A recent study shows that large private home insurance companies that have left Florida in recent years are being replaced by smaller, lower-quality companies whose financial stability ratings do not meet the minimum requirements set by government guidelines. be.
The study, led by researchers at Harvard University, Columbia University and the Federal Reserve Board, has not yet been peer-reviewed but was published on the academic website SSRN in December. The report states that new insurers replacing traditional insurers in high-risk areas are “less diverse, less capitalized, and 20% of them are bankrupt.”
Researchers say the growth of these smaller, lower-quality insurers, filling the void left by the exodus of large private companies, can be traced to a “lax insurance regulatory environment.”
The Sunshine State is facing a crisis in its home insurance sector, with residents currently paying some of the highest premiums in the country. According to the Insurance Information Institute (Triple-I), the average premium for homeowner’s insurance in Florida is already $6,000.
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Florida homeowners insurance premiums have risen in recent years due to a combination of factors, including excessive litigation, widespread fraud, and an increased risk of more severe and frequent catastrophic extreme weather events.
This last factor in particular will be exacerbated by climate change, with major insurance companies pulling out of Florida or leaving the state for fear of having to pay increasingly expensive claims and losing profits. This has led to reductions in insurance contracts within the country.
Major insurance companies that have left Florida in recent years include Farmers Insurance, Allstate, and State Farm. Some insurance companies have gone bankrupt, including UPC, which in August 2023 became the Sunshine State’s ninth property and casualty insurance company to go out of business after 2021, and the largest property and casualty insurance company to go out of business in the past 15 years. included. washington post.
The Sunshine State currently relies on about 50 small insurance companies to cover 70 percent of its policyholders. tampa bay times I will report. All these companies are usually rated by his one company, Demotech Inc.
According to research published in SSRN, ratings by Demotech differ significantly from ratings by other rating agencies. An A in Demotech is equivalent to a “B” or “B+” in AM Best, the researchers wrote. AM Best sets rates for several insurance companies in Florida.
According to the researchers, this means that two-thirds of Demotech’s A-rated insurers do not meet the mortgage eligibility criteria set by Freddie Mac, and 21% are rated AM Best by Fannie. This means that May’s requirements are not met. Approximately 19% of Demotech’s “A” rated insurance companies went bankrupt between 2009 and 2022. tampa bay times report.
newsweek Demotech and the three researchers who led the study were contacted for comment via email Sunday morning.
Joe Petrelli, Founder and CEO of Demotech, said: newsweek “Although the study states that the majority of small insurers rated by Demotech do not pass federal guidelines, that view is not supported by the ratings the authors simulated by assigning an estimate of AM Best Ratings for specific insurers. It is based on a comparison of
He further added, “In contrast to the ratings created by the authors’ estimates, the ratings assigned by AM Best through the 157 dual-rated carriers, i.e. AM Best process, and what AM Best does. A comparison of the ratings assigned by individuals based on their estimates showed that: All dual-rated carriers rated by Demotech meet or exceed federal guidelines. ”
According to Petrelli, the simulated ratings created in the study “are in stark contrast to the AM Best ratings assigned by AM Best and the reality of our ratings.”
Petrelli also said the investigation was “part of a damaging case” against the company that “began in July 2022.”
In 2022, Demotech was accused of being a “fraudulent ratings agency” by Florida’s chief financial officer (CFO) after notifying 17 insurance companies of potential downgrades.
Researchers are concerned that less financially stable insurers will seek more favorable agency ratings.
Florida regulators recently approved eight new insurance companies to write policies in Florida, a move that is welcome to homeowners in the state who are struggling to find home insurance coverage. It was news. Six of these new insurers are expected to begin writing policies this year and are rated by Demotech.
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Newsweek is committed to challenging conventional wisdom, finding common ground and finding connections.
