Joseph L. Petrelli, ACAS, MAAA, FCA
President, Demotech, Inc.
Demotech, Inc. is a financial analysis firm specializing in evaluating the
financial stability of regional and specialty insurers. Since 1985,
Demotech has served the insurance industry by assigning accurate,
reliable and proven Financial Stability Ratings® (FSRs) for Property &
Casualty insurers and Title underwriters. FSRs are a leading indicator of
financial stability, providing an objective baseline of the future solvency of
an insurer.
Demotech's philosophy is to review and evaluate insurers based on their
area of focus and execution of their business model rather than solely on
financial size. This philosophy was the catalyst for the Demotech
Company Classification System to stratify and categorize insurers by
broad operational categories.
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Joseph L. Petrelli, President, ACAS, MAAA, FCA, MBA
Sharon M. Romano Petrelli, Vice President, CPCU, AIAF, ARC, CCP
Barry J. Koestler II, Chief Ratings Officer, CFA
Robert M. Warren, Client Services Manager, CPA, CPCU
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In the mid-1990s, hurricanes devastated properties along the Florida
coastline and simultaneously devastated Florida’s property insurance
marketplace. As a result, a large number of the insurance carriers,
including some rated by A. M. Best, were forced into liquidation in
Florida or other states of domicile.
To enhance availability, the State of Florida developed the Florida
Residential Property Casualty Joint Underwriting Association (JUA) to
provide homeowners insurance and related property coverage. The
JUA, which evolved into Citizens Property Insurance Corporation,
became the leading writer of homeowners insurance in Florida.
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In 1996, the State of Florida, Florida Office of Insurance Regulation
(OIR) and the JUA initiated an effort to depopulate the JUA. The
depopulation effort included legislation to permit Florida to offer
financial incentives to insurers that depopulated the JUA. The
legislation included guidelines and procedures to ensure that the OIR
could expedite processing the insurers that would be formed for the
purpose of capitalizing on the financial incentives.
To level the playing field, we developed a procedure to review and rate
newly formed insurers. Our process assisted Florida, insurance agents,
insurance companies, consumers, reinsurers and the secondary
mortgage marketplace. Since then, our process has been utilized to
review and analysis start-up insurers domiciled or licensed in all
jurisdictions.
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Demotech has contributed to the stabilization of the property
insurance market in Florida since 1996. Our efforts have focused on
the assignment of FSRs to financially stable insurers, including startups as well as established insurers.
Over the past several years, legislative and statutory changes, turmoil
in the global financial markets, a decline in residential real estate
values and other economic factors have resulted in an increased focus
on the financial stability of Florida’s property insurers.
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Our standards have been consistently utilized as part of
our overall evaluation and review process.
We apply objective evaluation criteria to each insurer
writing property business in Florida. These criteria are
not a safe harbor or bright-line indicator for acceptable
financial performance.
2014 Update and Addendum regarding FSRs in Florida –
largely unchanged from 2013.
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It is Demotech’s expectation that companies will procure first event limits
EXCEEDING the 100 year event return period PML including loss
amplification/demand surge and secondary uncertainty.
◦ This equates to the company providing cover in excess of the 100 year event return
period reflected in Section II of Demotech’s Exhibit A.
◦ If a company’s vertical limit for the first event does not exceed the 100 year event
return period based on the information provided in Section II of Exhibit A, the
company is unlikely to be eligible for a Financial Stability Rating® at the A level or
above.
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Demotech has always reviewed CAT programs under multiple event scenarios.
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Although Demotech has not previously provided publicly available guidance or
requirements related to multiple catastrophe event scenarios, our annual
reinsurance review has consistently reflected analysis of multiple catastrophe
event scenarios. The only change for the 2014 reinsurance renewal is that
we published the guidance that we had been providing to certain carriers.
For a company to remain eligible for a Financial Stability Rating® at the A level
or above, it must secure a second event cover in excess of the 50 year event
determined by:
◦ A first event that exhausts the mandatory layer of the Florida Hurricane Catastrophe
Fund
and
◦ A 50 year event return period PML as reflected in Section II of Exhibit A.
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If a company’s second event cover does not exceed a 50 year event return
period based on the information provided in Section II of Exhibit A, the
company is unlikely to be eligible for a Financial Stability Rating® at the A level
or above.
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100 year event return
(based on Section II of Exhibit A)
50 year event return
(based on Section II of Exhibit A)
First Event
Second Event
$100.0 M
(with FHCF fully exhausted)
Layer 3
$80.0 M
Layer 2
FHCF 90%
10%
Copay
$65.0 M
Layer 3
$25.0 M
Layer 1
$5.0 M
Retention
Layer 2
Layer 1
Retention
$60.0 M
$45.0 M
$25.0 M
$5.0 M
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Quality and liquidity of invested assets
Adequacy of loss and loss adjustment expense reserves
Quality of reinsurance
Quantity of reinsurance
Adequacy of rate levels
Underwriting results
Ability to serve niches – business model, not size
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Excerpts from an independent study reviewing nine years of ratings
issued by A.M. Best, Standard & Poor’s, Moody’s Investors Services, Fitch
and Demotech, Inc.
Demotech serves the need of another unique group of insurers, namely those
that are geographically focused.
Comparisons of Demotech ratings to other agencies show relative
consistency in the factors that drive Demotech ratings compared to agencies
such as A.M. Best, Moody’s, Standard and Poor’s, and Fitch.
There is general consistency in the firms that each agency would categorize
as financially secure.
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If you have questions, or would like to discuss
your company’s situation, contact:
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Barry Koestler, Chief Ratings Officer,
Bkoestler@demotech.com
Bob Warren, Client Services Manager,
Bwarren@demotech.com
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(614) 761-8602
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