The Florida Office Of Insurance Regulation (OIR) is taking emergency action as the state waits on the potential downgrade of several companies’ financial stability ratings from Demotech.
OIR announced Wednesday that it is establishing a temporary reinsurance arrangement with the state-backed Citizens Property Insurance Corps to financially back any company that’s rating is downgraded.
In the state of Florida, these ratings are important for agents to be able to write policies for the company and for federal mortgage loans such as Freddie Mac and Fannie Mae.
According to the loan providers, an insurance agency rated by Demotech must have an “A” rating to receive a loan from them.
OIR Commissioner David Altmaier said in a statement, “In the event we need to implement this temporary solution, consumers will not need to seek coverage elsewhere, agents will not need to move policies, and lenders can have confidence that these insurers continue to meet the mortgage qualifications.”
Reinsurance is essentially insurance that an insurance company gets to back them up if there is a significant storm and several homeowners need repairs.
The release explains, "Fannie Mae and Freddie Mac each offer an exception to the financial rating requirements for an insurer that is covered by a reinsurer who assumes, by endorsement, 100 percent of the insurer’s liability for any covered loss payable, but unpaid by the insurer, by reason of insolvency. In the event that a participating insurer is declared insolvent, the Florida Insurance Guaranty Association shall carry out its statutory duties under Part II of Chapter 631, Florida Statutes, and pay claims as set forth in the statute."
We asked OIR where this reinsurance funding is coming from and what would happen if there’s a big storm, but they have not yet responded.
We know that since Citizens is state-backed, they have the power to re-assess their policyholder and then every homeowner in the state if they need more money.
Mike Puffer, partner and agent at Florida Strategic Insurance, explained how it would work if there was a catastrophic storm and Citizens did not have enough money to fund claims.
“Citizens can assess a policyholder up to 45% of theirs. So you can imagine that can be a pretty substantial assessment if there's a pretty large loss. And then if all of those assessments don't match what their overall loss was, then they can start going to other policyholders within the state of Florida and the taxpayers themselves to cover all of the losses,” Puffer said. “So basically everybody is going to be on the hook whether you would citizens or not. In the state of Florida, if there is a catastrophic event or a few catastrophic events.”
Puffer adds that overall this is encouraging news for the insurance industry, for the time being, that way if and when Demotech rating downgrades come out, at least homeowners won’t be scrambling to find new insurance, likely with Citizens.
To read the full release, click here.