Industry Advisory: In Anticipation of Demotech’s Potential Insurer Downgrades

Recently, the insurance ratings agency, Demotech, Inc. (Demotech), which provides financial stability ratings of Florida property and casualty insurers, indicated that it may downgrade ratings for up to 17 Florida insurance carriers. On July 25, 2022, Demotech President Joseph Patrelli stated in an e-mail to the Commissioner of the Florida Office of Insurance Regulation (OIR), that Demotech had informed these 17 insurance companies that the ratings agency did not intend to take any rating action until further notice and planned to withhold the release of all ratings-related information until the completion of the rating process. It is unclear when the ratings process will be concluded.

In the event Demotech does downgrade one or more of these 17 carriers, the ratings given may have an impact on the primary and secondary mortgage markets due to requirements contained within the Fannie Mae and Freddie Mac guidelines. With limited exceptions, the guidelines require borrowers to maintain property insurance with a carrier rated “A” or better by Demotech. As such, there is a concern that a ratings downgrade may cause a Fannie Mae- or Freddie Mac-backed mortgage to fall out of compliance with those guidelines.

As a result, the OIR, in conjunction with Citizens Property Insurance Corporation, has formed a temporary reinsurance arrangement program that meets the exceptions to the Fannie Mae or Freddie Mac guidelines. To protect Floridians and ensure the stability of the marketplace, lenders and servicers are therefore encouraged to evaluate the reinsurance program prior to requiring a replacement policy, or force placing coverage, based solely on a downgrade of an insurance company’s rating. For more information, please see OIR’s press release.

As the state regulator of state-chartered financial institutions, mortgage brokers, mortgage lenders/servicers, and loan originators, the Office of Financial Regulation (OFR) is sensitive to the challenges these industries may face as a result of a ratings downgrade. The OFR is diligently monitoring potential ways to mitigate any adverse consequences of a potential downgrade. The OFR further encourages its regulated institutions and entities to monitor this situation closely and remains committed to working with its regulated institutions, entities, and stakeholders to ensure a thriving mortgage marketplace that works for all Florida consumers.