Damning Warning Issued Over Florida Insurance Market

Fort Myers Beach, Florida, Estero Island, property damaged after Hurricane Ian.

The major private home insurers that have left Florida in the past couple of years are being replaced by smaller, lower-quality companies whose financial stability ratings wouldn’t meet the minimum requirements set by government guidelines, according to a recent study.

The study, led by researchers at Harvard University, Columbia University and the Federal Reserve Board, is yet to be peer-reviewed but was published on SSRN, a website for scholarly papers, in December. It states that new insurers which are replacing the traditional ones in high-risk areas are “less diversified, hold less capital, and 20 percent of them become insolvent.”

According to the researchers, the growth of these smaller, lower-quality insurers that are filling the gaps left by the exodus of bigger private companies can be traced back to “a lax insurance regulatory environment.”

The Sunshine State is undergoing 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 Florida homeowners’ premium already stands at $6,000.

What sent homeowners insurance premiums in Florida soaring in the past few years has been a combination of factors including excessive litigation, widespread fraud and the increased risk of more severe and more frequent catastrophic extreme weather events.

This last factor in particular, made worse by climate change, has caused major insurers to withdraw from Florida or cut their policies in the state for fear of having to pay increasingly high damage claims and not being able to make a profit.

Among the major insurers who have left Florida in the past couple of years is Farmers Insurance, Allstate and State Farm. Others became insolvent, including UPC, which in August 2023 became the ninth property insurer in the Sunshine State to fold since 2021 and the largest to do so in 15 years, as reported by The Washington Post.

The Sunshine State is currently relying on approximately 50 small insurers to cover 70 percent of policyholders, the Tampa Bay Times reports. All these firms are normally rated by a single company, Demotech Inc.

According to the study published on SSRN, ratings by Demotech are very different from those by other rating agencies. Demotech’s A would be the equivalent to AM Best’s “B” or “B+,” researchers write. AM Best rates some insurers in Florida.

That means, according to the researchers, that two-thirds of Demotech’s A-rated insurers would not meet the eligibility standards set by Freddie Mac to insure mortgaged homes and 21 per cent would not meet Fannie Mae’s requirement if they were rated by AM Best. About 19 percent of insurers rated “A” by Demotech went insolvent between 2009 and 2022, the Tampa Bay Times reported.

Newsweek contacted Demotech and the three lead researchers behind the study for comment by email on Sunday morning.

Joe Petrelli, Demotech’s founder and CEO, told Newsweek that “although the study states that a majority of smaller insurers rated by Demotech wouldn’t pass federal guidelines, that observation was based upon a comparison of ratings that the authors simulated through assignment of their conjecture of AM Best ratings of certain carriers.”

He added: “In contrast to ratings created by the authors’ conjecture, a comparison of 157 dual-rated carriers, i.e., ratings assigned by AM Best through the AM Best process versus ratings assigned by individuals speculating what AM Best might do, indicated that each and every one of the dual-rated carriers rated by Demotech would meet or exceed federal guidelines.”

The simulated ratings developed in the study, according to Petrelli, “are in direct contrast to the reality of AM Best ratings assigned by AM Best versus our ratings.”

Petrelli also said that the study was “part of the hit job” against the company “that began in July of 2022.”

In 2022, Demotech was accused by Florida’s chief financial officer of being a “rogue rating agency” after the company notified 17 insurers of potential rating downgrades.

Researchers fear that less financially stable insurers might seek to be rated by more favorable agencies.

Florida’s regulators recently approved eight new insurers to write policies in the state, a move which was welcome news to the state’s homeowners who are struggling to fight coverage for their homes. Six of these new insurers, which are expected to start writing policies over the course of this year, are rated by Demotech.

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