Tampa Daily Press

Experts say that today’s problems are rooted in many ways in the decisions made by regulators and lawmakers after Andrew.

The hurricane reshaped Florida’s insurance industry, causing several companies to go out of business and others fleeing the state. The legislature created the state-backed Residential Joint Underwriting Association, which was essentially a precursor to Citizens Property Insurance. It offered homeowners coverage that could not be provided by private insurers.

It quickly became the largest state-owned insurer, and there were concerns that it was taking too much risk. The state provided incentives to companies to assume its policies. A number of smaller insurers joined the ranks.

However, the new insurers were faced with a problem: They couldn’t get a financial stability rating by a qualified rating agency. Federally backed mortgage holders, such as Fannie Mae or Freddie Mac, must have high-rated property insurance companies to protect them.

Fannie and Freddie and state insurance regulators as well as banking regulators looked to different rating agencies for assistance. Only Demotech was willing rate the new insurers. Petrelli and Sharon Romano Petrelli, his wife, founded the company in Columbus, Ohio in 1985. Both Fannie and Freddie approved the company’s “A” rating.

Demotech has been Florida-based insurers’ primary rating agency since then. They dominate Florida’s market, and Demotech is paid to rate their financial strength. While other rating agencies, like AM Best in New Jersey, can provide ratings for certain insurers, none of them has been able to compete with Demotech.

According to Kevin McCarty (the state’s insurance commissioner between 2003 and 2016), Florida wouldn’t have an insurance marketplace without Demotech.

McCarty stated, “Regardless of your opinion on them, they serve an inestimable service to the state and the wider economy.”

‘We never got a phone call’

Florida’s dependence on smaller insurers has led to homeowners experiencing booms and busts.

Reinsurance, which is basically insurance for insurance companies, helps smaller insurers to weather Florida’s hurricanes. An insurer may be responsible for paying a few million dollars if a storm strikes, while the reinsurer will pay the rest.

Insurers and state regulators blame excessive lawsuits over the past few years. Petrelli has been a vocal critic of the inaction of the Legislature to curb litigation.

He cited data from Florida’s insurance commission that showed Florida was responsible for 7.75% to 16% of all homeowners’ claims in the United States, and 64% to 76% of all homeowners’ disputes. Critics claim that insurers have more problems.

DeSantis called for a special session to the Legislature in May to adopt insurance reforms that would stabilize the market and reduce lawsuits. But Petrelli stated it wasn’t enough.

Petrelli stated, “It didn’t deter us.”

Mark Friedlander, the communications director at the industry-backed Insurance Information Institute, stated that the response was unlike any he had ever seen. He said that rating agencies are neutral third parties that give ratings to companies.

Friedlander stated that the state’s response was “definitely, in our view, stepping over it.”

Petrelli, on the other hand “has pushed him further into the spotlight by publicly engaging in politics theater,” Florida Association of Insurance Agents stated in a memo distributed to the Office of Insurance Regulation.

In a memo, the association asked whether state insurers should leave Demotech. The memo raised concerns that Demotech can often downgrade a company days before it becomes insolvent.

The memo said that “That often begs question, ‘Does Demotech rating mean something or provide the intended peace-of-mind to consumers, agents, and lenders?’

Petrelli stated that companies should keep their “A”, rating for as long as possible because Fannie and Freddie don’t accept the “S”, rating despite Demotech making numerous attempts to convince them.

He said that when a company receives an “S”, they “unfortunately” fall off the cliff edge.

This is a very elegant solution

The letter from the Office of Insurance Regulation did not dispute the fact that Florida’s insurers were failing. It has 27 companies on its watch list that are subject to “enhanced surveillance.”

Patronis suggested that insurance companies should look for a new rating agency. Friedlander disagreed and said that it wouldn’t be feasible. He noted that AM Best, a New Jersey-based firm, has more stringent requirements than Demotech.

Six days later, state officials announced a solution in case the ratings of companies were downgraded.

Florida’s plan allows insurance companies that are financially sound but not yet receiving Demotech’s “A” rating to continue operating and providing coverage for people’s policies.

The long-running state program, the Florida Insurance Guaranty Association covers homeowners’ claims if they go under. It also covers the first tranche of any claims made by failed insurance companies. Anything over $500,000 for homes or $300,000 for condominium units would be paid by the citizens.

Handerhan described it as a “very creative and very elegant, very customer-centric” solution.

But it will satisfy federal mortgage holders?

Despite numerous calls and emails from the Times/Herald over the past week, representatives from Fannie Mae or Freddie Mac did not respond to Rubio’s inquiries. According to Rubio’s office, the Florida Housing Finance Agency did not respond either.

A spokesperson for the Office of Insurance Regulation stated that they are confident that the solution will be accepted.