Florida Stopgap Program Receives First Insurer After Downgrade | Daily Business Review – Law.com | Hot Mobile Press

A day after United Property & Casualty Insurance Co. was hit by a financial rating downgrade, on Tuesday it became the first property insurer in Florida to participate in a state emergency relief program aimed at maintaining coverage for homeowners.

United, which had about 185,000 policies in Florida as of March 31, was one of three insurers downgraded by ratings agency Demotech on Monday amid widespread financial troubles in the state’s property insurance market.

Financial ratings are important in part because mortgage industry giants Fannie Mae and Freddie Mac require homes to be insured by financially sound companies. Demotech rated insurers require Fannie Mae and Freddie Mac ratings of “A” or better.

Monday’s downgrade lowered United’s rating from “A Exceptional” to “M Moderate”. Normally, the drop below Fannie Mae and Freddie Mac standards would likely force United customers to seek other insurance coverage.

But the Florida Office of Insurance Regulation last week announced a program that would see Citizens Property Insurance Corp. of the state acts as a financial backstop for private insurers who are downgraded. Citizens will take on a reinsurance role to ensure claims are paid when insurers go bankrupt.

The arrangement is designed to please Fannie Mae and Freddie Mac. It uses an exception in the Fannie Mae and Freddie Mac standards that applies when reinsurers accept responsibility for paying claims when insurers go bankrupt.

The Office of Insurance Regulation posted information on its website on Tuesday saying United will participate in the program.

Regulators put together the program after Demotech suggested about 17 insurers could be downgraded. Along with United’s downgrade, Demotech withdrew financial stability ratings from Weston Property & Casualty Insurance Co. and FedNat Insurance Co. on Monday. The Insurance Journal first reported on the downgrades.

It wasn’t immediately clear if Demotech would downgrade more insurers — or if United, Weston and FedNat were even part of the potential 17 downgrades that prompted regulators to piece together the new program. Demotech did not disclose the names of the companies it was investigating.

In an order issued Tuesday through the program, the Office of Insurance Regulation cited the possibility that downgrades could otherwise leave homeowners with little choice but to seek coverage from citizens. The state-backed company was founded as an insurer of last resort but has expanded to more than 900,000 homes as private insurers dumped customers to avert financial risk.

“The sudden loss of acceptable financial strength ratings for numerous insurers, which took effect during the Atlantic hurricane season, would have a significant, immediate and adverse impact on the well-being of Florida’s insurance customers, insurers, agents and the overall property insurance market,” he said of Insurance Commissioner David Altmaier signed the order. “The majority of policies from downgraded insurers would likely be forced to insure with Citizens due to the loss of their financial strength rating. This temporary reinsurance arrangement allows these insurers to remain viable, continue to provide coverage to Floridians, and withhold policies from citizens.

Under state law, another agency, the Florida Insurance Guaranty Association, pays claims when insurers go bankrupt. Under the new rule, Citizens would step in as a reinsurer and cover claims if the association reached its claims payment limit.

Regulators have said the new program is temporary, but operating in the reinsurance role could create additional financial risk for citizens.

Citizens has cash and buys reinsurance in the private market to help settle claims. But when the cash and reinsurance aren’t enough, it can collect extra money from policyholders across the state — a process known as appraisal gathering — to pay claims.

Gov. Ron DeSantis called a special legislative session in May to deal with the property insurance system, but problems lingered. For example, a report issued on July 1 by the Office of Insurance Regulation said 27 property insurers were under “enhanced scrutiny” because of their financial health.

In recent months there had been signs of financial problems at United and FedNat.

United said in July that its board had begun a “review of its strategic and capital raising alternatives,” which could include steps such as a sale. FedNat reached an agreement with the Office of Insurance Regulation in May requiring it to cancel policies and transfer other policies to an affiliate, Monarch National Insurance Co. Monarch was rated “A Exceptional” by Demotech.

Jim Saunders reports for the Florida News Service.

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