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Outrageous! Shocking to think any insurance regulator would trust Demotech | Property Insurance Protection Law Blog



The recent events of Demotech indicating that it may downgrade seventeen Florida insurance companies reminded me of the above scene from Casablanca. Florida Insurance Commissioner David Altmaier should try out for the role of corrupt police captain Louis Renault if the movie is ever remade.

Altmaier wrote an orchestrated Florida insurance industry protest letter to Demotech protesting the CRA̵

7;s actions. The letter stated in paragraph:

The Florida Office of Insurance Regulation (OIR) has recently learned that Demotech, Inc. (Demotech) has notified approximately 17 Florida domestic property insurance companies that their Financial Stability Rating (FSR) will be downgraded from an “A” to an “S” or an “M.” OIR strongly believes that credit rating agencies and regulatory agencies in the insurance industry have two important but very different roles. As such, we have endeavored to ensure that Demotech can derive its ratings based on a consistent and objective application of its own standards. But as OIR learns more about the notices sent to businesses, and given the impact these actions would have on millions of Floridians, countless jobs and Florida businesses, this type of unilateral action warrants further scrutiny. OIR is compelled to take the extraordinary step of reviewing these unprecedented measures to protect the Floridians we serve, especially two months into hurricane season. This is an example of the inconsistent, monopolistic power of a select CRA seeking to exert coercive influence over Floridians and policy makers in an attempt to subvert public policy according to their own views.

OIR has noted that Demotech recently received the designation of Nationally Recognized Statistical Rating Organization (NRSRO) through the federally run Securities and Exchange Commission (SEC) and is now required to publish its rating methodology publicly. It appears that affected operators have only been notified of this classification method in the last two days through the downgrade notice they received. OIR has reviewed recent letters received from affected operators, received feedback regarding conversations between Demotech and affected operators, reviewed your personal statements and has noted several discrepancies between these recent decisions and the rating methodology published on Demotech’s website. To ensure that actions are not taken capriciously and are applied fairly and consistently, OIR has determined that we would benefit from an understanding of why these discrepancies exist, if Demotech plans to change its methodology to account for these discrepancies, and if Demotech plans to allow companies to appeal its decision as permitted in Demotech’s published methodology.

This letter would be laughable if it weren’t so tragic. Everyone in the insurance industry has questioned how Demotech provides acceptable financial opinions on Florida’s homegrown insurance companies. Florida’s insurance industry has supported Demotech. Florida insurance regulators apparently looked the other way at Demotech’s rating methodology until yesterday because Demotech supported otherwise unworthy ratings.

Demotech’s rating is not a new problem. In 2015 we warned that Tampa Bay Times questioned whether Demotech was a company that regulators could trust Citizens, hurricanes and making sure your insurance company isn’t broke:

“There is no easy answer for policyholders trying to ensure they have quality coverage in the event of a storm, but there are three resources for policyholders to use to research their insurance company: AM Best, DemoTech and Weiss Ratings. Tampa Bay Times points out that at least one of these rating agencies may also fail.

Six insurance companies between 2006 and 2011 that received take-out insurance from Citizens and then failed costing taxpayers hundreds of millions. All six, according to the analysis, were rated “A” by DemoTech.

In 2018, a separate rating agency questioned Demotech’s rating. A cozy relationship was alleged between Demotech, the Florida insurance industry and the Florida Office of Insurance Regulation. The Insurance magazine article, CRA ignites controversy over financial strength of Florida insurersexplained in part:

“We believe that assigning an A rating to a company with below-average financial strength is tantamount to consumer fraud,” said Weiss Ratings founder Martin D. Weiss. “If that credit rating agency is paid fees by the insurer for the ratings, and if this cozy arrangement is defended by trade associations or regulators, we fear that those institutions may also be parties to this fraud.”

Months before Sawgrass Mutual Insurance Co. failed, Weiss assigned it a D+ (weak) rating and kept that warning in place until the day it failed, Weiss said. In addition, Weiss gave a D+ rating to Prepared Insurance Co., which was then acquired. Although this company did not fail as a result of the takeover, we believe our rating was an appropriate warning to consumers of the risks.’

Weiss said the open claims of Hurricane Irma and Sawgrass’ mutual failures raise “serious questions for consumers and regulators,” such as why did they occur despite ratings deemed acceptable by Freddie Mac and Fannie May?

Weiss also claimed that its rating is “100 percent independent,” which it claims is not the case with Demotech…

Demotech is the all-time king of changing A to F insurance classes in the shortest possible time. But that track record is not new. How would it be possible for Insurance Commissioner Altmaier not to suspect that Demotech provided financial opinions to the insurance industry that most other credit rating agencies would find incredible? I suspect he’s just surprised that Demotech is actually stopping this charade. This is tragically similar to the game of “musical chairs” where Altmaier is left without a chair – but that has been the danger of relying on Demotech.

The financial failures of insurance companies are bad for everyone. Policyholders need insurance companies to make lasting profits and grow. “The purpose of insurance commissioners is to maintain fair pricing of insurance products, protect the solvency of insurance companies, prevent unfair practices by insurance companies, and ensure access to insurance coverage.”1

The problem is that Florida’s insurance industry has relied on a single credit rating agency to get the coveted A rating. As I pointed out earlier this week in my post, The revolving door connects insurance regulators with the supposedly regulated insurance industryFlorida’s insurance regulatory system is dysfunctional because of its cozy relationship with the industry it regulates.

As we see in real time, policyholders and the insurance industry suffer in the long run when this type of regulatory oversight occurs.

This is a true insurance crisis in the Florida insurance market.

Today’s thought

Renault: Everyone get out of here immediately! This cafe is closed until further notice. Clear the room, at once!
Rick: How can you close me? On what grounds?
Renault: I am shocked – shocked – to find that there is gambling going on here!
Croupier: [hands Renault money] Your winnings, sir.
Renault: [to croupier] Oh thank you very much. [announcing to the room] All out at once!
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1 Wikipedia, at https://en.wikipedia.org/wiki/Insurance_commissioner#cite_note-3


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