The Not Unreasonable Podcast

Joe Petrelli on the Trouble with Insurance in Florida

October 22, 2022 David Wright
The Not Unreasonable Podcast
Joe Petrelli on the Trouble with Insurance in Florida
Show Notes Transcript

Joe Petrelli founded Demotech, the rating agency that dominates the solvency assessment market for Florida's homeowners insurance market. This year (2022) he has found himself the bearer of bad news: that many of Florida's domestic insurance companies have not met Demotech's standards. At least six insurance companies went insolvent this year with others being downgraded, which meant that many thousands of Florida residents have to scramble to get their insurance replaced. 

I should note that all of this happened before Hurricane Ian, the costliest hurricane to make landfall in Florida's long history of landfalling hurricanes. What's going on in Florida? Joe is here to talk about it!

youtube: https://youtu.be/Cd9JpHsjDr8
show notes: https://notunreasonable.com/?p=7636

Twitter: @davecwright
Linkedin: https://www.linkedin.com/in/david-wright-73661214/
Social Science of Insurance Essays: https://notunreasonable.com/the-social-science-of-insurance/

David Wright:

My guest today is Joe Petrelli, president and co founder of demo tech, a rating agency specializing in insurance company ratings. Joe is an actuary by training. And as we covered in our first interview, a disruptive innovator inside of the exceedingly unusual business of rating agencies. Joe, welcome back to the show.

Joe Petrelli:

Thank you, David. Good to be here.

David Wright:

First question. So it has been an action packed here for demo tech. And for you personally, Joe, you've downgraded some companies, some companies going into business, these are Florida insurance companies before Hurricane Ian slammed into the Fort Myers area. Does this turmoil though, indicate I mean, I shouldn't say expecting probably some more difficulty financially for for insurance companies in Florida. We'll see how that pans out. We'll talk about that. But does this turmoil indicate that maybe you're a little too lenient? On the insurance companies that are facing financial distress in advance of Hurricane Ian and during Hurricane Ian and after Hurricane Ian, could you have been a little harder on them? In the past?

Joe Petrelli:

I would say Did they answer the question? I don't think we're too lenient. I think if we're guilty of anything, it's being bespoke. In our reviews of the companies. I think every one of our carriers had to purchase minimum reinsurance requirements vertically horizontally. And I think in terms of Florida, I think we've reached a point where Hurricane exposure is quantifiable. And you can have a prophylactic measure through reinsurance treaties, catastrophe reinsurance treaties. I think the problem in Florida is disparate litigation levels. And we're, I think we've got that figured out going forward. But anyway, no, I don't think we're do we were too easy. I think we were bespoke. And I think the companies responded as best they could.

David Wright:

So I would guess I'll ask the question, I guess how much of the risk of something like a litigation run or runaway cost or change? Can you do you incorporate into your assessment?

Joe Petrelli:

Yeah, I think well, well, just to put a parameter out there for your your listeners to hear. It's my understanding whether it's Commissioner David Myers letter of April 2021, or the more recent July 120 22, report on a condition of the residential property insurance marketplace. Rough Cuts, Florida's outstanding homeowners claims are about 8% of the national total of unsettled homeowners claims yet 75 to 80% of the litigation in the country is Florida's, which means that 8% of the country's open homeowners claims are generating 75 to 80% of the litigation. That is a eye opening and fascinating statistic that the commissioner identified. And we're monitoring that as actively as we ever did more actively than we had in the past.

David Wright:

Did you should you have or did you see something like that coming? I mean, Florida has been a bit of a tough place for litigation for a long time. Right. So I mean, I don't know what that was in 2015, or maybe 2005. But it probably wasn't 8% 8%. So, you know, the a more modest or moderate increase in litigation in Florida could be a massive increase in claims like how much has that influenced influencing your decision?

Joe Petrelli:

Yeah, no, I think we've been monitoring Florida. Keep in mind, we've been monitoring Florida since we were invited to be there by the state that which was July of 1996. We saw the three court cases in late 2016, early 2017. We saw Johnson Johnson case SIBO case, Joyce case. And at the end of 2016, just to put it in perspective, at the end of 2016 demo tech rated carriers had recorded positive, honestly, unassign surplus, they'd been making money. And then these three court cases kind of hit within 12 months of each other. And so it was 2017 when things started turning around and going, making it more difficult to make a profit, and obviously less profitable for the companies. The litigation level, the answer your question, the litigation level in July of 2019 Well, let's go back before that we had sinkholes. And Florida in the earlier like 20. Late early, early 22,008 2012 in there, we had sinkholes, and we were actually astounded. Being in Columbus, Ohio, we were astounded that this was a surprise because we were thinking to ourselves, what Claims Department doesn't talk to somebody about the fact that just cost them $50,000 To close a claim without payment by getting an engineering firm in there. So when sinkholes became an issue, we were wondering what the heck's going on with sinkholes, and the legislature address sinkholes, then they had assignment of benefits and assignment of benefits became problematic. And July of 2019, the legislature passed assignment of benefits reform. Then we had July of 2021, the legislature passed Senate Bill 76. Then we had July of 2022, where we had asked for a s to Governor to house speaker and President the Senate for a special session. They got it, they passed some bills. So to answer your question, should we have been on top of this sooner? We were under the impression that the legislature was actively working to address sinkholes, assignment of benefits, roofing problems, and roofing problems and assignment of benefits again in 2022. So we were on the impression that good faith legislation had been passed, and that it was going to actively work. What we've began to see in 2021, which is why we got interested in the special session and 2022 by following some of the parameters that are out there, including the monthly public reports from case glide and other companies that measure litigation. It turns out none of the legislative reforms were having the impact that they were intended to have. So, you know, I think if anything, you know, we thought the legislative reforms would be working better than they did. And that that's kind of how we were viewing the world. Now, we don't view it that way.

David Wright:

And how do you view now now your view that is not working or didn't work or partially working? So I guess you'll be encouraging them to do more?

Joe Petrelli:

Well, I mean, we're not going to Well, we made our pitch in March of 2022. You know, the governor and was was a leader and got the got them to meet after they had refused to address it in this regular session. So I think from my perspective, we're scorekeepers, you know, we're the thermometer and we'll tell you if the patient's got a fever. But I think from our perspective, it's up to the state to fix things. And we're just gonna sit back and keep score.

David Wright:

And now just for some basic kind of data here, what is your market share of various segments in Florida, say Florida homeowners and any other businesses you do?

Joe Petrelli:

Well, I countrywide demo Tech has about 460 companies and growing they right in every state Puerto Rico, American Samoa, Guam, Alaska, DC, Hawaii. And right now we have I believe, 35 companies in Florida, that have approximately a 55% homeowners market share.

David Wright:

Okay, and why is your market share so large in Florida?

Joe Petrelli:

Well, we were invited in July of 1996. To work with the state they were they had the joint underwriting Association, they were going to depopulate it and they needed they had a takeout program where they were going to give credits to companies that were capitalized and formed to depopulate, the J QA and the legacy rating agencies that had 100% of the market between them and Florida, evidently were unwilling or unable to assist. We were invited by then Commissioner Gallagher to understand what was going on what the Ticket program was about how it would be formed, formalized. And after we did our review, we said we'd be glad to help you. And so we were able to assign ratings to companies. And I would say our market share is what it is because we were the ones that stepped up when everyone else stepped away.

David Wright:

And so it's an important little jargon there for folks who might not know J UA was the state back then was the state run insurance company and now joint underwriting Associates is a bit of a different structure but citizens is what's called now the successor function organization. And depopulated. You know, when a when a state backed insurance company is the market of last resort other companies go away then they write all the policies eventually have to have a mechanism for extracting those policies from the state back insurance company. What they do is they run an auction I believe, or at least a contest of some kind where an insurance company then take out those policies. What was the problem that the legacy rating agencies had with that with companies taking policies out?

Joe Petrelli:

I don't know. I really don't know. I think, you know, maybe to the extent that we were the very first company back in 89, and 90 with Fannie Mae and Freddie Mac to rate independent regional and specialty insurers. Maybe it was that we were more familiar with how smaller companies utilize reinsurance. Maybe we better understood catastrophe reinsurance programs, disaster recovery programs, catastrophe response programs, maybe we were more familiar with that, because we were the first to really look at the smaller companies. So I can't speak to why they stepped away. But I think we stepped up because we understand that smaller companies use reinsurance as as a source of claims paying ability.

David Wright:

Right? So important pieces of capital. And so larger companies use less reinsurance, and these companies in Florida, another important historical point to make, and we'll just finish the history off with this is many of the major carriers, the largest ones, the ones we all know, outside of Florida State Farm, those kinds of companies. They all left, because Florida wouldn't allow them to increase the rates is that right after injury, and so you had a depopulation of insurance companies, which then left an absence of capacity there. I read him about that.

Joe Petrelli:

Well, I think when it comes to rate adequacy, I mean, I think, again, you mentioned I'm an actuary, you're an actuary. I'm a firm believer in rate adequacy first, and that that enhances availability. And then the issue of consumer affordability. I think that that that gets addressed, perhaps more through social and governmental measures, I don't think that it you cannot expect an insurance industry to have availability, affordability. And, and and also have a healthy necessarily a healthy market. So I think it's like, you know, faster, cheaper, better pick two. And I think it's got to be the same with the availability and the affordability of insurance you, you have to have adequacy. And so it's adequacy, availability, affordability, pick two.

David Wright:

And one thing we find, though, is that this is maybe a, you know, a voice of criticism of your of your approach, there are at least support. Devil's Advocate support of why reinsurance is tricky, but a capital because it gets repriced every year. And so we're entering a world now, where maybe the reinsurance prices are going up faster than the original prices, you can get squeezed. And you can't make money as an insurance company. What do you think the chances are of that happening in Florida now as Hurricane Ian, they're not gonna have a positive or they're, they won't have a reduction reducing effect on reinsurance prices?

Joe Petrelli:

Yeah, no, you're absolutely right. I think if your business model and your execution of your business model, whether it's Florida, Louisiana, Texas, California wildfires and earthquakes wherever you are tornadoes in the Midwest, whatever it is, if your program, and your execution of that program depends on reasonably priced reinsurance, the next several years are going to be shocking to those companies. Because you're absolutely right, the cost of reinsurance is, is going to go up. And I think that, to the extent that Ian is out there right now, no matter what happens in Florida, there's a half a million claims right now that are even related, based on what we've seen reported, that's probably going to creep up north of a half a million. So whatever claims are in the pipeline, are subject to the current rules. And I think that's going to be of concern to reinsurers based on what I'm reading based on. Friends of mine who attended rendezvous who attended the APCI meeting recently. reinsures just don't like that turmoil. And to your point about us in the smaller companies, we raid smaller companies, they have very low retentions in terms of catastrophe events, and reinsurers don't want to go down low. And if they come down low to meet those retentions that cost is dear. So yeah, it's gonna be fascinating. And I use that term in air quotes. Fascinating for the companies who are wholly dependent on reinsurance to execute their models in any cap prone state

David Wright:

is to what degree is this a concentration problem? So Florida happens to be you know, pretty risky spot and maybe there's some kind of political risk or just generally, you know, like, if you're only in Florida and Florida kind of goes weird. Boy, don't you wish you had some business elsewhere to blunt that?

Joe Petrelli:

Well, I think that that's the way it looks. Now in 2022. I think if you go back to 1996, and you're looking at the depopulation of the giant underwriting Association, and thank you for defining that, but I think when you go back to 96, many of the people who stepped up the companies that were formed, you had mgas, that were Florida focused, that started insurance companies. I mean, these are privately held, these are people that stepped up. And in 1996, everybody was rowing in the same boat, legislature, executive branch, the insurers, the consumers. depopulate that Jay EUA. I mean, we've been looking at this from afar for over 26 years. And what we saw in 1996, was literally I've summarized it like that, internally, everybody's rowing in the same boat headed in the right direction. And today, 2022, there's constituencies, it's not one big constituency, there's multiple constituencies. And what we've seen is sort of a deterioration of that we're all rowing in the same boat. Now, it's, it's people are criticizing insurance companies, claims practices, and they're criticizing insurance companies for and they're saying, Well, we have to sue them because they don't pay claims when they're supposed to. And it's turned in, it's just a totally different situation over the last 26 years. And one of the things I think you talked about the political, one of the things that's contributed to the lack of institutional knowledge is term limits. The people who were elected officials, and solve the problem in 1996, they were all gone within six or eight years because of term limits. So from 2004, forward, you're having this kind of turnover of people who've been who've been involved in the insurance process. The other thing that was interesting to us, again, looking at it from Columbus, Ohio, when you had the cat fund setup, when he had citizens set up that first individual that ran that program. And I'm not talking about people by by name, but the individual who ran it for the first time, they were creating something that I mean, the legislature created it in one regard, but they were creating it in terms of infrastructure and corporate philosophy and the type of people who would be in it. And those people just started retiring, and getting out so so you really have an institution of billions of dollars, that was Florida focused, that in many ways, was shaped by its first leader. And now that's changing too. So again, I think that the political process is a small p. And and part of it is you know, if somebody were to write a book about the last 26 years, I think it's about the transition from a single constituency in 1996, to multiple constituencies comprising the the larger state of Florida in 2022.

David Wright:

So the history for that single constituency would have been Hurricane Andrew was in 92, I think it was right so slammed into Miami. And from what I studied of the history at various points in my career, you had a lot of you had a lot of times you go insolvent, you got a lot of companies that had to lose a lot gonna leave the state because the state reduced or prevented insurance companies from raising rates. And that's not the same thing. You can still take cherry pick a portfolio and do fine probably right. So certain areas are going to be less adequate over time. And we'll we'll we'll kind of the crisis of this year, right, which is something you're in the middle of there by downgrading companies, or at least as you say, take in taking the temperature and declaring the illness is not going to generate another you know, single constituency real estate, it was all broken. Now let's go and fix it.

Joe Petrelli:

What I think you know, again, going back to 1992, Andrew hits in August and decimates the market and a lot of things happened. That that I think those that read the headlines might not be familiar with but I think you go back to to 9293 you had Karen Clark and you know the original AAR telling people you know catastrophe modeling was going to be and what what what your losses might be. And I'm told anecdotally that, you know, early on, even even back in 92, when, again 30 years ago, that Karen Clark's estimates were fairly accurate. You now have in Florida, the hurricane Commission, which reviews models, and approves them for use in the state. So in that 30 year period, this the science of catastrophe analysis has has really moved forward. And so we have this ironic situation that 30 years ago, when we were using the back that napkins and things like that to do estimates, everybody's rowing in the same boat. Now, 30 years later, we have all kinds of science, whether it's the catastrophe modeling, whether it's risk selection, I mean, there's there's reinsures, and companies that have and brokers who have put together programs, I'm sure it sure has one where you can tell any given risk that you're going to underwrite, you can tell what his contribution to or from your reinsurance costs are going to be. Is it a burner of reinsurance is, is it going to help my reinsurance is going to, and so the science now, has has, has graduated, and yet the camaraderie, if you will, or the the willingness to work together to solve a problem that seems to have dissipated? And so is that going to cause another set of problems? I think there already is a set of problems. I think that when you got 8% of the, when any given State's got 8% of the open homeowners claims in the country, and they represent 75 to 80% of litigation in the country. Yeah, that's problematic. And I think the state of Florida recognized that they had reforms in 2019 2021 2022. And now here we are today,

David Wright:

in 2023. I'm sure. So what would you say if you were to put your finger on something in particular? Is there a, is there a particular evolve? It's different in Florida that is elsewhere? Is there a lot of needs to be passed or repealed? Or is there something specific you can get about what you think a cause of this Romaine cause of this problem is,

Joe Petrelli:

well, well, being an actuary, you know, I, I'm more comfortable talking about the numbers, but there's several defense attorneys. And I think one of the ones that I've come to know and respect is His name is Matthew Monson. And he's a defense attorney. And his he, he's, I've heard him say, on multiple occasions, get rid of the One Way attorney fee. Okay, it'll eliminate a lot of claims. And I'll have plenty of work anyway. So I mean, you've got a defense attorney who's telling you how to stop litigation, and he makes money because there's litigation. And so I would say one way attorney fees based on on the legal professionals I've talked to,

David Wright:

and what is that? What is the one way attorney fee?

Joe Petrelli:

What the way I understand it, if you have a situation where and again, it goes back to when when when a claim was egregiously handled by a company, I owed you, $50,000. And I tried to close it without payment. The purpose was that there would be if because you had to sue me. And it was cut and dry. That that you and I just arbitrarily chose a lowball number. You your attorneys would then be entitled to an above average attorney fee, because my denial of your claim was so egregious. And what's happened over time, as I understand that is we've come it's come to the situation in Florida, where if I offer you $10,000, and you think you should get $10,000.01, that one cent has been adjudicated enough to trigger the the attorney fees at a higher than average rate. And so there was an article, two articles on LinkedIn one was about a penny. It was a multi year court case over a penny and the company the insurance company won, and the lawyers were celebrating that they won. And I said how can you celebrate winning a case for one cent that took you multiple years? And they said because it means we're not going to company's not going to have to pay additional attorney fees above and beyond what it cost to win this. The same law firm had another case, over 17 cents, and they fought for four years over 17 cents and they won that one and the reason they If they were pleased to win is because if they would have lost, the insured would have got 17 cents. And the lawyers would have got, who knows what, in terms of legal fees? So it seems to me that when that's going on, yeah, there's a there's a there's a problem,

David Wright:

Right. So you're awarding damages to the lawyers that they get to pump their fee if they win.

Joe Petrelli:

Exactly. And the insured, the insured gets next to nothing in terms of the total process.

David Wright:

Man, that's rough. Well, sounds like some low hanging fruit. What are your what's your sort of take on the current solvency situation? Or rather the one kind of in the next eight months? Do you think that next spring is going to be as dramatic as this past spring was? Because maybe talk a bit about what happened this spring? I mean, it was a heck of a journey. I think you put 20 companies in like that, that you put on notice for potential downgrade?

Joe Petrelli:

Yeah, let's talk about that. Let's talk about this year before we talk about next year. Sure. I think demo Tech's process is to be in touch with companies, whether it's Florida or anywhere else, we're in touch with companies a minimal minimum of six times a year. That's a review of every quarterly statement. And that's also includes the when we say the year end statement, we're also looking at the statement of actuarial opinion, we're looking at the independent audit. But then we also when they're cap prone, we also look at their preliminary and final reinsurance programs. So there's sort of a continuum of analysis going on throughout the year. If a company hits a bump in the road, and we need to review or talk to their management more often, then it's certainly well in advance of six times a year. So it's a fluid process. And at any given point in time, the number of companies that we're in touch with, we don't look at it as a finite number, we might send out some number of letters that say, Hey, here's what we think, based on what you've sent us. What else you got, what else is there to tell us. And so at any point in time, it's fairly, it is very fluid. And I think when you you mentioned 20, companies, I know I've read 17, I've heard 20, I think the July 120 22, report of the Office of insurance regulation talks about 27 companies referred for enhanced monitoring, I think that can include financial as well as other other reasons. So I don't look at it as any given number, but rather, its its are at some point in time company stops sending us information, and we make a decision. And it's preliminary, and it's confidential, and we send it to the company. And we've been doing that six or eight times a year, for the last 26 years. And somehow, this spring blew up when the other 100. And something times we've done this, it's been absolutely a non starter. So from our perspective, it's a chance to talk to the companies, we're in constant communication with the companies. And they know who they know who to call here, we know who to call there. So that's kind of where, you know, this year, it surprised us, because we're doing the same thing we've done for 26 years. And somehow, it became, became what it was,

David Wright:

how often do you have to downgrade company? Or do they withdraw their rating? Because those are two things that happened? Right? This?

Joe Petrelli:

Yeah, I think what there's a few things. I mean, I think we tell the company, what we think based on what they've sent us, they have an appeal in the sense that they can send us you know, additional information, and hopefully, it'll be meaningful. And so there's, you know, you can withdraw rating downgrade a company company can withdraw from the process. But I think the kind of a fourth item, if you will, is that the company will come to you and say, here's, here's our remedy, we are going to put in x millions of dollars, which we and we're going to do it and we're going to strengthen loss reserves, and we're going to raise rates and we're going to revise our underwriting criteria. And we believe that, you know, by putting in this money, it's you know, it will give us time to demonstrate that this new underwriting plan this new business plan, this these new this new rate structure, and is going to be working. And so if the remedy and the pro formas associated with it seem reasonable and workable, then, you know, we might decide to say you know what, let's go well, we can sustain the rating based on the infusion of capital revised business model. Let's see what happens. And then we monitor that company very closely and they know what they're are, what their goals are because they have provided to us their anticipated plan.

David Wright:

When this year did you think you probably thought at some point because you did have Did you have an unusual activity this year? Was there unusual kind of downside activity, which was established that your take on that? Or not like last year there weren't or the year before,

Joe Petrelli:

when you say downside, you talked about the potential to downgrade companies?

David Wright:

Yeah. I mean, you did downgrade, I think, two companies and one or two withdrew their ratings. Is that right?

Joe Petrelli:

Well, we had we had a few companies downgraded, I think it was more than two we had, we had several companies, I think that wound up merging into one. And then we had a few that, you know, withdrew from the process. So yeah, I think we had kind of a combination of pretty much every way to go, right downgrades mergers. And I think part of the idea of the merger is, you know, the company had an idea, a business model, and they were going to use two or three companies to execute it. And they finally got to the point where they said, you know, is perhaps not the way to go, we're going to consolidate these companies consolidate operations and go in a different direction. And so we view that as sort of a fresh start, if you will, given that the capital was was sufficient to implement that business model.

David Wright:

And that amount, that activity that hadn't happened as much in prior years.

Joe Petrelli:

Yeah, I guess, in fairness, to what you're saying, you know, was it was it more downside this year? You probably probably that's true. I think that's a safe statement. I there's some activity every year. Right? I think, you know, in terms of the market conditions themselves. 2022. Again, keep in mind, there were reforms, Senate Bill 76, July of 2021, which again, from our perspective, it's like, if we might have done things in 2021. If there was no reform, we might have done things a little differently. But there was a reform, there was an intent to make to address the situation. So that gave us another qualitative factor to look at. But if you go back to August of 2020, we publish a quarterly magazine, the demo tech difference. And in August of 2020, we wrote an article called the point of no return. And it was about, you know, kind of what we thought about what was going on in Florida. And that was August of 2020. So July of 2021, with Senate Bill 76. We're thinking well, they tried to they're trying to change what's going on in Florida. But it didn't take like it might have. And and so yes, to your point, yeah, in the spring of 2022, we're looking at the 2021 operating results, we're looking at first quarter operating results at 2022. And at the same time, we're looking at the preliminary reinsurance programs of the companies, and the cost of reinsurance was going up yet again, over 2021. And at the same time it was going up yet again, it was more and more difficult to come down low, which was something that the that the special session addressed with the with the wrap layer of of 2 billion because the private industry wouldn't go down there, in large part, as we understand it, because they don't want to get involved in claims that were being heavily litigated. At the lower level.

David Wright:

Do you do you? Do you a part of your model and you kind of macro considerations for the state of Florida like it? Let's say that there's a massive Lehman, there's a bigger layer of reinsurance download there. They have the Florida hurricane to catch catastrophe on their citizens. I mean, in Florida, the massive event hits Florida, the state has to issue debt. Is that something that does that look just sort of like something's too remote for you to worry about? Do you explicitly think about things like that? No, can we can is the is there solvent? Is there a solvency problem for the state of Florida?

Joe Petrelli:

Well, I think, well, wow, there's a lot of questions here, but let me hit them. And you can tell me I'm not ducking any of them. So you tell me if I missed it. I think at the macro level. I think Florida is one of the few states that I think is triple A from everybody in terms of the larger bond raters. So I think you know state of Florida's got good credit. And, and I'm going to digress for a minute I have to go back. What if you go back to the to the rich and this is part of the evolution The evolution of 1996 Everybody rowing in the same boat to 2022. Originally, when the cat fund was formed the cat fun. And again, I'm colloquial with this, but the cat fun was basically we're just gonna have a little bit of money on hand. And if there's an event, we'll go get the money, because Florida's triple A, and we're kind of triple eight because we're, we're a piece of Florida. And then people started, you know, kind of ragging on the cat funds and we got no money, you got no cash, what do you do and, and their philosophy was, well, we'll go get it if we need it. And we'll see what happens well over time, because they were getting that kind of a ribbing, from the private sector to Cat funds started building up cash. And they started charging a little higher premiums. In 2009, the cat fund put together a program called the rapid cash buildup. And what they did was they would now charge the reinsurance premiums. And then they would charge a surcharge of the reinsurance premium. So that was the rapid cash buildup component. And ironically, over the last several years, you hear people talking about how the industry lost a billion dollars a year. Over, you know, that was kind of a common number for the last 345 years. Guess what the rapid cash surcharge build up was? About a billion dollars a year. So so the industry was basically giving to the cat fund, additional cash above and beyond the reinsurance premiums, because 10 years earlier, people have been kidding, the the cap fund about not having cash. So this whole evolution of the last 26 years in Florida has been it's starting, it started to look a little bit more like a private sector company, in that it was actually having cash on hand. And and so I think that, you know, does. So the good to go back to your question, is this going to affect the state of Florida? The answer would be less in 2022. Because the cat fund already has cash in it doesn't have to go borrow that. The bad news is it came from the industry. And that hurt the industry. Because at the same time, all the factors relating to reinsurance costs going up over you know, 2021 22, the cat funds surcharge, the litigation issue that disproportionate litigation? Yeah, it's tough to be a Florida only carrier.

David Wright:

What do you say is the in was pretty bad. Irma hit New the same spot? I think that was it gene or is another storm Tilden for hit again, nearly the same spot? You know? It could be worse though. What's the worst case scenario for Florida? In your mind? And what what do you think of in that way? Like, did you have a mental model frame? Well, you know, if this happened, then how do they react?

Joe Petrelli:

Well, let me let me let me put in, let me go back. almost 20 years, if you look at Oh 405 When Governor was Jeb Bush? Oh, four No. Five, I think they had eight or nine named named hurricanes, the worst two back to back years. Everybody, not everybody, but the companies that were affected there. Everybody who was there in 2004. I believe every company we work with in 2004 is still there today. They survived the two wars back to back years. But but that was also pre this litigation just proportionality. Okay, so what's the worst case scenario? I think that the worst case scenario is another storm this season. And the reason I say that is because the litigation effort to have disproportionate litigation. There's very aggressive initiation of claims. So you almost have to claim frequencies in Florida, you have your policyholder reporting a claim, which is your traditional kind of claim frequency like you have in every other state every other line. But on the residential property side, you also have independent third parties, and when I say independent, they're not the insured. And they're not the issuer, the insurance company, and they're not the agent they got they're just not part of the process. But yet, they will contact someone. You got a foundation problem you got a roofing problem, you got a window problem, you got a red pipe problem. And they're out, looking for ways to interest and insured in becoming a claimant. And so that's almost a second layer of frequency. And so you got your policyholder frequency, and then you have your third party initiation frequency. And right now you've got a half a million claims from N. Probably more to come. And if there's another event, I think that's the worst case scenario, because you're going to have even more claims. And they're all going to be under the old rules. Because whatever they do in the future, to improve this disparate litigation, it's not going to impact what's out there now. And so I think the more claims you have in this pipeline, the worse it's going to be, for the companies. The solution to the problem. Everybody involved.

David Wright:

It's amazing to me that the problem with Florida isn't even so much the hurricanes, it's the culture. Right. It's this. It's this litigation. I mean, is it the worst in the country? I mean, I know you don't necessarily cover every part of the country, maybe, maybe, maybe you do. I mean, were there any comparable place to this from insurance standpoint? Well, we?

Joe Petrelli:

Well, I mean, we have clients in every state, and they tend to be property writers, we have several auto clients, workers comp clients, some are RRGs. But I think in in terms of Florida, my my personal saying for for the last five or six years has been Florida is no longer a peninsula, it's an island when it comes to claim procedures and practices and protocols. And I'm told that on the personal auto side, that you have something that's not quite to the level of the the residential property and homeowners, but it's very interesting on on the personal auto side as well.

David Wright:

And so it's the worst. Well,

Joe Petrelli:

I mean, I'll leave that to the American Tort Reform Association.

David Wright:

Okay. Right. But at least you know, we don't talk about the other places in the country this way. Well, I

Joe Petrelli:

mean, from from a property insurance perspective, and property reinsurance perspective, I mean, Florida's the center of the global universe. I mean, yes. You know, I mean, the, you know, you made a point earlier about, is there something special about Florida, I think the thing about Florida is the population is growing, because people who retire like to be there. The values are growing in terms of appreciation on existing structures, the new builds are growing. And what amazes me is that, you know, you could have a prop, a gorgeous 40 storey condo, it's like 200 yards from the ocean or from the Gulf, you know, it's like, wait a minute here, you can't complain about hurricanes and the cost of insurance and still build something 200 yards from the Gulf, or the or the Atlantic, but yet, they build them and then they complain, too. So I mean, I yeah, it's just a fascinating set of dichotomies.

David Wright:

Well, I mean, speaking of complaining, you know, there's, it's interesting is, to me, what your public perception is of you in Florida, right, and dental tech, and, and they, they see your firm as a kind of gatekeeper. Right. And so it did make the press in Florida that that demo Tech was downgrading Florida companies and was established, I think, popularly amongst some circles least what I read, which probably not the most broad set of newspapers, the insurance person living in New Jersey, but they they established that really, demo Tech was the problem. So it's, it's your company's fault, why insurance companies are now pulling out or going out of business at the move their policy, and there's been a popular upwelling of support to replace demotech. Right. So one council or legislature of some kind fund research project into who might be an alternative rating agency as though they had some kind of control over that. It's kind of amazing. So you've hit the fit the mainstream down there, Joe, I imagine you're not thrilled about that.

Joe Petrelli:

Well, I guess a little bit of history, and then you know, I talk about, I'll talk about it because you brought it up, but I mean, if you go back 20 last add 2016 and prior demo, tech rated companies had earnings. Positive unassigned surplus. They're making money since 2017 and forward when a company came to us, too, to appeal. It's our decision if we were looking at a downgrade, and they brought a remedy, that remedy to sustain their rating almost has always included the company indicating they would make a capital infusion. From 2017. Through today, demo tech rated companies have made billions of dollars of capital infusions to sustain their rating and to present to us, you know, we accept their their premises and their assumptions. They're going for rate increases, but they're also infusing capital. And so we've seen billions of dollars of companies additional capital. And nobody ever said way to go double check. Me, you know, so So I get, you know, but but but companies have been doing that. And the companies have been doing it because, again, these are many times privately held companies, Floridians trying to help Floridians. And these people just keep plunking in their own money. And, and I think so. So anyway, we've done I think billions of dollars of capital infusions over time. Did we have some bumps in the road this year where people didn't like what we were doing? Yeah, I got those letters too. I was surprised by them. I think when when I looked at some of the letters that we got the one of the letters, the day that we got the letter, we had already talked to 12 companies that we had contacted. And we'd already had meetings we aren't we either had a meeting or we had a meeting set up. So whatever that number was that people want to use. In terms of companies, we were going to downgrade on the day that this as the Commissioner commissioners letter on the 21st of July, when he when he issued his letter, we'd already talked to 12 companies, one of them told us Oh, yeah, you're right, we hit the numbers we sent you aren't right. Here's what we should have sent you. So we were we were in what at least one situation, we were relying on erroneous information, the company sent to us by mistake. It was corrected. We caught it. It was corrected. And it made sense. And so we obviously we relented when we had the right information. But my point is this. We were under attack, for not talking to companies and being unilateral. On the very same day that we had talked to 12 companies to get additional information. And we went through the process. Some of the companies said, you know, we're better off merging companies together. And this will be our new business model, our new plan. Other companies said, We don't want to, we don't want to talk to you anymore. We're gonna withdraw from your process. It's whatever they want to do. I mean, we're we're not the regulator. By the time something gets to us, it's already been reduced to writing and been reported. It's, you know, and I think from our perspective, are we a gatekeeper? I think we're a scorekeeper. And I think there's a difference. But we're really we're really trying to work with every company, reflecting its business model. And understanding what it does. And we do we have a very granular approach. We're talking to the companies. What if you're changing your underwriting guidelines? How's it gonna change your frequency? If you're changing your underwriting guidelines? How's it gonna change your distribution of business? So? Yeah, I think people criticized us, but at the same time, I've talked to you more today than I have to every official in Florida who wrote a letter in July of 2022, I've talked to you more today than I have to them since July 28, of 1996. So if somebody wants to talk to me, I answer my phone, I answer my emails. Somebody wants to write us a letter, you know, and they don't want to talk to us. I can't help it. We, but we've been doing the same thing for 26 years, on a very regular basis, with every company we deal with. And from my perspective, complaints of that, to anything that says contrary to that, it just not not factual.

David Wright:

You know, you bring up an interesting point, there are gatekeepers and regulators. You're not a regulator. You're a privately held company that performs a service. why don't why did why do we have rating agencies? I mean, I know you're probably biased to this, but like shouldn't, isn't it the regulator's job to to I don't know guide solvency requirements, and they do but they're constantly superseded by what by what granting agencies.

Joe Petrelli:

We can segue into that because I think I know you've brought up the you know, the legislation and Florida. We, we've view ourselves download text views itself, there were smaller Companies back in, you know, 8990 91, nobody rated the smaller companies, no one, we were the very first. And to a certain extent, I agree with you. We look at ourselves as a rating agency, we kind of look at ourselves like the the seven updated in the 80s, or 70s. Those were the underwriting agency, they were the young Cola, if you need a rating, and when a company needs a third party rating to qualify for something, and they there were 1000s of them, that didn't have it, we stepped up because if you're going to require a rating, you might as well get a rating from somebody to understand your business model, somebody that understands if you're smaller, somebody that understands your business model, somebody that understands your use of reinsurance, somebody who's, you know, not afraid to talk to a company that's got seven people, or four people, or 700 people, or 1700, people would still be considered a relatively small company. So anyway, we saw the need, and we said, let's let's help unrated and underrated companies that qualify, with us qualify for things that require a rating. And so that's kind of the route we've taken, but I can see where, you know, and I will say this, there are companies every day, 1000s of companies every day, every state, who are denied the ability to issue policies, even though they are duly licensed, and in good standing with their state of domicile, because they don't have a rating from any one of one or two or three rating services like a third of a large third party. If you have, I don't want to pick on a corporation, let's say you have a national corporation that uses vendors, they may say that national corporation who's not an insurance company may say our vendors have to have their liability insurance, their commercial auto insurance, their workers comp insurance, their surety bond from XYZ rating agency, and it must be are better. And those are their criteria. And you're talking to duly licensed companies that are offering that product at a reasonable price. The vendor wants it. And there's a third party who's denying both that insurance company the opportunity to be an insurer to get an insured and denying that insured the opportunity to select the company they want to use. And so one of the fights we fight every day is helping those insurance. And those insurance companies. And whether or not the commissioners of insurance in the CFS at the departments are willing to take on some of that by saying you can't have those sorts of criteria. I haven't I haven't seen that yet. But we'd certainly be willing to discuss it with any department that wants to help their their companies that are domiciled their state.

David Wright:

So how about the cynical entrepreneur that says, Oh, I see a business opportunity. I'm gonna not do any analysis. And I'm just gonna give everybody a great rating. Can they? How do they not get away with that? Like, what? What are the mechanisms for decertified or controlling or policing the police? Right, the rating agency, the scorekeeper? What would make what it would make? What would destroy your business? Presumably that would?

Joe Petrelli:

Well I think, from our perspective, I mean, we made a decision early on that we will only support companies that we feel are financially stable. And the reason we decided to do that is because there's really no margin in calling a bad company bad. And they're time burners. And so we already decided early in 1980 1989, we started issuing ratings, that we were going to support carriers at the s level or above, we were not going to support carriers that receive our M or L rating. And so but what we've done is two things. Number one is we pre published in 1989 our expectations on each of our rating levels in terms of survival 18 months after we withdrew our rating. Okay, so we publish that on our websites been out there since 1989. The second thing we do is we have had independent consultants review and analyze each of our ratings from day one to now. And we're actually in the process of an update. But we've had independent consultants come in and say Have we hit our marks in terms of the rating criteria that we publish and the percentage survival rates 18 months after rating withdrawal? The first study was done at the end of 2018. And it had approximately 2025 years of information. And we passed. And we got another one that we hope will be out by summer of 2023. That's in process. So I think that's what we've done, we publish our grades. Our business model is financially stable companies only, we publish our expected criteria in terms of survival, and then we test our survival. If somebody actually wants to get out there and issue ratings. I think it's dangerous to issue a rating. If you are looking at CAP prone companies in cap prone jurisdictions, you have to talk to companies, you have to get reinsurance information. It's not public, but it's material, and you have to understand it. So I think if somebody just wants to give A's, then they go ahead and do it. We got it. We're busy doing what we do. And if somebody else wants to, wants to get involved in that, good luck to us all.

David Wright:

Now, they but how do they do that? So who is there? You're there's a certification? I mean, you know, nobody. If I started reading agency tomorrow, nobody cares. Like, who's the how do you get in the game? Right?

Joe Petrelli:

Yeah, no, I? Well, I don't know. I mean, I think there's different layers, I think there's needs, I think, for example, that I know, there's a request for quotation out there from the state of Florida, you know, here, they published a 20 3040 page document, you know, here's what we want to do in Florida. I think in terms of

David Wright:

Oregon rating agency, there will be a new rating agency they're looking for,

Joe Petrelli:

they're looking, I think, I don't know, if they're looking for a new rating agency, or they're looking for a different solution. So it could be a solution that's not necessarily rating agency. I don't know, I but uh, but I think to your to your point, and then I'll talk about the the quotation RFQ, if you want. We recently, in July of this year, demo, tech became the 10th, nationally recognized statistical rating organization. And it's not about how we do our ratings, but it's about our process and our infrastructure that and I think if you go to the SE C's website, and you look for the office of credit ratings, you'll find a list of 10 credit rating agencies, there used to be nine. And so they have reviewed our procedures and our process, they will come in periodically, they will ask questions, they will analyze us, they will send people on site, you know, when they're no longer concerned about, you know, COVID and, and so there's a registry of sorts, in the sense that there's only 10. And we're pleased to be one of them. Because we've now had a process that's looked at our infrastructure and procedures, our conflict checks, and all those things that we do internally. So we've been, we now have something with the nrsro registration, where we used to Self Publish and have consultants look at our, our, our track record, you know, we've now got that registration. But I think that if somebody wants to break into to it, it's like, good luck to them.

David Wright:

So that's, that's a sort of, is there something that enabled? Is that why is that good for you? Like is it does it improve? or increase the number of companies that would rely on demo tech ratings in some way?

Joe Petrelli:

Well, I mean, I think when you look at when you look at the the companies that are currently registered, you know, we're talking about Fitch we're talking about and best, we're talking about Standard Poor's, we're talking about Moody's. We're talking about demo tech, and, you know, five others. And that's, and there's always, there's always discussion, you know, on the on the bond ratings for government and everything else, people talk about the big three, you know, Moody's and Standard and Poor's and Fitch have 97 or 98% of that market. Well, you know, you want to talk about insurance company ratings. You don't need three to have 97 or 98% of that market. So, I think the office is set up to to help create competition to inform consumers. And I will say this, I think we may be, we may be I don't know, because I haven't called all of them but we may be the only nationally recognized statistical rating organization where somebody actually answers the phone. There's no phone trees. If you call us and have a question, we're going to get you the reception. is going to get you to the right person right away. And that's the way it's going to be. Because I think when people call in, they deserve to talk to a human being. And we answer every voicemail, we answer every email, if that's the way they prefer to send in an inquiry, but it's just us, because insurance is complicated. We got credentialed people with insurance designations, we've worked together a long time, and we think we're qualified to answer those questions.

David Wright:

So close on this question, you do bring it up there, which is an interesting kind of idea where I find rating agencies to be tremendously secretive. And and behave with, I would say excessive discretion, you know, sort of terse little statements that come out, you know, they peep individuals have contact with their individuals, it's kind of this mysterious, almost like mystical process that happens to get a reading out of some other places. And yet, you're much more engaging in public kind of figure. Is that good? I mean, you do it. So I mean, you probably think in some way it must be but, you know, like is there's something about the mystique of a place that is just extremely quiet, and doesn't its CEO doesn't know who the person is? You know, that kind of authority is obfuscated, and everything is about the organization. Do you see this? Is that something that's real? And is it does it help somehow to be mysterious?

Joe Petrelli:

I think I think that yeah, I mean, I may be the the face of demo tech as the founder. But I think if you look back, at most, most of the other like, if you look at the insurance ratings area, if you look at you know, Fitch and best Standard Poor's Moody's, they started out as publishers. And they they transitioned into ratings. We started out as insurance people that were credential that understood ratings. And so I think what what you've talked about in terms of me being visible, I'm guessing if you went back to the early days of Alfred Magellan best and Mr. pores and Mr. Standard and Mr. Fitch and Mr. Moody, they may have been more visible. I'm just that our company's just at a different point in time. And so we're at the early stage, if you will, the first generation, if you will. And so perhaps is my role to be more visible, but again, if you look at our team, very Kessler's a CFA 26 years with the company, Bob Warren is a CPA cpcu 17 years. Dub Paul's and MBA 17 years. Paul Osbourne 17 years, my wife and partner Sharon Romano Petrelli, cpcu, ae fccp, aarC, been under the Board of Governors of cpcu. We want people know who we are, we got nothing to hide. We're credentialed. We're experienced, we know what we're doing. And we want people to know that we are the people that are doing the analysis. That might change down the road, but right now it just feels right.

David Wright:

My guest today is Joe Petrelli, founder of demotech Joe, thank you very much.

Joe Petrelli:

Thank you, David. My pleasure.