As major insurers continue their retreat from high-risk coastal markets, a small ratings agency based in Ohio is playing an outsized role in enabling lesser-known insurers to fill the void — often with significant consequences for policyholders.
Demotech and the Rise of Small Insurers
Demotech, a privately held ratings company founded in 1985, has emerged as a critical player in the home insurance market for hurricane-prone states like Florida and Louisiana. The firm currently rates hundreds of insurers and is known for its willingness to assign high financial stability ratings — often an “A” or higher — even to companies that are small, relatively new, or operating in volatile geographic areas.
This approach has opened the door for lesser-known insurers to serve customers in regions where major carriers have scaled back or exited altogether due to mounting losses tied to natural disasters. According to Demotech’s data, its rated insurers collect approximately 50% of home insurance premiums in Florida and roughly one-third in Louisiana.
Ratings and Repercussions
A Wall Street Journal analysis found that insurers rated by Demotech were 30 times more likely to become insolvent than those evaluated by major competitors such as AM Best, S&P Global, or Kroll Bond Rating Agency. Since 2017, 17 insurers with Demotech ratings have failed, leaving more than $1.7 billion in unpaid claims. Every one of these companies held an “A” rating from Demotech within a year of its collapse.
One such case is Lighthouse Excalibur Insurance, which provided coverage to homeowners in Louisiana. After Hurricane Ida struck in 2021, Lighthouse collapsed under the weight of over 16,000 claims in the state. Demotech had maintained its “A” rating for the insurer until just one week before regulators intervened.
Another insurer in Louisiana, Maison Insurance, also held an “A” rating from Demotech before going under, and insurer claims remain unresolved.
Role of State Guaranty Associations
When insurers fail, unpaid claims are often passed on to state-run guaranty associations funded by other insurers. In Louisiana, the state’s guaranty association has assumed more than 42,000 pending claims from failed insurers between 2021 and 2023. As of mid-2025, approximately 1,700 of those remain unresolved.
Claimants and their legal representatives say that disputes with guaranty associations can drag on for years, with homeowners covering out-of-pocket costs long before any potential reimbursement.
Demotech’s Defense and Methodology
Demotech’s founder, Joseph Petrelli, argues that the firm’s ratings give consumers access to coverage in otherwise uninsurable markets. He defends the methodology, which emphasizes the level of reinsurance carried by insurers and includes both financial metrics and subjective evaluations of company management.
Petrelli acknowledged that the failures of Demotech-rated insurers have had real impacts on policyholders but attributed the collapses to rapid, unforeseen pressures in the market. He also noted that some competitors have been slow to downgrade struggling insurers.
Demotech recently revised a securities filing to reflect a default rate of 1.9% among its A-rated insurers — down from an earlier figure of 10%— by excluding failures that occurred after the firm stopped rating the companies.
Calls for Transparency and Reform
Critics, including consumer advocates and insurance professionals, argue that Demotech’s consistently high ratings may give homeowners a false sense of security. Questions have been raised about how ratings agencies, especially smaller ones, should be held accountable for the financial health of the companies they endorse.
With the Atlantic hurricane season forecasted to be active and U.S. disaster claims already hitting record levels in 2025, the durability of small insurers — and the credibility of the ratings they rely on — remain under the spotlight.
Stay informed and ahead of the curve — explore more industry insights and program opportunities at ProgramBusiness.com.