and legislative impact on Florida’s markets 25 years ago.

The rating agency assigns FSRs to more than 40 Florida domestic insurers.

Petrelli told Insurance Journal that more than a dozen carriers could receive downgrades. He blamed the deteriorating condition of the state’s property insurance market.

Petrelli said that carriers’ business models feel the impacts of the reinsurance marketplace conditions, and catastrophe bonds and insurance-linked securities. Other impacts affecting carriers’ balance sheets include judicial decisions, revisions to carrier and reinsurer claim protocols, procedures and practices.

“It seems to us that the eco-system developed in Florida was constructed to permit the executive and legislative branches to assert some degree of control over the cost of reinsurance, which is a significant component of the ultimate cost to consumers," he said. 

Tweaks have been made to add some direct control over the cost of insurance to consumers also.

Petrelli told Insurance Journal that Demotech’s concern is that this eco-system created to respond to natural disasters faces other threats coming from judicial decisions and settlements.

“The ability of the eco-system to protect Floridians has been compromised by a small number of Floridians who have revised the rules of engagement through judicial decisions and/or utilize litigation as a tool to create claims protocols, practices and procedures in Florida that do not exist in any other US jurisdiction,” Petrelli said. “This converts the peninsula of Florida to the island of Florida.”

He said many factors contribute to the downgrade of carriers. Among them are the exit of insurer investor capital from Florida instead of entering. Holding company debt sits at what Petrelli said are burdensome levels given the natural disasters from 2016 to 2019. These impact annual profitability and balance sheets.

Carriers will endure a financial shock now and in the future with the cost of catastrophe reinsurance. This cost impacts the dollars carriers keep to honor or defend claims of policyholders and for operating expenses.

The past few years of rate increases of less than 15% – which eliminates the expense and time of rate hearings – had a cumulative effect on carriers’ ability to withstand current conditions, Petrelli told Insurance Journal.

The impact of natural disasters got magnified by revised claims settlement rules set by the judiciary, with more claims subject to these new rules of engagement.