The inconvenient truth
Florida Insurance Commissioner Michael Yaworsky
Florida Insurance Commissioner Michael Yaworsky is disputing a recent academic report that claims Florida’s property insurance market is full of “low quality insurers,” especially those Florida-based companies that write the bulk of the 7.5 million homeowners and condo insurance policies. The report casts aspersions on Demotech, the rating agency that reviews the companies’ financial stability.
Yaworsky told Bloomberg last week the report by researchers at Columbia University, Harvard University, and the Federal Reserve Board is based on “dated” information and rejected the idea put forth that small insurers in Florida are weak. The main cause of insurance failure in the state in 2021 and 2022 was “pervasive and abusive insurance fraud,” he said, according to Bloomberg. “This study cites data from over a decade ago. It seems to me that the market and the industry has moved on.”
I sat down recently with Demotech President Joe Petrelli to get the other side of the story that the report didn’t. We recorded our conversation as the newest episode of the Florida Insurance Roundup podcast. I learned that it wasn’t low capital and surplus that led to seven company insolvencies, as the report claims, but instead the fraud Commissioner Yaworsky references, together with targeted technology-enabled claim instigation.
“I think the thing to keep in mind is the report is based on what are called counterfactual AM Best ratings of Demotech-rated companies,” said Petrelli, who described counterfactual methods as those based on “what-if” scenarios. “So I think that, in and of itself, should have alerted people that this was not based on anything real or actual. It was based on counterfactual information. It’s like rewinding the world, changing a few crucial details, and then hitting play to see what happens. It’s essentially a simulation,” said Petrelli.
Joe Petrelli, President of Demotech. Courtesy, Demotech
Petrelli is an actuary and a 55-year veteran of the insurance industry. Florida regulators approached Demotech in 1995 to become the very first ratings company to review and rate independent, regional and specialty companies that filled the gap left by legacy property insurance carriers that fled the state after losses from 1992’s Hurricane Andew. Demotech has been rating Florida-based companies and others ever since (460 nationwide at last count) and is registered with the U.S. Securities and Exchange Commission as a nationally-recognized statistical rating organization for insurance companies.
The Bloomberg article also quoted Jeff Mango, managing director of AM Best, who said the academic report’s comparison is “inappropriate” based on both companies’ SEC filings, and said that smaller insurers don’t struggle to obtain high AM Best ratings. The report was not peer-reviewed prior to public release online nor, said Petrelli, did one of the author’s respond to his reply to call him on his mobile phone for information requested for the report.
What I found most intriguing though in my conversation with Petrelli was the inconvenient truth not in the report. According to Petrelli, those very Florida-based companies that went insolvent “were being targeted through tech-enabled claim instigation. They were being targeted by artificial intelligence platforms,” he told me. “We’re talking about litigation financing, we’re talking about litigation marketing firms who would help find claimants, and we’re talking about search engine optimization being used online.” He had a lot more to say, including his take on the current reinsurance market and its implications on Florida property insurance rates for consumers. You can read more about our conversation and listen to the “When Insurers Exit” episode here.
LMA Newsletter of 4-29-24
