Q&A: Rating Expert on Florida’s Domestic Insurers and Reinsurance

Joseph Petrelli is president of Demotech, an actuarial servicing firm based in Columbus, Ohio. He and his team have been tracking the Florida property insurance market and its domestic startup carriers, in particular, for years. Demotech rates many of the smaller companies that other ratings agencies won’t. In a recent podcast with Insurance Journal’s Andrew Simpson, Petrelli discusses the Florida Hurricane Catastrophe Fund, reinsurance, smaller domestic carriers, Coral Insurance and more. The following excerpts are from the complete interview, which is at www.insurancejournal.tv. Demotech is an official research partner of Insurance Journal.

IJ: How dependent on the state Cat Fund are these smaller insurers for reinsurance?
Petrelli: In Florida, there’re a couple unusual things going on. Number one, the reinsurer there, there’s a mandatory layer of reinsurance that the cat fund is the reinsurer that has a mandatory layer. So companies must participate.

IJ: There’s a mandatory layer and then additional layers?
Petrelli: Yes. I guess the most famous layer is what they call TICL, Temporary Increased Coverage Layer, which is a fairly high excess layer. I think it’s there that the exposure of the cat fund is most critical. As we sit now, I think the cat fund has, just using round numbers, approximately $30 billion of exposure. Its cash on hand, commitments for bonds, bonds that have been sold, it has anywhere from 10 to $15 billion of cash or near-cash. So, there’s a funding shortfall of $15 to $20 billion. [B]ecause it is a post-event funder, it is, by statute, allowed to do that. It’s allowed to write business that it hasn’t already funded, unlike a traditional insurance company. I think that’s the biggest cause of the concern. The folks in the insurance business in the other 49 states, we don’t see things like that.

IJ: Do you advise startups to have a contingency plan to pay claims without the fund?
Petrelli: I want to discuss that… but I want to make it clear that we believe – and it’s an implicit assumption – that the money will eventually be there. Whether it’s sold in the private bond markets or whether the federal government buys bonds or whether the state itself buys its own bonds from indirect obligation of its quasi-government entity, we think the money will be there. So, what we talk to companies about is, “What are you going to do to continue to pay claims if the cat fund has a short-term liquidity problem?” …[W]hat we say to our companies is, “OK, if you only get half your money, and it’s going to take them six months, eight months, whatever it might take to get you all of your money, how are you going to continue to honor claims during that period of time?” We’ve gotten some fascinating responses…. Many of the smaller companies in Florida have not gotten due credit for being extremely responsive to this contingency and being extremely careful of making sure they’re going to be able to honor meritorious claims. We have 59 carriers in Florida that we actively follow and they have all responded to us, and they are all in at least quarterly, and over the last several months, monthly communication.

IJ: Do they have contingency plans?
Petrelli: They do. They do. Consumers need to know about it. The other thing is that what we’ve also found is, in this process, that the companies themselves have been, I think, very modest. They should be thumping their chests a little bit more about what they’ve done and how they’ve done it, because there are some fascinating programs in place for contingency plans.

IJ: If you find carriers without contingency plans, could that alter their rating?
Petrelli: Oh, most assuredly…. We’re still getting information but, of the 59 that we work with, I think that there will be maybe six to 10 companies, that we will have to downgrade.

IJ: How do these startups rate as a group? There have been a few problems. Are those isolated or a sign of more trouble ahead?
Petrelli: I would say that they are isolated problems. The reason I say that is when we look at the companies that we have reviewed and rated from 1996 to date, many of those companies now are 10 and 12 and 13 years old. Even though we don’t rate them anymore, they have gone on to get very good ratings from other services. We know we have been able to identify some very strong companies.