Takeaways:
- New insurers that took on Citizens home policies have failed
- Demotech bases ratings on the insurer's current financial health
- Reinsurance costs can rise after a new insurer's first year
Demotech, a ratings agency that Florida consumer advocates are criticizing, rates new home insurers in the state based on their current characteristics, according to an executive at the agency.
Demotech's ratings of new insurers now covering homes previously insured by Citizens, Florida's insurer of last resort, are inflated, according to the advocacy groups Unlocking America's Future, the Insurance Fairness Project and Florida Watch.
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When rating insurers, Demotech looks at their business plans and evaluates whether their actions are consistent with what they promised to do in those plans, according to Bob Warren, ratings manager at Demotech.
"Everybody wants the magic eight ball or the mystical orb that says, 'hey, in 18 months, this company is going to be insolvent,'" Warren said. Generally, projections and ratings should be no more than 12 months into the future, he added.
New insurers like those taking over policies from Citizens should estimate reinsurance costs correctly, Warren emphasized. "They can run it through catastrophe models and determine how much the reinsurance cost is going to be for the coverage," he said. If the insurer projects 25% reinsurance costs and models show 40 or 50% is more likely, that insurer would not earn an A rating, Warren added.
The ideal time of year for insurers taking over Citizens policies is late November and early December, because Florida's storm season is usually done, Warren explained. Policies taken then typically won't be subject to an event until at least June when hurricane season starts. This allows the insurer time to collect premiums while reinsurance costs are lower.
"That's why you'll see these new companies start up, they'll pick up that Citizens business, and they'll be profitable for the first year or two," Warren said. "Once the true reinsurance costs start to hit the book, it becomes a different issue."
Under the Insurance Regulatory Information System (IRIS), a group of measurements devised by the National Association of Insurance Commissioners (NAIC) to evaluate the financial stability of insurers, the ratio of gross premiums written to policyholders surplus is a key ratio. If that ratio is higher than 900% or 9 to 1, that can be cause for concern. However, an insurer covering properties in states with coastal climate exposures, like Florida, needs this IRIS ratio to be no higher than 6 to 1, according to Warren. New insurers in Florida that exceed a 6 to 1 ratio are then more reliant on reinsurance, he added.
Those insurers, especially those taking policies off Citizens, may have high premium growth at first, but if that growth slows or stalls – on top of reinsurance issues – they may stop writing new policies or even send policies back to Citizens, Warren explained.
Insurers that have been in the Florida market for decades take on Citizens policies as a sideline, because it does not account for all their growth, or the health of their business, he explained. On the other hand, a new insurer that includes taking Citizens policies in its growth projections might not be as discerning about which Citizens policies it takes, Warren added.
