Demotech downgrades add more chaos to the Florida home insurance crisis

Thousands of Florida homeowners facing policy cancellations, higher premiums, and mortgage defaults after Demotech downgrades several Florida insurance carriers.

Jennifer Gimbel

By

Jennifer Gimbel

Jennifer Gimbel

Senior Managing Editor & Home Insurance Expert

Jennifer Gimbel is a senior managing editor and home insurance expert at Policygenius, where she oversees our homeowners insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.

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The home insurance crisis that’s plagued Florida homeowners over the last year with record-high insurance rates is about to get worse.

Earlier this week, several Florida home insurance companies had their Demotech financial strength ratings either withdrawn or downgraded so low that homes with federally backed mortgages could be impacted. This could lead to home insurance policy cancellations, higher premiums, and even mortgage defaults for thousands of Florida homeowners.  

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What Florida home insurance companies were affected?

The Ohio-based rating firm that measures the financial strength and stability of 40 insurance carriers in Florida downgraded United Property and Casualty (UPC) Insurance from an “A” rating to an “M” for moderate. 

Ratings for Weston Property and Casualty Insurance, FedNat Insurance, Bankers Specialty Insurance, and First Community Insurance were withdrawn entirely. Companies with a rating withdrawal typically become insolvent. 

This has already happened to Weston. On late Wednesday, it was declared insolvent by the Florida Office of Insurance Regulation and will be placed in receivership and ordered to liquidate. 

“It will be the fifth insolvency this year of a Florida home insurer — the most since seven Florida-domiciled insurers failed after Hurricane Andrew in 1992,” says Mark Friedlander, a spokesman for the Insurance Information Institute.

What do the downgrades mean for Florida homeowners?

“When companies are declared insolvent by the Florida regulator, all of their policyholders are required to find new coverage within 30 days after receiving notification from the company,” says Friedlander.

Around 20,000 Weston policyholders in Florida will be forced to shop for new home insurance policies in the middle of hurricane season, similar to what we saw with Southern Fidelity customers last month.

Fortunately, homeowners insured by Bankers Specialty Insurance or Community First Insurance won’t be affected. Their parent company, Bankers Insurance Group, voluntarily withdrew its ratings from Demotech since it already had a B++ (Good) rating with A.M. Best, which qualifies them to continue to insure homes with federally backed mortgages. 

FedNat policyholders might not have to find coverage with a different insurance company, either. The insurer is trying to get approval to move its roughly 84,000 Florida home insurance policies under its Monarch Insurance Company subsidiary, which has maintained its “A” rating.

The same can’t be said for UPC policyholders. The downgrade of UPC Insurance could affect Florida homeowners who have mortgages backed by Fannie Mae or Freddie Mac, which require that property insurance policies are written by A-rated insurers. This means borrowers with insurance backed by UPC could find their loans in default. When this happens, mortgage servicers typically purchase force-placed insurance for the property that’s usually much more expensive than standard policies. 

In mid-July, UPC’s board of directors announced it was seeking a merger, acquisition, or other capital infusion to help stabilize the company, but this won’t help current policyholders who are facing loan defaults and higher insurance premiums now.

Florida homeowners are already paying an average home insurance premium of $4,231 per year — nearly three times the national average of $1,544 per year, according to a recent Insurance Information Institute analysis. And with premium renewal increases averaging 33% in Florida, this could mean premiums as high as $5,000 to $6,000 for many homeowners affected by the downgrades.

How the State of Florida is responding to the crisis

In an effort to curb this problem in the short term, the Florida Office of Insurance Regulation devised a new “market stability” program with Citizens Property Insurance — the state-run insurer of last resort for Florida homeowners — that’s “supposed to satisfy the mortgage requirements of Fannie Mae and Freddie Mac, but it’s unclear if the lenders have accepted this,” says Friedlander.

If they do, this would temporarily solve homeowners’ mortgage issues, since Fannie Mae and Freddie Mac are OK with lower ratings for insurance companies if their claims are fully backed in case of financial trouble.

But Citizens might not have enough to pay out claims in the event of a catastrophic event like a Category 5 hurricane. The insurer already has 1 million active policies and averages 6,000 to 8,000 new policies each week before accounting for the insolvent carriers it’s being asked to back.

Citizens’ active policies have $311 billion in exposure as of July 15, but it only has the ability to pay out about $11.3 billion in claims, says Michael Peltier, the media relations manager at Citizens Property Insurance. For context, Hurricane Michael caused more than $8.5 billion in total paid losses in 2018.

“If that is exhausted, we are required by law to first issue surcharges on our policyholders. If a deficit still exists, we must levy assessments (hurricane taxes, if you will) on all non-Citizens property and casualty customers (home, auto, boat) to make up the deficit,” says Peltier.

This would once again cause the burden to fall on Florida homeowners in the form of policy surcharges and hurricane taxes. And with the state already dealing with widespread roofing fraud, runaway construction prices, and expensive insurance litigations, Florida home insurance rates aren’t likely to fall any time soon.

What Florida homeowners can do

So what, if anything, can Florida homeowners do to lower premiums not just now, but in the long term? 

Florida’s Insurance Consumer Advocate Tasha Carter says one option is to look into storm-proofing your home with wind-resistant features.

“Florida homeowners can take advantage of the new sales tax holiday on impact-resistant window, doors, and garage doors that will run from July 1, 2022 through June 30, 2024,” says Carter.

“Installing these wind mitigation features has multiple benefits. It creates a stronger home that decreases your likelihood of damage and reduces your chances of filing an insurance claim. And insurance companies are required to issue discounts or credit to homeowners who implement [these features].”

Other common ways to save on home insurance premiums recommended by Friedlander include taking advantage of discounts for bundling your home and auto policies, paying your policy in full each year, signing up for autopay, or installing security systems.

“Raising your standard home deductible and your hurricane deductible are also great ways to significantly reduce premiums. However, you need to be financially prepared to pay more out of pocket if you make these adjustments,” says Friedlander.

The Florida Department of Financial Services is also working on a program to help homeowners pay for these mitigation improvements with two initiatives.

The My Safe Florida Home program will provide free home inspections to Florida homeowners to identify improvements they can make to mitigate hurricane damage and, in turn, receive home insurance discounts on their premiums.

The program will also offer a matching grant of up to $10,000 that qualifying Florida homeowners can use on improvements to their homes to make them less susceptible to hurricane damage.

While it’s unclear when the My Safe Florida Home Program is set to launch, you can check back on the Florida Department of Financial Services website for more information on timing and updates.

Image: Andrew Merry / Getty

Author

Senior Managing Editor & Home Insurance Expert

Jennifer Gimbel

Senior Managing Editor & Home Insurance Expert

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Jennifer Gimbel is a senior managing editor and home insurance expert at Policygenius, where she oversees our homeowners insurance coverage. Previously, she was the managing editor at Finder.com and a content strategist at Babble.com.

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