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Demotech

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Demotech, Inc.
Company typeCorporation
IndustryFinancial services
Founded1985
FounderJoseph L. Petrelli
Sharon Romano Petrelli
Headquarters
Columbus, Ohio
,
U.S.
Area served
United States
Key people
Joseph L. Petrelli
President & CEO
ProductsDemotech Difference (magazine)
ServicesRating agency, insurance information publications
Websitewww.demotech.com

Demotech, Inc., is an American insurance rating agency headquartered in Columbus, Ohio, that focuses on independent, regional, and specialty companies in the property and casualty insurance (P&C) industry.[1][2] It is independent from the companies that it rates.[3]

Differences

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An insurance rating agency issues financial-strength ratings measuring a company's ability to immediately pay claims presented.

A credit rating agency issues financial-strength ratings measuring a company's ability to pay back debt by making timely principal and interest payments and the likelihood of default.

Traditional companies such as AM Best, Moody's Investors Service, Standard and Poor’s, and Fitch Ratings do rate insurance providers, but typically only large national companies.[4] Demotech was founded in 1985[1][2] to provide financial analysis of, and actuarial services for, niche markets ignored by Big Three (credit rating agencies).[5][6] The principals were Joseph and Sharon Romano Petrelli.[7]

The U.S. Securities and Exchange Commission provides a list of nationally recognized statistical rating organizations on its website. As of August 2022, Demotech was one of ten organizations on that list.[8]

Ratings

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Demotech developed a rating system for independent, specialt, and regional insurance carriers. It gathers and analyzes annual and quarterly statutory financial statements, statements of actuarial opinion, actuarial opinion summaries, reinsurance information, audit reports, and discussions with management.[9] It then performs "an analysis of a series of quantitative ratios and certain qualitative considerations".[9]

Demotech uses the registered term Financial Stability Rating® (FSR) to judge an insurer's ability to perform in the general economy and the "underwriting cycle that exists in the insurance industry".[10]

The company has eight levels of stability. The first five predict the percentage of insurers that will have a surplus 18 months after their ratings no matter "the severity of a general economic downturn or deterioration in the insurance cycle".[10]

Rating Percent Description
A″ 100% (A Double Prime), Unsurpassed
A′ 99% (A Prime), Unsurpassed
A 97% Exceptional
S 95% Substantial
M 90% Moderate
L -- Licensed by state regulatory authorities. Evaluation of their financials precludes assignment at an FSR.
NR -- Not Rated do not currently have an FSR.
N/A -- Ineligible for an FSR because complete financial data was not available.

Their FSRs were approved by Fannie Mae in 1989,[11] Freddie Mac in 1990,[12] and HUD in 1993.[13] Following Hurricane Andrew in 1992, more than 20 insurance companies could not cover their losses and were taken over by the state of Florida. In 1996, the Florida Office of Insurance Regulation requested that Demotech rate new Property & Casualty Insurance companies doing business in Florida. Because newly capitalized insurers do not have the financial records typically utilized, a new process was developed using business plans; pro forma financial statements; administrative agreements; marketing and sales materials; job descriptions of key personnel; investment policy statement; claims department procedures and practices; initial rate, rule, and form filings; biographies of critical employees, service providers and principals; reinsurance data; Catastrophe modeling reports; and Underwriting guidelines and application.[9] As of 2014, the company was reviewing/rating companies that write about 60% of those policies in Florida and were reviewing/rating over 400 insurance carriers nationwide.[7]

Demotech issues financial stability ratings for 50 Florida-based insurers. On March 23, 2022, the top five executives from Demotech sent a letter to Florida's Governor Ron DeSantis plus the Senator and House leadership entreating them to pass reforms before the start of Atlantic hurricane season on June 1. Failure to do so would cause Demotech to downgrade the financial stability ratings for "a number" of Florida insurers. The letter stated: "The conditions of the property insurance marketplace in Florida are unsustainable, and without the necessary corrective action, many Florida insurers will struggle to maintain adequate surplus, efficient capital sources will avoid the market, private reinsurance costs will become prohibitively expensive, and consumers will ultimately bear the cost."[14]

Comparisons

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In 2011, the Florida State University College of Business, Risk Management and Insurance compared Demotech FSRs with insurer ratings issued by AM Best plus the Big Three (credit rating agencies). Their independent study reviewed thousands of insurer ratings issued over nine years. The resulting paper was "A Comprehensive Examination of Insurer Financial Strength Ratings," and its executive summary contained the following conclusions:[7][4]

  • ratings comparisons between Demotech and others show "relative consistency"
  • Demotech serves a unique group of insurers
  • there is general consistency in the firms that each agency would categorize as financially secure
  • the comparability between Demotech and others has "important public policy implications for insurers, regulators and consumers"
  • Demotech provides an important service within the ratings community and plays a very important role in the insurance market.

In 2023, researchers from Columbia Business School, Harvard Business School, and the Federal Reserve Board examined the quality of Florida property insurers rated by Demotech versus traditional rating agencies, and found:[15]

  • "Demotech[-rated] insurers are of significantly lower quality than traditional insurers across most observable measures of financial and operational risks."
  • "Demotech ratings are almost uniformly high and sufficient to meet the GSE[note 1] threshold. This is despite the fact that traditional insurers are higher quality on average."
  • "[A] vast majority of Demotech insurers would not meet GSE eligibility under AM Best’s methodology."

Title insurance

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Demotech has published Performance of Title Insurance Companies since 1988. The data is released annually and updated quarterly. It represents over 99% of the premium volume in the title industry and Demotech claims it "is the most complete and thorough industry analysis available".[16][3]

Awards

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  • ACQ Global Awards 2014 — US — Niche Financial Analysis Provider of the Year (Insurance) award
  • ACQ Global Awards 2015 — US — Niche Financial Analysis Provider of the Year (Insurance) award
  • ACQ Global Awards 2015 — US — Gamechanger of the Year (Financial Analysis) award
  • Finance Monthly’s Innovation and Excellence Awards 2015 — USA — Excellence in Financial Analysis award

Notes

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  1. ^ Government-Sponsored Enterprise, e.g. Fannie Mae or Freddie Mac

References

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  1. ^ a b Hunt, Janet (December 21, 2021). "Demotech, Inc. Insurance Company Review". Financial Review Board. Retrieved 30 March 2022.
  2. ^ a b "Insurance Journal Names Demotech As Official Research Partner". Wells Publishing Company. January 18, 2007. Retrieved 30 March 2022.
  3. ^ a b McKenna, Bruce A. (1999). Title Insurance A Guide to Regulation, Coverage and the Claims Process in Ontario. CCH Canadian. p. 236. ISBN 9781551412382. Retrieved 31 March 2022.
  4. ^ a b "The Bar Plan Chooses Demotech, Inc". Thebarplan.com. The Bar Plan, Inc. 6 November 2017. Retrieved 30 March 2022.
  5. ^ "AM BEST VS. DEMOTECH FINANCIAL STABILITY RATING". Myclearchoiceins.com. Clear Choice Insurance Services. Retrieved 30 March 2022.
  6. ^ Pelletier, Andrea (29 October 2019). "Insurance Carrier Ratings: What Are They And Why Should It Matter?". Gulfshoreinsurance.com. Gulf Shore Insurance. Retrieved 30 March 2022.
  7. ^ a b c "Corporate Milestones". Demotech.com. Demotech. Retrieved 29 March 2022.
  8. ^ "Current NRSROs". US Securities and Exchange Commission. US Government. Retrieved 31 August 2022.
  9. ^ a b c "Property & Casualty Review". Demotech.com. Demotech. Retrieved 30 March 2022.
  10. ^ a b "Financial Stability Ratings® Definitions". Demotech.com. Demotech. Retrieved 29 March 2022.
  11. ^ "Fannie Mae Title Acceptance" (PDF). Demotech.com. Federal National Mortgage Association. Retrieved 30 March 2022.
  12. ^ "Freddie Mac rating acceptance" (PDF). Demotech.com. Federal Home Loan Mortgage Corporation. Retrieved 30 March 2022.
  13. ^ "HUD Casualty Insurance Acceptance" (PDF). Demotech.com. US Department of Housing and Urban Development. Retrieved 30 March 2022.
  14. ^ Hurtibise, Ron (29 March 2022). "Grim new developments reveal more trouble in Florida home insurance market". South Florida Sun-Sentinel. Retrieved 30 March 2022.
  15. ^ Sastry, Parinitha; Sen, Ishita; Tenekedjieva, Ana-Maria (December 23, 2023). "When Insurers Exit: Climate Losses, Fragile Insurers, and Mortgage Markets". SSRN 4674279.
  16. ^ "Demotech Performance of Title Insurance Companies". Demotech.com. Demotech. Retrieved 30 March 2022.
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