A dramatic decision to transfer the risk of property insurance companies failing to Florida consumers held off crisis in the property insurance market by preventing at least temporarily the downgrades of approximately 17 to 27 Florida insurers by the insurance rating company Demotech.

These downgrades would have had a devastating effect on homeowners and the real estate industry as customers of these companies with mortgage loans guaranteed by Fannie Mae or Freddy Mac would have had to scramble to replace their home insurance.

The mortgage companies require that homeowners have insurance from a highly rated company. In Florida, the home insurance market is dominated by small companies that are only rated by Demotech, which gives the company tremendous sway in the industry.

If the Florida companies had been downgraded, homeowners with insurance from the downgraded companies would have had to immediately seek replacement coverage in a marketplace where insurers are dropping customers and raising prices.

To avoid the devastating impact of these downgrades, the Florida Office of Insurance Regulation (OIR) stepped in and announced that the state-run Citizens Property Insurance Corp. would provide reinsurance to those companies which were downgraded.

Fannie Mae and Freddy Mac each offer an exception to the financial ratings requirement for an insurance company that is covered by a reinsurer who assumes 100 percent of the insurers liability for paying claims if the insurer is financially unable to pay the claim. The OIR offer for Citizens to provide that reinsurance meets that requirement.

This action helps customers deal with an immediate crisis, but it does little to deal with the underlying problem of instability in the Florida property insurance market. The market has been in turmoil since Hurricane Andrew tore through the state in 1992, creating billions in damage and ultimately leading many major insurers to abandon the Florida property insurance market.

Instead, these companies created Florida-only “pups” with the name of the major company but without the financial backing of the parent company, and many smaller companies came into the Florida market. With losses mounting due largely to fraud and litigation, the industry has been unstable for years.

During the last two years, the Florida Legislature has enacted insurance reforms aimed at stabilizing the industry, including those just enacted in a special session. However, some industry experts believe these reforms were not enough to bring stability to the industry.

We are not experts in insurance company finance or regulation, but it is clear to us that even though the legislature has placed bandages on the industry, it has not enacted the reforms necessary to bring stability. Continuing to transfer insurance risk to Florida consumers through giving more responsibility to public-backed Citizens Insurance Corp. is not a long-term answer.

We urge our legislative representatives to seriously address and deal with the issues that threaten the property insurance industry and restore stability to a necessary industry in the state.