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

Altmaier wrote a Florida insurance industry orchestrated letter of protest to Demotech where he objected to the actions of the rating agency. The letter stated in part:

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 has a strong belief that rating agencies and regulatory agencies in the insurance industry serve two important, but very different, roles. As such, we have endeavored to ensure that Demotech is able to derive its ratings based upon the consistent and objective application of its own standards. However, as OIR learns more about the notice letters sent to companies, and considering 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 scrutinizing these unprecedented actions to protect the Floridians we serve, especially two months into hurricane season. This is an example of inconsistent, monopolistic power of a select rating agency and is trying to exert coercive influence over Floridians and policymakers in an effort to thwart public policy according to its own opinions.

OIR has taken note that Demotech has recently received the Nationally Recognized Statistical Rating Organization (NRSRO) designation through the federally run Securities and Exchange Commission (SEC) and are now required to publicly post their rating methodology. It appears that impacted carriers only received notification of this rating methodology in the last two days through the downgrade notice they received. OIR has reviewed recent letters received by impacted carriers, received feedback regarding conversations between Demotech and impacted carriers, reviewed your personal statements, and have noted several discrepancies between these recent decisions and the rating methodology posted on Demotech’s website. To ensure actions are not made in a capricious manner and are fairly and consistently applied, the OIR has determined that we would benefit from an understanding of why these discrepancies exist, if Demotech plans to amend its methodology to account for these discrepancies, and if Demotech plans to allow companies to appeal its decision as allowed for in Demotech’s posted methodology.

This letter would be laughable if it were not so tragic. Everybody in the insurance industry has questioned how Demotech provides acceptable financial opinions about Florida’s homegrown insurance companies. Florida’s insurance industry has supported Demotech. Florida’s insurance regulators have apparently looked the other way at Demotech’s rating methodology until yesterday because Demotech supported otherwise non-worthy ratings.

Demotech’s ratings are not a new concern. In 2015, we warned that the Tampa Bay Times questioned if Demotech was a firm that regulators could rely upon in Citizens, Hurricanes, and Making Sure Your Insurance Company is not Broke:

“There is no easy answer for policyholders trying to ensure they have quality coverage in case of a storm but there are three resources for policyholders to use to research their insurance company: A.M. Best, DemoTech, and Weiss Ratings. Tampa Bay Times points out that at least one of these ratings companies may be failing too.

Six insurance companies between 2006 and 2011 that received takeout policies from Citizens and then failed with taxpayer costs in the hundreds of millions. All six, the analysis notes, were rated ‘A’ by DemoTech.

In 2018, a separate ratings agency questioned Demotech’s ratings. It alleged a cozy relationship between Demotech, the Florida insurance industry, and Florida’s Office of Insurance Regulation. The Insurance Journal article, Ratings Agency Ignites Controversy Over Financial Strength of Florida Insurers, stated in part:

‘We believe that assigning an A rating to a company with below-average financial strength is tantamount to a consumer deception,’ says Weiss Ratings founder Martin D. Weiss. ‘If that 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 these institutions could also be parties to that deception.’

…

Months prior to the failure of Sawgrass Mutual Insurance Co., Weiss assigned it a D+ (weak) rating and retained that warning in place until the day it failed,’ Weiss said. ‘In addition, Weiss gave a D+ rating to Prepared Insurance Co., which was subsequently taken over. Although this company did not fail thanks to the takeover, we feel that our rating provided an appropriate warning to consumers of the risks.’

Weiss said the open Hurricane Irma claims and Sawgrass Mutual failure raise ‘serious questions for consumers and regulators,’ such as why they occurred despite the ratings deemed acceptable by Freddie Mac and Fannie May?

Weiss also argued that its ratings are ‘100 percent independent,’ which it alleges is not the case with the Demotech….

Demotech is the all-time King of changing A to F insurer financial grades in the shortest time imaginable. But that track record is not recent. How would it be possible for Insurance Commissioner Altmaier not to suspect that Demotech was providing financial opinions to the insurance industry that most other rating agencies would find unbelievable? I suspect he is 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 upon Demotech.

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

The problem is that Florida’s insurance industry has relied upon an easy rating agency to get the coveted A rating. As I pointed out earlier this week in my post, The Revolving Door Connecting Insurance Regulators with the Supposedly Regulated Insurance Industry, Florida’s insurance regulatory scheme does not work because of its cozy relationship with the industry it regulates.

As we are seeing in real-time, policyholders and the insurance industry suffer in the long run when this type of regulatory oversight happens.

This is a real insurance crisis in the Florida insurance marketplace.

Thought For The Day

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