FPCA Homeowners Division: Joe Petrelli Comments on Demotech During Recent FIC Meeting
Jun 3, 2009
Joe Petrelli, President of Demotech, Inc., gave an overview of the company and its rating analysis method during a recent Florida Insurance Council (“FIC”) meeting. The following is a brief summary of Mr. Petrelli’s comments:
Demotech was incorporated in 1985 and began working with the Florida Office of Insurance Regulation (“OIR”) on start-up companies in 1996.
Demotech monitors companies on a quarterly basis, performing an annual review of reinsurance contracts. In its rating analyses, Demotech places a stronger emphasis on the adequacy of an insurance company’s rate levels than the reasonableness of its rates. Demotech is “not against large insurers.” A company’s reserves are weighed heavier than profits in Demotech’s rating analysis. Mr. Petrelli said there are “great” large companies.
Of the companies rated A double prime by Demotech, 98 percent are still in business, a better average than A.M. Best; 70 percent of the companies receive a stable rating from Demotech, compared to 85 percent garnering a secure rating from A.M. Best.
According to Mr. Petrelli, contrary to common perception, Demotech withdrew its stable rating for Southern Family and Atlantic First in May 2004.
An audience member inquired about Demotech’s assessment of recent changes made to the Florida Hurricane Catastrophe Fund (“FHCF”). Mr. Petrelli replied that Demotech gives full credit to insurers for the mandatory FHCF coverage purchase. Full credit is given for purchase of the Temporary Increase in Coverage Limits coverage only if the company has the surplus to wait for the FHCF to pay its liabilities at that layer.
In response to a question about how long a company is required to wait for the FHCF to secure enough liquidity to pay its obligations, Mr. Petrelli responded that the waiting period is one to three years.
Heated discussion ensued regarding Demotech’s provision of full credit for an insurer’s purchase of the FHCF mandatory layer, because the FHCF’s own bond paying estimate falls short of its claims paying capacity. Mr. Petrelli stated that full coverage is granted because FHCF bonding capacity estimates demonstrate adequate coverage of the mandatory layer.
Mr. Petrelli stated that there has been no official guidance from the OIR regarding criteria to consider in upgrading or downgrading an insurer’s rating.
An audience member requested numbers on the amount of capital generated by Florida companies. Mr. Petrelli replied that he can get the requested information, but specified no time frame.
Should you have any comments or questions, please contact Trevor Mask at tmask@cftlaw.com.