Breaking: Senators Launch Probe Into Demotech’s Ratings in Florida

Core Insights - Three US senators have initiated an inquiry into Demotech, an insurance ratings firm, questioning its ratings and the potential risks they pose to Fannie Mae, Freddie Mac, and taxpayers due to climate-related insurer failures [1][2][3] Group 1: Inquiry Details - The senators have expressed concerns over why Fannie Mae and Freddie Mac continue to accept Demotech ratings as proof of insurer financial strength, despite a high failure rate among rated insurers [2][3] - They have also requested information from Demotech regarding its financial status and the reasons behind its 2022 threat to downgrade ratings for up to 27 insurance companies [2][3] Group 2: Market Context - The inquiry is set against the backdrop of increasing climate change impacts, which are straining the property insurance market across the US [4] - Fannie Mae and Freddie Mac together account for over 50% of all US mortgages in the secondary market, with the government establishing insurance quality standards to safeguard its investments [4] Group 3: Demotech's Role - Demotech, founded in 1985, focuses on rating smaller insurance companies that struggle to meet the standards of larger rating agencies, providing them with better ratings based on their reinsurance purchases [5][6] - A 2023 study indicated that over 60% of Florida insurers are rated by Demotech, but nearly 20% of these rated insurers became insolvent while holding an A rating from 2009 to 2022 [7] Group 4: Systemic Risks - The senators have warned that reliance on Demotech could enable private lenders to transfer riskier mortgages to federally backed entities, potentially creating systemic risks in the mortgage market [8][9] - They are seeking detailed disclosures on the extent of mortgages relying on Demotech-rated insurers and contingency plans for potential widespread insurer failures in disaster-prone areas [9] Group 5: Potential Consequences - The letter from the senators cautions that a collapse in the insurance market driven by climate change could have far-reaching effects on mortgage-backed securities, reminiscent of the 2008 financial crisis [10]