Demotech, Inc. is an American insurance rating agency headquartered in
Columbus, Ohio
Columbus () is the state capital and the most populous city in the U.S. state of Ohio. With a 2020 census population of 905,748, it is the 14th-most populous city in the U.S., the second-most populous city in the Midwest, after Chicago, an ...
, 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, r ...
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 companies' 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 rat ...
issues financial-strength ratings measuring a companies' 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
Moody's Investors Service, 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 historical name. Moody's Investors Service provides internation ...
Fitch Ratings
Fitch Ratings Inc. is an American credit rating agency and is one of the " Big Three credit rating agencies", the other two being Moody's and Standard & Poor's. It is one of the three nationally recognized statistical rating organizations ( NRS ...
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 ...
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 their website.
As of August 2022, Demotech was one of ten organizations on that list.
Ratings
Demotech developed a rating system for independent, specialty and regional insurance carriers. The gather analyzed Annual & Quarterly statutory financial statements, Statements of actuarial opinion, Actuarial opinion summaries, Reinsurance information, Audit reports and discussions with Management. Then perform "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".
The company has eight levels of ''stability''. The first five predict the percentage of insurers that will have a surplus 18 months after their rating 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 N ...
in 1989,
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.HUD in 1993. Following
Hurricane Andrew
Hurricane Andrew was a very powerful and destructive Category 5 Atlantic hurricane that struck the Bahamas, Florida, and Louisiana in August 1992. It is the most destructive hurricane to ever hit Florida in terms of structures damaged ...
in 1992, more than 20 insurance companies could not cover their losses and were taken over by the State of
Florida
Florida is a state located in the Southeastern region of the United States. Florida is bordered to the west by the Gulf of Mexico, to the northwest by Alabama, to the north by Georgia, to the east by the Bahamas and Atlantic Ocean, a ...
. 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 ...
s;
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, tends to ...
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 & sales materials; job descriptions of key personnel; investment policy statement; claims department procedures & practices; initial rate, rule, & form filings; biographies of critical employees, service providers & principals; reinsurance data; catastrophe modeling reports; and underwriting guidelines & application. 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.
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 serving as the 46th governor of Florida since January 2019. A member of the Republican Party, DeSantis represented Florida's 6th district in the U.S. House of Represe ...
plus the Senator and House leadership entreating them to pass reforms before the start of
Atlantic hurricane season
The Atlantic hurricane season is the period in a year from June through November when tropical cyclones form in the Atlantic Ocean, referred to in North American countries as hurricanes, tropical storms, or tropical depressions. In addition, ...
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, Risk Management and Insurance compared Demotech FSRs with insurer
ratings issued by AM Best plus the
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 ...
. 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.
Title Insurance
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".
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