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Florida forms plan to temporarily help keep homeowners insured if ratings get downgraded

The measure involves a temporary arrangement with Citizens Property Insurance Corporation.

TALLAHASSEE, Fla. — State regulators have developed an idea they hope will keep homeowners insured through hurricane season if a ratings agency moves forward with plans to downgrade two dozen Florida-based property insurance companies.

More on that in a moment, but here's the background first:

On Tuesday, ratings firm Demotech delayed the release of ratings that were widely expected to downgrade 27 insurers from an “A" rating to grades of either “S" for substantial or “M" for moderate.

State leaders had warned the move could cost more money for homeowners with loans. Florida Insurance Commissioner David Altmaier and Chief Financial Officer Jimmy Patronis previously criticized the ratings agency over the situation. They said the decision was based largely on the company’s opinion that legislative reforms enacted over the past two years were not enough to bring the state’s overall insurance market back to health. The market has been facing losses over the past five years.

By doing that, the ratings firm was applying a methodology that fell outside the criteria it is supposed to use, the Florida officials said in letters.

“This is an example of inconsistent, monopolistic power of a select rating agency and is trying to exert coercive influence over Floridians and policymakers in an effort to thwart public policy according to its own opinions,” Altmaier said in his earlier letter.

Federal mortgage loan guarantors Fannie Mae and Freddie Mac require borrowers of loans it backs to maintain insurance coverage with A-rated insurers. Borrowers with insurance backed by companies rated below A could find themselves in default of the terms of their home loans. If that were to happen, Fannie Mae and Freddie Mac could then order mortgage servicers to get more expensive coverage by acceptable insurers on the home loans they manage.

But, there might be a solution – at least for now.

On Wednesday, the Florida Office of Insurance Regulation (OIR) revealed it planned to form a temporary reinsurance arrangement through Citizens Property Insurance Corporation if Demotech follows through with rating downgrades, disrupting the market.

Under this arrangement, the OIR says insurers would qualify for an exception with the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). That exception would let Floridians keep their coverage through hurricane season, which is currently underway.

Here's how it would work: Fannie Mae and Freddie Mac both require policies on properties with mortgages they back to be written by insurers that meet a certain rating threshold. But, as the OIR explains in a press release, they both allow for an exception if the insurer "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."

According to the OIR, if an insurer were declared insolvent, the Florida Insurance Guaranty Association would pay claims required under state statute. OIR says its arrangement with Citizens would fit the Fannie Mae and Freddie Mac guidelines and help ensure the system still works.

"If there were claims that needed to be paid and the company couldn't be paid, then Citizens would step in and pay those claims," Michael Peltier said, a spokesperson for Citizens. "The office of insurance regulation has a plan that the agency feels will satisfy the requirements of federal mortgage guarantors in the event that Demotech downgrades some of Florida companies."

"Therefore, there should be no reason for lenders to require a replacement policy, or force place coverage based solely on the ratings downgrades," OIR wrote in the release. "This temporary arrangement would allow insurers to remain viable, to continue providing coverage for Floridians and helps keep policies out of Citizens."

In a statement, Altmaier said these steps are being taken to protect millions of consumers amid the uncertainty about the future of Demotech's ratings.

“This innovative arrangement satisfies requirements set by the secondary mortgage market," Altmaier wrote. "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.”

Last week, the OIR asked Demotech to further explain its rating methodology. Demotech sent back a six-page response, but the OIR complained it didn't offer a timeline for any upcoming ratings.

"The sudden loss of an acceptable Financial Strength Rating would have a significant and adverse impact on Florida’s insurance consumers, insurers, agents and property insurance market," the OIR wrote in a release. "OIR is remaining committed to protecting Floridians and the property insurance market under this plan."

Citizens said they are confident they have the funding to get Florida and all of their new policyholders through the current hurricane season. 

"Citizens has about 11 billion dollars of claims-paying ability, which can handle a very severe storm or series of storms," Peltier said. "If we were to exhaust all of that, we would be required to levy surcharges first on our policyholders."

So why are these insurance companies facing a downgraded rating in the first place? Florida leads the nation in insurance litigation.  

"Florida has about eight percent of all the claims in the country," William Trump, president and CEO of Trump Insurance, told 10 Tampa Bay earlier this week. "When you think about that, that's kind of average. [Florida has] 75 percent of all the insurance litigation... It doesn't take long until that erodes the entire market."

Trump said he's often having bleak conversations with clients, worried about where the whole situation leaves them. 

"Obviously Demotech delayed the downgrading — these companies already received letters of the downgrading," Trump said. "It's not as though this isn't going to happen or if it's going to happen. It's definitely when."

Trump's insurance companies have clients in Largo and St. Petersburg. He says right now, 92 percent of the policies his company writes are to Citizens, which is considered a last-resort company for homeowners who could not obtain insurance elsewhere. While Citizens is a last-resort option, experts like Trump warn if it becomes everyone's option, they'll have to turn away new policies.

Florida has seen a lot of new residents moving here, buying homes, and getting home insurance policies on their homes. There is some fine print to know before signing a policy with Citizens and it is how the company can insure it will stay afloat even if the most severe disasters strike. Policyholders will sign an acknowledgment of potential surcharge and assessment liability. 

The acknowledgment reads, in part, "As a policyholder of Citizens Property Insurance Corporation, I understand that if the corporation sustains a deficit as a result of hurricane losses or for any other reason, my policy could be subject to surcharges, which will be due and payable upon renewal, cancellation, or termination of the policy, and that the surcharges could be as high as 45 percent of my premium, or a different amount as imposed by the Florida legislature."

Citizens policyholders can be charged thousands more a year if the company can't pay claims. 

"The way we set up Citizens, we work like a private insurance company, with one notable exception," Peltier explained. "In the event that we exhaust our ability to pay claims, say a big storm comes and wipes out our surplus and all of the reinsurance that we have, Citizens insurance is required to levy surcharges on our policyholders first and then levy assessments on other FL insurance policy holders if we need to continue to pay claims."

The Associated Press and Malique Rankin contributed to this report.

    

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