Florida's Insurance Mess Began With Andrew In 1992, Continues W. Inflated Ratings For Today's Remaining Insurers

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These shakier insurers were incentivized in part by payments Florida made to them to take on policies the state’s insurer-of-last-resort, Citizens Property insurance Corporation, issued. And most of them were the beneficiaries of grade inflation by a rapidly-growing rating agency called Demotech. Both the mortgage originators and the GSEs accept Demotech’s financial stability rankings for these insurers, and the GSEs are now stuck with a steaming pile of risk. I think we can assume that this situation has only gotten worse since 2018. But the authors had to stop there because the insurers convinced a court that their data was all a trade secret and shouldn’t be released to the public. This is a common move; picture the industry as ATMs with lawyers layered on top. Avoiding disclosure is easy.

Back to the narrative. You may have heard of the big three credit rating agencies: AM Best, Moody’s, and S&P. Demotech is probably new to you. It entered the market in the 1990s and specializes in evaluating the financial stability of regional and specialty insurers, mostly in Florida. It now issues most of the insurer credit ratings in Florida.

Following Hurricane Andrew in 1992, and the huge numbers of insurer exits and insolvencies that storm caused, Florida set up its public insurance option, Citizens. Floridians swarmed toward Citizens, which ballooned. Florida then began paying insurers to take policies off Citizens’ books. Meanwhile, however, the big insurers like State Farm had quietly been leaving high climate-risk counties in Florida. That didn’t mean that the wheel stopped spinning. New, substantially lower-quality insurers with financial stability ratings from Demotech rapidly gained market share in Florida, growing in large part by absorbing those Citizens’ policies. That was superficially great news for Florida, because if Citizens goes under Florida bears all the liability—meaning the state’s residents will have to bail it out.

According to the study’s authors, the Demotech-rated insurers are lower quality in many ways: they have far less capital, focus on lower-value homes, aren’t geographically- or product-diversified, and tend to enter rehabilitation (restructuring) at higher rates. But Demotech gives them grades that are higher than the ratings traditional credit ratings agencies would give for insurers comparable characteristics. Grade inflation is rampant at Demotech: “The vast majority of these insurers would likely be rated ‘junk’ if they received their ratings from a traditional rating agency rather than Demotech,” say the study authors.

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https://thinc.blog/2024/04/18/climates-big-short-florida-insurance-and-a-financial-apocalypse/#more-97090