A recent study by researchers from Harvard University, Columbia University, and the Federal Reserve Board sheds light on the financial vulnerability of small insurers in Florida.
The study, which has yet to undergo peer review but has been published online, indicates that most of these insurers are financially weak, falling short of federal guidelines required to back mortgaged homes. This raises concerns about the accuracy of ratings that may lead consumers to perceive these insurers as healthier than they are.
Columbia University (Credits: The New York Times)
The focus on Florida’s insurance market reveals a huge reliance on about 50 small insurers, covering 70% of policyholders, often rated by a single entity, Demotech Inc.
The study underscores the consequences of relying on a single rating agency, especially after a public dispute in 2022 involving Demotech’s threat to downgrade 17 companies. The potential downgrade could have impacted the state’s housing market and led to challenges for policyholders.
Comparing Demotech’s ratings to those of AM Best, a more established ratings company, the study found discrepancies. While Demotech’s “A” rating equates to AM Best’s “B” or “B+”, the study suggests that many of Demotech’s A-rated insurers would not meet the eligibility criteria of mortgage giants like Fannie Mae and Freddie Mac if rated by AM Best.
Federal Reserve Board (Credits: Britannica)
These findings raise concerns about the reliability of rating agencies and the potential for rating shopping among lower-quality insurers. The study highlights the need for greater scrutiny and independent evaluations of insurers’ financial health, especially in disaster-prone areas like Florida.
Despite the risks associated with small insurers, the study notes that Florida regulators have been relatively lax in their oversight. Recommendations from the survey include requiring insurers to be rated by multiple agencies and implementing programs to incentivize insurers to improve their ratings over time.
While some lawmakers and regulators have acknowledged these risks, concrete actions based on the study’s recommendations have yet to materialize. The study’s findings underscore the ongoing challenges in Florida’s insurance market and the importance of robust regulatory measures to protect consumers and ensure the market’s stability.
