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Sep 23

Weiss Ratings Critical of Florida Property Insurance Market Discredited

A recent article from Reuters reported that Florida’s property insurance market may be an “accident waiting to happen.” An unbiased and balanced assessment of the market proves that this is simply untrue. The Florida property insurance market as a whole is strong, well regulated, and fully capable of paying claims when disaster strikes. The Reuters article not only misstates key facts but also builds a narrative based on financial ratings from Weiss Ratings, a Jupiter, Florida Company that uses incomplete models and has a dubious history that includes multiple run-ins with the Securities and Exchange Commission.

There are three substantive reasons that Weiss ratings of Florida’s property insurance market have no credibility. Every year in advance of hurricane season, property insurance companies in Florida must prove to regulators and rating agencies that they have the financial wherewithal to pay claims, even in the worst of circumstances. Demotech, the premier rating agency for Florida property companies, requires them to have the ability to pay claims from a 1:100 storm, a 1:50 storm, a 1:30 storm plus an additional event—all in the same year. To put this into perspective, consider that Hurricane Andrew was a 1:35 year event. There is no way that even the nation’s largest insurance companies could meet this high financial bar without buying reinsurance to spread the risk.   Reinsurance costs are roughly half of total premium dollars, the reason that Floridians pay the highest property insurance rates in the nation. Weiss does not review these very important reinsurance treaties. To rate a Florida insurer without undertaking a thorough review of its reinsurance treaties is like estimating the distance a car can travel by examining its color but not checking the fuel gauge.

Second, the Reuters article calls Weiss “a national agency with a reputation for tough ratings.” At first blush, this seems like a great thing for consumers. But when you look closer, you see that Weiss gives almost all companies low ratings. State Farm of Florida is rated C- (recently upgraded from D). JP Morgan Chase currently has a D rating from Weiss. Bank of America and Wells Fargo are only slightly higher with D+ ratings. It’s easy to claim that your record of predicting failures is good when you claim that virtually every company is vulnerable. The Reuters article calls Weiss’ track record at predicting insurance company failures “close to the mark” because it assigned them low ratings a year before failure. It does not mention that two of the failed Florida P&C companies actually had higher Weiss ratings on the date that they failed than from the year before, while only one was downgraded over the same period.

There is a third practical reason that Weiss ratings are irrelevant to the property insurance market, not just in Florida but nationally. Those homeowners who have a conforming mortgage must have homeowner’s insurance policies from companies with ratings sanctioned by Fannie Mae and Freddie Mac. Freddie and Fannie guidelines recognize Demotech, A.M. Best, and S&P, but not Weiss. Any company relying solely on a Weiss rating to write property coverage would simply go out of business.

Sadly, this may be more than just a matter of an incomplete or different rating philosophy. Some suggest that Weiss issues doomsday scenarios for one reason and one reason only—to pedal financial advice in the form of pricy newsletter subscriptions. It’s an old school sales technique that if you can scare someone badly enough, you can get them to buy a “cure.” And it is part of a business model that has more than once landed Weiss in hot water.

In 2006, the U.S. Securities and Commission (SEC) settled administrative proceedings against Weiss Research, Inc., Martin Weiss, and Lawrence Edelson (a long-time Weiss employee) for “violations of the Investment Advisers Act of 1940 in connection with their operation of an unregistered investment adviser and the production and distribution of materially false and misleading marketing materials.” The settlement paid by Weiss was over $2.1 million dollars. This was not the first brush with the SEC. According to a 1992 New York Times article calling Weiss the “Bad Boy of Insurance Ratings,” in 1972 Martin Weiss was cited by the SEC for “promotion of unregistered securities” and banned from the industry for four months.

Weiss’ troubles with the SEC have no direct relationship to its ratings of Florida property and insurance carriers. However, it is relevant information to have when considering whether the ratings are credible.

During the 22 years since Hurricane Andrew after which large legacy carriers started to shed their 95% of the property insurance market, Florida has built a strong domestic property insurance market that now writes over half of our market. There was no operating manual to guide state regulators and credible rating agencies through this remarkable transformation. There were, and will likely continue to be, bumps in the road. But overall the system is working.

FAIR’s mission is to help ensure that insurance consumers receive accurate information to make informed decisions about coverage options from companies that will be willing and able to pay legitimate claims. We have no choice but to call out anyone who would scare Florida insurance consumers with a motive that appears to be nothing more than a cynical ploy to sell financial advice.