Demotech, Inc., is an American insurance rating agency headquartered in

Columbus, Ohio Columbus (, ) is the List of capitals in the United States, capital and List of cities in Ohio, most populous city of the U.S. state of Ohio. With a 2020 United States census, 2020 census population of 905,748, it is the List of United States ...

, that focuses on independent, regional, and specialty companies in the

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, re ...

and

casualty insurance Casualty insurance is a defined term which broadly encompasses insurance not directly concerned with life insurance, health insurance, or property insurance. Casualty insurance is mainly liability coverage of an individual or organization for n ...

(P&C) industry. It is independent from the companies that it rates.

Differences

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

credit rating agency A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may ra ...

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 A.M. Best Company, Inc. is an American credit rating agency headquartered in Oldwick, New Jersey, that focuses on the insurance industry. Both the U.S. Securities and Exchange Commission and the National Association of Insurance Commission ...

Moody's Investors Service Moody's Ratings, previously and still legally known as Moody's Investors Service and often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its histo ...

, Standard and Poor’s, and

Fitch Ratings Fitch Ratings Inc. is an American credit rating agency. It is one of the three nationally recognized statistical rating organizations (NRSRO) designated by the U.S. Securities and Exchange Commission and is considered as being one of the " Bi ...

do rate insurance providers, but typically only large national companies. Demotech was founded in 1985 to provide financial analysis of, and actuarial services for, niche markets ignored by

Big Three (credit rating agencies) The Big Three credit rating agencies are S&P Global Ratings (S&P), Moody's, and Fitch Group. S&P and Moody's are based in the US, while Fitch is dual-headquartered in New York City and London, and is controlled by Hearst. As of 2013 they hol ...

. The principals were Joseph and Sharon Romano Petrelli. The

U.S. Securities and Exchange Commission The United States Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street crash of 1929. Its primary purpose is to enforce laws against market m ...

provides a list of

nationally recognized statistical rating organization A nationally recognized statistical rating organization (NRSRO) is a credit rating agency (CRA) approved by the U.S. Securities and Exchange Commission (SEC) to provide information that financial firms must rely on for certain regulatory purpo ...

s on its website. , Demotech was one of ten organizations on that list.

Ratings

Demotech developed a rating system for independent, specialty, 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. It then performs "an analysis of a series of quantitative ratios and certain qualitative considerations". 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". While this methodology broadens the pool of rated carriers, it has led to skepticism in the industry. For example, ''Insurance Journal'' points out that “DemoTech’s ‘A’ financial stability ratings have long been considered to be roughly equivalent to AM Best’s ‘B’-level ratings.” This is concerning for those who prioritize financial strength and long-term stability as DemoTech’s criteria does not align with the stricter standards of AM Best. Furthermore, a December 2023 study by researchers at Harvard, Columbia and The Federal Reserve found that Demotech’s examinations were not as thorough as other insurance rating agencies. 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".. Their FSRs were approved by

Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...

in 1989,

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.HUD in 1993. Following

Hurricane Andrew Hurricane Andrew was a compact, but very powerful and devastating tropical cyclone that struck the Bahamas, Florida, and Louisiana in August 1992. It was the most destructive hurricane to ever hit Florida in terms of structures dama ...

in 1992, more than 20 insurance companies could not cover their losses and were taken over by the state of

Florida Florida ( ; ) is a U.S. state, state in the Southeastern United States, Southeastern region of the United States. It borders the Gulf of Mexico to the west, Alabama to the northwest, Georgia (U.S. state), Georgia to the north, the Atlantic ...

. 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 plan A business plan is a formal written document containing the goals of a business, the methods for attaining those goals, and the time-frame for the achievement of the goals. It also describes the nature of the business, background information on ...

pro forma The term ''pro forma'' (Latin for "as a matter of form" or "for the sake of form") is most often used to describe a practice or document that is provided as a courtesy or satisfies minimum requirements, conforms to a norm or doctrine and tend ...

financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

s; administrative agreements; marketing and sales materials;

job description A job description or JD is a written narrative that describes the general tasks, or other related duties, and responsibilities of a position. It may specify the functionary to whom the position reports, specifications such as the qualifications ...

s of key personnel;

investment policy statement An Investment policy statement (IPS) is a document, generally between an investor and the assisting investment manager, recording the agreements the two parties come to related to issues relating to how the investor's money is to be managed. In ot ...

; claims department procedures and practices; initial rate, rule, and form filings; biographies of critical employees, service providers and principals; reinsurance data;

Catastrophe modeling Catastrophe modeling (also known as cat modeling) is the process of using computer-assisted calculations to estimate the losses that could be sustained due to a catastrophic event such as a hurricane or earthquake. Cat modeling is especially appli ...

reports; and

Underwriting Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability ...

guidelines and application. , the company was reviewing/rating companies that write about 60% of those policies in Florida and were reviewing/rating over 400 insurance carriers nationwide. 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 Ronald Dion DeSantis (; born September 14, 1978) is an American politician, attorney, and former United States Navy, naval officer serving as the 46th List of governors of Florida, governor of Florida since 2019. A member of the Republican Pa ...

plus the Senator and House leadership entreating them to pass reforms before the start of

Atlantic hurricane An Atlantic hurricane is a type of tropical cyclone that forms in the Atlantic Ocean primarily between June and November. The terms "hurricane", "typhoon", and "cyclone, tropical cyclone" can be used interchangeably to describe this weather ph ...

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."

Comparisons

In 2011, the

Florida State University College of Business The Florida State University College of Business is the business school of the Florida State University. Established in 1950, it enrolls more than 6,000 students including Undergraduate education, undergraduates and Graduate school, graduate stud ...

, Risk Management and Insurance compared Demotech FSRs with insurer ratings issued by

plus the

. 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: * 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 Columbia Business School (CBS) is the business school of Columbia University, a Private university, private research university in New York City. Established in 1916, Columbia Business School is one of six Ivy League business schools and one of ...

Harvard Business School Harvard Business School (HBS) is the graduate school, graduate business school of Harvard University, a Private university, private Ivy League research university. Located in Allston, Massachusetts, HBS owns Harvard Business Publishing, which p ...

, and the

Federal Reserve Board The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the mo ...

examined the quality of Florida property insurers rated by Demotech versus traditional rating agencies, and found: * "Demotech ratedinsurers 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 GSEGovernment-Sponsored Enterprise, e.g.

Awards

* 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

References

External links

*
SEC website of Current NRSROs
{{Authority control Companies based in Franklin County, Ohio Credit rating agencies Insurance companies of the United States Insurance industry organizations Financial services companies established in 1985