US Lawmakers Launch Probe Into Key Insurance Rating Firm in Florida

Core Viewpoint - An inquiry has been initiated by three US senators into Demotech, an insurance ratings firm, regarding its ratings and the potential risks they pose to Fannie Mae, Freddie Mac, and taxpayers due to climate-related insurer failures [1][2]. Group 1: Inquiry Details - The senators questioned the rationale behind Fannie Mae and Freddie Mac's acceptance of Demotech ratings, citing a high failure rate among insurers rated by Demotech [2][3]. - The inquiry also seeks clarification from Demotech about its financial stability and the reasons behind its 2022 threat to downgrade ratings for up to 27 insurance companies [2][3]. Group 2: Concerns Raised - The lawmakers expressed concerns about Demotech's involvement in the Florida insurance market and its methodological shortcomings, which they believe raise governance and reliability issues [3]. - They urged Fannie Mae and Freddie Mac to reassess their counterparty risk controls in light of these concerns [3]. Group 3: Market Context - Demotech President Joseph Petrelli defended the firm's ratings, stating that Demotech-rated insurers provide essential capacity in the US insurance market amid rising costs [4]. - The inquiry is set against the backdrop of increasing climate change impacts, which are straining the property insurance market nationwide [4]. Group 4: Demotech's Background - Founded in 1985, Demotech was established to rate smaller insurance companies that struggle to meet the standards of larger rating agencies like AM Best and Standard & Poor's [6]. - Demotech has historically provided these smaller firms with better ratings by considering their reinsurance purchases, which allows them a better chance at achieving higher ratings [6].