In response to the potential ratings downgrades of 17 property insurers by Demotech, the Florida Insurance Department announced a special temporary reinsurance program with Florida Citizens Property Insurance Corporation (Citizens). This arrangement would allow those policyholders whose insurers have been downgraded below the required "A" rating with mortgages backed by Fannie Mae and Freddie Mac to meet an exception offered by those secondary lenders and maintain coverage during hurricane season.
Per the department, Fannie Mae and Freddie Mac have an exception to their ratings requirements for an insurer who is reinsured by a company who reinsures, by endorsement, 100% of the insurer's liability for losses payable, but unpaid by the insurer in the event of insolvency. They have stated that the Florida Insurance Guaranty Association (FIGA) would provide their statutory protections to the insured's of an insolvent insurer. This temporary program appears to provide additional coverage in the form of 100% reinsurance for any amounts not covered by FIGA.
In creating the program with Citizens, the department indicates it will meet the exceptions to the Fannie Mae and Freddie Mac guidelines. This program per the Department's Press Release states "would eliminate reasons for lenders to require a replacement policy or force place coverage solely upon ratings downgrades. The effect of this temporary reinsurance program would allow insurers to remain viable, and continue to provide coverage to their policyholders, and stem the growth of Citizens" which is on track to grow to nearly 1.2 million policyholders this year.
This is an unprecedented program, and how effective it is remains to be seen. The department has posted the endorsement forms to be used by Citizens and the agreement between Citizens and FIGA. However there are several questions that need to be addressed; do the endorsements meet the mortgage holders requirements, what happens if other insurers are downgraded, and many more.
Under both liquidation law and the guaranty fund statute an insurance company must be declared insolvent and ordered liquidated by a court in order to trigger FIGA. The department cannot just prop up an insurer using FIGA as a backstop. In order for FIGA to pay up to its statutory limitation on coverage, it must be triggered. Then the Citizens reinsurance would pay any amounts over that statutory limitation as opposed to the insured having an over limits claim with the liquidation estate.
Additional concerns for insureds whose insurers end up in liquidation are also not addressed as statute requires policies to be canceled by court order 30 days post-liquidation with no exceptions. Only the disposition of the claims unpaid at the time of liquidation has been addressed by the announcement of this program. Will the department make arrangements with Citizens to pick up those policies affected by an insolvency prior to the cancellation date which is contradictory to their plan to stem the growth of Citizens?
This action by the Department raises even more questions surrounding the fallout from any potential ratings downgrades by Demotech.
Christine G. Barlow, CPCU
Christine G. Barlow, CPCU, is Executive Editor of FC&S Expert Coverage Interpretation, a division of National Underwriter Company and ALM. Christine has over thirty years’ experience in the insurance industry, beginning as a claims adjuster then working as an underwriter and underwriting supervisor handling personal lines. Christine regularly presents and moderates webinars on a variety of topics and is an experienced presenter.