Q&A – Are Florida’s Property Insurer’s Really ‘Low Quality’ Companies?

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Today’s Entry: Brian- What do you make of this (a link to a story headlined: Florida insurance market full of ‘low quality’ companies, study finds)?

Bottom Line: What I make of it is that there’s some truth to the characterization of some of Florida’s property insurers being of “lower quality” and that you have a disingenuous news media that’s engaged in unproductive sensationalism with a topic that’s a hot button. The story cited in today’s Q&A was first published by Lawrence Mower of the Tampa Bay Times on Friday and subsequently picked up by news outlets throughout the state by Monday. Lawrence is a veteran investigative reporter who started with the Palm Beach Post just over a decade ago and has progressed over the decade since. His story starts out like this:

The vast majority of small insurers operating in Florida are considered so financially weak that they wouldn’t typically meet federal guidelines allowing them to back mortgaged homes.

For Floridians already stressed by having had a series of property insurance challenges (including many first being forced on to Florida’s insurer of last resort Citizens, and then perhaps being forced off of it with a higher priced plan, etc.) and massive cost increases in recent years that’s bound to get the attention of people, and it has. It also comes amid a recovery attempt by Florida’s property insurance industry following a series of legislative reforms between regular and special sessions in 2022 and 2023. The story cites a non-peer viewed study conducted by researchers at Harvard, Columbia and the Federal Reserve Board that casts a seemingly dark shadow over Florida’s property insurers. In the study entitled: When Insurers exit: Climate Losses, Fragile Insurers, and Mortage Markets. The abstract to the study includes this:

This paper studies how homeowners insurance markets respond to growing climate losses and how this impacts mortgage market dynamics. Using Florida as a case study, we show that traditional insurers are exiting high risk areas, and new lower quality insurers are entering and filling the gap. These new insurers service the riskiest areas, are less diversified, hold less capital, and 20 percent of them become insolvent. We trace their growth to a lax insurance regulatory environment. Yet, despite their low quality, these insurers secure high financial stability ratings, not from traditional rating agencies, but from emerging rating agencies. Importantly, these ratings are high enough to meet the minimum rating requirements set by government-sponsored enterprises (GSEs). We find that these new insurers would not meet GSE eligibility thresholds if subjected to traditional rating agencies’ methodologies.

There’s a lot that’s in play within this study. At the root of it is this. With many of the largest property insurers having pulled back or pulled out of Florida in recent years the companies left and the newer companies that have emerged or reentered Florida’s property insurance market, aren’t as financially stable as the larger companies. This, by the way, is an inherent fact. The larger and more diversified an insurance company is, the better positioned they are to successfully withstand mass claims events. I wouldn’t imagine that a Floridian who is underwritten by a property insurance company they’d never heard of would imagine that the company is as substantiated as the largest named insurers that have pulled back within the state. That’s not really the question here. The question is whether the property insurance company you’re with can pay out your claim if you have one. I’ll come back to that point in a moment.

The crux of the study’s subjectivity focuses on Florida’s main insurance rating agency Demotech. Specifically the study suggests that Demotech’s ratings aren’t as rigorous as the largest insurance rating company in the world, AM Best. As is noted in the study an “A” rating by Demotech may only equate to a “B” or a “B+” using the AM Best standard. The study, and for that matter the Times’ story, also goes on to highlight that about 19% of “A” rated Demotech companies went insolvent between 2009 and 2022. Now, what the story failed to mention is that the selected window of time featured the most volatile operating environment for property insurers in American history (let alone in Florida). Within that select window the US economy faced:

The Financial Crisis/Great Recession
Six of the seven most expensive hurricanes for the property insurance industry (in inflation adjusted dollars in American history)
The Pandemic induced recession of 2020
The Pandemic bubble burst recession of 2022

Frankly, that’s only 19% of Florida’s “A” rated property insurance companies were forced to fold after facing that 13-year deluge negative events is surprising. Context is also key and that takes me to this.

Demotech is called an “emerging” rating agency by the study however they’ve been in operation since 1985.
A previous Florida State University College of Business study of Demotech compared to the larger rating agencies concluded: Demotech provides an important service within the ratings community (by rating smaller insurers) and that their standards show relative consistency (with the largest agencies like AM Best and Moody’s).

But evidently that kind of stuff wasn’t important enough to include in the story bandied across the state. And there’s also an even bigger issue in play. I often talk about the premise. Specifically, if the premise of anything is false, anything built on it is too. Aside from only one side of the story being told in the news article, there’s the even bigger question. Why now?

The study was written on December 23rd of last year and published on January 13th. Why wait three full months past publication before writing a story full of potentially dire warnings? Why wouldn’t this be brought to the forefront in advance of the state legislative session so that proper legislative consideration could be paid to the considerations in play? Either the “investigative journalist” responsible for the story stumbled onto study three months after the fact which speaks for itself, or it was specifically timed. Perhaps coincidentally or not so coincidentally during the same week that the insurance industry trade publication “The Insurer” published the report entitled: Florida insurance market on the mend. The story that includes this excerpt: New capital is entering the market, Citizens is shrinking, and the Florida homeowners insurance market has turned a modest profit after seven years of red ink. Prior to passage of tort reform, the tone of Florida insurance market discussions was all gloom and doom. Fast-forward to today, rates are stabilizing, new companies with fresh capital are entering the market, Citizens is shrinking, and insurers are reporting a mild profit.

At a March 2024 Bermuda Risk Summit panel that included Florida Insurance Commissioner Mike Yaworsky, the tone of the discussion was positive, suggesting the market has finally turned the corner since “recent legislative changes in Florida … are beginning to heal a fractured residential property insurance market”.

But none of that was apparently relevant to said investigative journo – instead dated information was. Nor was this statement by Citizen’s Property Insurance’s CEO during their Board of Governor’s meeting last week: We think the market's going to continue to recover, capital's going to continue to flow into the Florida market. The market is interested in our business.

The fact of the matter is this. Florida’s property insurance market is still distressed but it’s recovering. Demotech does what companies like AM Best don’t do. Your property insurance company is likely at least as capable of paying out claims as it has been in the past and in the worst-case scenario of insolvency the Florida Insurance Guaranty Association would step in to pay claims up to $300,000 in value.