As Florida seeks to revive its private home insurance market after almost a decade without a hurricane, homeowners are pouring $6 billion a year in premiums into a new generation of small, in-state insurance companies with an unproven record of withstanding a major hurricane.
A consumer-oriented rating agency, Weiss Ratings, recently awarded the companies a median grade of C-minus, and even without a major storm to drive up claims, 11 of them have already failed in Florida since 2006, according to state records.
"This is an accident waiting to happen," said Gavin Magor, senior financial analyst with Weiss, a national agency with a reputation for tough ratings based in Jupiter, Florida.
The new in-state companies emerged after major national carriers pulled out of the market, following a series of costly hurricanes in 1992, 2004 and 2005.
Responding to the Weiss ratings, Robert Hartwig, president of the Insurance Information Institute, a trade association, said all the companies meet state regulations, noting that other rating agencies gave higher grades.
"Things are moving in the right direction for Florida in attracting private capital. The risk has been diversified and there's clearly an appetite for this new risk," said Hartwig.
Almost 80 per cent of Florida's insured residential and commercial property, valued at about $3 trillion, lies in coastal areas vulnerable to both wind damage and flooding, according to risk modeling experts.
State officials have encouraged the growth of the private market in recent years, seeking to downsize the overloaded state-run Citizens Property Insurance Co, which ballooned as it took on policies after the major companies withdrew.
The major insurers have stayed away from Florida, saying state regulators require rates that are too low to make the risk of doing business profitable.
Citizens remains the single largest carrier in the state, with 14.5 percent market share.
Weiss rated 48 Florida-based private companies that collectively take in two-thirds of all comprehensive homeowners property insurance premiums paid by Florida homeowners.
Of those, 19 received ratings of D-plus or worse on the Weiss report card, reflecting high risk to customers.
Kevin McCarty, Florida's insurance commissioner, was not available for comment, according to his office.
A handful of other companies offer specialty insurance such as windstorm and flood insurance, and were not included in Weiss's ratings.
Another 70 out-of-state companies offer homeowner policies in Florida, and have a total 19 percent market share. Those companies, which are held to different regulatory standards imposed by their home states, achieved a median grade by Weiss of B minus.
Two other rating agencies, A.M. Best and Demotech, operate in Florida. Demotech President Joe Petrelli said his company only issues A ratings, choosing not to rate companies that warrant a lesser score.
A.M. Best issued only A and B grades to Florida insurers that it rated, according to data from the Florida Office of Insurance Regulation.
A.M. Best Vice President Rich Attanasio said fewer than half of Florida's in-state insurers chose to obtain a rating from the company, and one of them fell into A.M. Best's "vulnerable" category with a B, according to data from the state.
Low-grade insurance companies usually choose not to be rated by the company, he added.
It was not surprising for rating agencies to vary, said Hartwig. "The differences are driven by the criteria they measure and how they weight them, and perceptions of the ability to secure more reinsurance coverage after an event that exhausts a company's reserves," he said.
Weiss said that unlike other companies, its rating take into account not just the likelihood of a company failing, but financial stress undermining customer service.
Bert Gindy, vice president of government affairs for the Florida Farm Bureau in Gainesville, which has been offering homeowner insurance for 70 years, said he wasn't surprised at the low grades from Weiss, given the newness of most Florida insurers.
"Most of them coming into the market are as thinly capitalized as they can be," said Gindy. The Florida Farm Bureau's two insurance companies scored two of Weiss's highest grades — B and B minus, as well as A grades from A.M. Best.
Jeffrey Scott, an executive at seven-year-old Olympus Insurance Co. in Orlando, which received an A from Demotech and a D plus from Weiss, argues that Weiss doesn't adequately consider company financials, especially reinsurance.
"I think that Demotech is the most thorough with respect to understanding Florida domestics," said Scott, referring to the finances of the in-state companies.
Weiss recommended that consumers buy policies from companies that it rates B plus or higher. No private in-state carrier achieved that grade, according to Weiss's analysis.
The only in-state insurer to achieve an A rating from Weiss was Citizens, which has the authority to tack special fees on all insurance policies issued in the state to cover its debts.
Weiss's track record is close to the mark. Out of 25 property and casualty companies that have failed in Florida since 2004, including those that also cover cars and businesses, Weiss graded 17 with a D-plus or worse one year before the company went out of business. None of the failing companies earned a grade higher than C.
The latest failure in 2014 was homeowner insurer Sunshine State Insurance Co., which Weiss had rated E-plus, its second lowest rating, for two years in a row.
The insurance industry noted that when companies folded, no claims were left unpaid, becoming the responsibility of the companies that took over the policies.
"That is zero comfort for the consumer," said Weiss's Magor. "If your insurer fails when you need to make a claim, that is a disaster from the consumer perspective. You need the claim paid right away, not by some other entity down the road."
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