By Arek Sarkissian
01/13/2020 01:35 PM EST
TALLAHASSEE — Florida regulators signed off on a double-digit rate hike for a Boca Raton insurer as the state industry is under threat of being downgraded due to thinning profits.
The Florida Office of Insurance Regulation on Friday approved Edison Insurance Co.’s filing for a 21.9 percent rate increase. In an annual rate filing submitted in October, Edison wrote that about 20 percent of the company’s water damage claims were under assignment-of-benefits agreements in which homeowners allow their contractors to negotiate directly with the insurance company for payment.
The Legislature last year approved a bill to limit such agreements after insurance companies complained that they led to skyrocketing litigation fees. The law took effect in July. It was too early to predict its effect, Edison wrote in its Oct. 8 filing.
“The Company is just beginning to collect and observe data for experience happening after the implementation of the law,” the company wrote.
Security First Insurance Co. Chairman and President Locke Burt said other insurers would line up behind Edison for a rate increase. For every $1 brought in by a company, about $1.25 goes toward paying claims and covering expenses, Burt said.
“No one in business can survive like that,” Burt told POLITICO.
The Office of Insurance Regulation allows insurers to collect a 4.2 percent profit. If a company’s profits exceed that threshold, it’s required to reduce rates. But increases in claims due to recent hurricanes and rising litigation costs has driven the industry into the red, Burt said.
Edison’s rate increase was approved after the Office of Insurance Regulation held a Dec. 17 public hearing in Tallahassee. Three days later, Insurance Commissioner David Altmaier received a copy of a letter from financial analysis firm Demotech Inc. warning of a pending drop in financial ratings for many Florida insurers unless quick changes are made by the state and federal government.
The letter from Joseph Petrelli, president of Ohio-based Demotech, to Barry Gilway, president and CEO of taxpayer-funded Citizens Insurance Corp., said Demotech would downgrade several Florida insurers that have been operating at a loss for years. Demotech would drop the insurers from its top “A” rating to an “S” rating, or satisfactory, one step lower.
“The economics of the marketplace over the past several years have made it impossible for Demotech to sustain each of the Florida focused carriers that we review each quarter,” Petrelli wrote.
Demotech’s financial health ratings are used by government-sponsored mortgage companies Freddie Mac and Fannie Mae, which stand behind about half of U.S. home loans. If an insurer rating falls below Demotech’s “A“ rating, Fannie and Freddie could hold affected homeowners in default on their mortgages.
After Hurricane Andrew hit Florida with $26 billion in damage in 1992, leading credit rater AM Best refused to give the state’s insurance providers ratings good enough to pass muster with Fannie Mae and Freddie Mac. So the state looked to the smaller financial analysis firm Demotech, which now is the leading insurance rater in the state.
Petrelli made a similar threat in 2018 that never materialized. But Jeff Grady, president of the Florida Association of Insurance Agents, said Petrelli is saying he simply can’t award the “A” ratings anymore.
“This seems different,” Grady said. “It’s basically Demotech saying he can’t hold his nose anymore.”
Security First’s Burt said Petrelli is signaling a breaking point for insurance companies that have taken losses for years. Burt also pointed to trouble in an Oct. 15 presentation he gave to the Senate Committee on Banking and Finance. While the stock market continues to grow overall, investments in Florida insurance companies have plummeted.
Burt served in the state Senate from 1991 to 2002 and helped write regulations enacted after Hurricane Andrew and eight other major storms in 2004 and 2005. One of those regulations, which requires a rapid buildup of cash for the state’s Hurricane Catastrophe Fund, should be rescinded, he said.
The state-created “Cat Fund” is funded by insurers to provide cash assistance when they’re hit with a large number of claims after a major disaster. The state can impose a surcharge on most insurance policies to replenish it if it runs out of money, and Florida insurers are required to purchase reinsurance coverage from the fund.
By 2005, the fund had been depleted and the Legislature ordered insurers to replenish it. As of last month, the fund had $12.8 billion on hand, which Burt said was more than enough to cover the industry in another disaster.
Petrelli said Demotech’s ratings drops will begin this month and continue through through March. They could trigger an increase in the number of policies taken on by Citizens, a state-funded insurer of last resort.
Gilway, who took the helm of Citizens in June 2012, has worked to decrease the number of policies written by the company. Citizens went from 1.5 million policies in 2011 to more than 400,000 earlier this year, state records show.
In his letter to Gilway, Petrelli wrote that a new state law governing assignment-of-benefits contracts won’t bring quick relief to the industry. Citizens noted a drop in AOB-related claims in November, but said it was too early to tell how the law would affect the company’s bottom line.
“We will continue to closely monitor market conditions and are ready to perform our residual duties if called upon to do so,” Gilway said in a statement Thursday.
The financial health of the insurance industry is monitored by the Office of Insurance Regulation, which has not taken action on Petrelli’s letter.
Agency spokesperson Alexis Bakofsky said the office will work with Gov. Ron DeSantis, the Florida Cabinet and the Legislature, which convenes Tuesday for this year’s legislative session.
Petrelli wrote that his downgraded ‘S’ rating is still considered “well above average.” But Fannie Mae and Freddie Mac have not responded to a request he made in 2012 to consider the ‘S’ rating acceptable for mortgages.
Gary Fineout contributed to this report.