financial stability ratings ® and florida’s property insurance market demotech, inc. february 4,...
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Financial Stability Ratings® andFlorida’s Property Insurance Market
Demotech, Inc.February 4, 2010
Incorporated in 1985, Demotech, Inc. is a financial analysis and actuarial services firm that provides Financial Stability Ratings® (FSRs) to the Property & Casualty and Title insurance industry.
Demotech was the first company to have its rating process formally reviewed and accepted by:◦ Fannie Mae (1989)◦ Freddie Mac (1990)◦ HUD (1994 & 2005)
1996 ◦ Worked with Florida Department of Insurance to develop FSRs for Florida
“take out” insurers to depopulate the residual market. 2005
◦ Accepted by HUD for rating Professional Liability insurers of long term care facilities.
In 1996, when the State of Florida, the Florida Department of Insurance (now OIR), and the secondary mortgage marketplace needed a rating solution, they contacted Demotech, Inc.
We developed a procedure to review and rate start-up insurance companies.
Our procedure met the needs of the State of Florida, insurance agents, insurance companies, consumers and was acceptable to the secondary mortgage marketplace.
Biographical information on principals and key employees
Summaries of the duties of key personnel
Business plan Pro forma financial
statements Catastrophe modeling
analysis Underwriting guidelines Initial rate, rule and form
filings
Investment guidelines Claims department
procedures and practices Management and
administrative agreements Reinsurance information Marketing and sales
materials Producer contracts Any other information
necessary to familiarize Demotech with the company and its operations
Capital adequacy Quality and liquidity of invested assets Loss and loss adjustment expense reserves Unearned premiums Premium to surplus leverage ratios Other underwriting expenses incurred Quality and quantity of reinsurance Adequacy of rate levels
Demotech data call◦ Exhibit A◦ Illustrative tower graph
Aggregate retentions and impact of multiple events Provision for reinstatement of reinsurance coverage Probable maximum loss Catastrophe modeling
◦ Parameters/switches◦ Particular model utilized
Florida Hurricane Catastrophe Fund (FHCF)◦ Company liquidity relating to FHCF funding◦ Company decisions regarding TICL
Financial stability of reinsurer Changes or modifications to book of business
Lack of focus on marketing, underwriting and claims practices
Reinsurance purchasing decisions Pricing decisions Emphasis on earning projections or market share Inadequate loss reserves in order to meet earning
projections (at least on paper) Entrance into new markets/product lines Inefficient information technology systems
Demotech AM Best S&P Moody's Fitch
2001 93 467 136 6 12
2002 114 425 136 3 20
2003 108 419 121 22 21
2004 125 422 115 7 26
2005 129 414 100 4 19
2006 168 256 42 8
2007 179 347 16 14
2008 200 327 46 33
Total 1,116 3,077 712 42 153
Source: An Examination of Insurer Financial Strength RatingsSouthern Risk and Insurance Conference - November 2009
Is there agreement in terms of insurers considered to be secure?
Firms Rated Secure by Demotech
Not Secure Secure % Agree
Best 69 344 83 %
S&P 10 92 90 %
Moody's 4 30 88 %
Fitch 1 31 97 %
Source: An Examination of Insurer Financial Strength RatingsSouthern Risk and Insurance Conference - November 2009
Demotech does appear to rate a group of insurers that is different from those generally rated by other rating agencies.
Controlling for differences in the sample of firms each agency rates, there is some consistency between factors impacting Demotech ratings and other agencies (especially AM Best).
Source: An Examination of Insurer Financial Strength RatingsSouthern Risk and Insurance Conference - November 2009
Source: A.M. Best Co.'s Impairment Rate and Rating Transition Study dated May 1, 2009; complement of page 4, Exhibit 2.
Demotech, Inc.’s Serious About Solvency updated for data as of 12/31/2008.
Source: A.M. Best Co.'s Impairment Rate and Rating Transition Study dated May 1, 2009; complement of page 4, Exhibit 2.
Demotech, Inc.’s Serious About Solvency updated for data as of 12/31/2008.
Source: A.M. Best Co.'s Impairment Rate and Rating Transition Study dated May 1, 2009; complement of page 4, Exhibit 2.
Demotech, Inc.’s Serious About Solvency updated for data as of 12/31/2008.
We have been part of the solution to the Florida property insurance situation since 1996
Demotech’s track record on long-term solvency – Florida and countrywide – is enviable
We plan to be a part of the solution for years to come