Insurance coverage

Florida offers temporary solution for homeowners to maintain insurance coverage

Amid fears that a financial rating agency is downgrading many property insurance companies, Florida regulators announced an interim plan on Wednesday to try to ensure homeowners can maintain coverage.

The plan involves Citizens Property Insurance Corp. of the State acts as a financial support. Citizens would take on a reinsurance role to ensure claims are paid if private insurers become insolvent.

The arrangement is designed to satisfy Fannie Mae and Freddie Mac, giants of the mortgage industry who demand that homes be insured by financially sound companies.

Regulators have been scrambling over the past week after ratings agency Demotech indicated it could downgrade many Florida insurers to levels that would not meet Fannie Mae and Freddie Mac standards. Such a move could lead to what state chief financial officer Jimmy Patronis called “financial chaos” as owners may have to find other cover in the struggling market.

The plan announced Wednesday would use an exception in the Fannie Mae and Freddie Mac standards that applies when reinsurers take responsibility for paying claims if insurers become insolvent. The state-backed Citizens, which already insures more than 900,000 homes, would temporarily provide such reinsurance to companies downgraded by Demotech.

“The biggest priority of the OIR (the National Insurance Regulatory Board) is to ensure that consumers have access to insurance, especially during hurricane season; and due to the uncertainty surrounding the status of Demotech’s ratings, we have been forced to take extraordinary action to protect millions of consumers,” Insurance Commissioner David Altmaier said in a prepared statement.

The announcement came amid massive problems in the property insurance market as many carriers abandoned customers and demanded steep rate increases due to financial losses. Four property insurers have been declared insolvent since late February, and thousands of policies a week are flocking to Citizens, which was set up as an insurer of last resort.

Governor Ron DeSantis called a special legislative session in May to address the property insurance system, but problems persist. A July 1 report from the Office of Insurance Regulation, for example, says 27 property insurers are under “enhanced scrutiny” because of their financial condition.

The Office of Insurance Regulation released a letter from Altmaier last week saying “about” 17 insurers were at risk of being downgraded by Demotech. Altmaier and Patronis have criticized Demotech, questioning, for example, its scoring methods.

Demotech was due to release ratings changes on Tuesday, but postponed decisions. Nonetheless, Demotech President Joseph Petrelli defended the company’s methods and said it had been rating Florida insurers since 1996.

“Demotech has worked diligently to be a positive force in resurrecting and sustaining the Florida homeowners insurance market that was devastated by Hurricane Andrew,” Petrelli wrote Tuesday in a six-page letter to Altmaier, referring to the massive 1992 hurricane. “Since 1996, Demotech has consistently applied its rating methodology and appeals process to all rated insurers. Our process does not guarantee the financial success of every carrier, nor does our process guarantee carriers an FSR (Financial Stability Rating) at the level they want or require.

The Office of Insurance Regulation did not provide a detailed explanation of Citizens’ role in reinsurance, and an agency official did not immediately respond to a request for additional information on Wednesday.

But the arrangement appears to potentially create additional financial exposure for citizens.

Under state law, another agency, the Florida Insurance Guaranty Association, pays claims when insurers become insolvent. Under the new arrangement, if the association reaches its claims payment limit, Citizens, as reinsurer, would step in and cover the claims, Citizens spokesman Michael Peltier said.

Citizens have cash and buy reinsurance in the private market to help pay claims. But if the money and reinsurance aren’t enough, it can collect additional funds from policyholders across the state — a process known as assessment collection — to pay claims.