Florida Creates Backstop to Protect Homeowners Insurance through Hurricane Season

If their insurers lose their financial stability ratings, Florida homeowners will not lose their insurance coverage or face forced policies — at least not during hurricane season.

Source: South Florida Sun Sentinel | Published on July 28, 2022

Florida insurance market improves

The Florida Office of Insurance Regulation announced today that the state will provide 100 percent backstop coverage of any claim left unpaid by a bankrupt insurer through the Florida Insurance Guaranty Association and the state-run Citizens Property Insurance Corp. The temporary program will be in effect until the end of hurricane season on November 30.

According to a news release, the pledge satisfies a requirement by federally backed loan guarantors Fannie Mae and Freddie Mac that borrowers maintain coverage with A-rated insurers.

Fannie Mae and Freddie Mac required mortgage lenders to force-place expensive coverage on properties if insurers' ratings fell below an A if homeowners were unable to immediately purchase A-rated replacement policies. The majority of home loans in Florida and across the country are backed by Fannie Mae and Freddie Mac.

According to the release, Fannie Mae and Freddie Mac each make an exception "for an insurer who assumes, by endorsement, 100 percent of the insurer's liability for any covered loss payable but unpaid by the insurer due to insolvency."

"This innovative arrangement meets secondary mortgage market requirements," Florida Insurance Commissioner David Altmaier said in a statement.

"If we need to implement this temporary solution, consumers will not need to seek coverage elsewhere, agents will not need to move policies, and lenders can be confident that these insurers will continue to meet mortgage qualifications."

The arrangement, known in the insurance industry as a "cut-through endorsement," is a "elegant solution to a very disruptive problem that could potentially affect millions of policyholders," according to Paul Handerhan, resident of the Federal Association for Insurance Reform, a consumer-focused watchdog group based in Fort Lauderdale.

A "cut-through endorsement" is used "when you have a credit risk," he explained. "You can purchase a policy that guarantees that policy's obligations will be met."

Handerhan explained that in this case, several events would have to occur for the state to be obligated to cover a total loss.

To begin, the insurer's financial stability rating would have to be reduced. Second, the company would have to declare bankruptcy. Third, the company must have open and active claims.

The Florida Insurance Guaranty Association is required by law to cover individual losses up to $500,000.

Citizens would be held liable for any amount of loss in excess of $500,000.

Citizens, the state-owned insurer of last resort, currently has $6.7 billion in reserves and $11.3 billion in claims-paying ability with reinsurance, according to Citizens spokesman Michael Peltier.

So, while the likelihood of the state having to pay the additional loss amount is low, the program ensures Fannie Mae and Freddie Mac that the properties they back are completely covered.

"It gives loan servicers confidence that they'll be made whole at the end of the day," Handerhan said. "If the claims are guaranteed by the state, there is no reason for force-placed policies."

The program was announced by Altmaier's office in the aftermath of a crisis sparked by letters from ratings agency Demotech informing 27 Florida-based insurers that their A ratings, which stand for Exceptional or Unsurpassed, would be downgraded on July 26. The downgrade would force hundreds of thousands, if not millions, of homeowners to violate the loan terms of Fannie Mae and Freddie Mac.

Altmaier and Chief Financial Officer Jimmy Patronis publicly blasted Demotech on Thursday, demanding to know whether the Ohio-based firm's decision was based on assessments of the overall health of Florida's insurance market rather than the quantitative methodology it has used in the past.

Demotech CEO Joe Patronis announced on Monday that it would postpone decisions to downgrade or affirm insurer ratings while it reviewed additional information provided by affected insurers.

Demotech also sent the office a lengthy response outlining its methodology and claiming that it has not deviated from its historical approach to analyzing firms' financial stability.

The office acknowledged Demotech's response today, but provided no timetable for its rating decisions.

"The loss of an acceptable Financial [Stability] Rating at any time would have a significant and negative impact on Florida's insurance consumers, insurers, agents, and property insurance market." Under this plan, OIR remains committed to protecting Floridians and the property insurance market," according to the release.