Senators Initiate Investigation into Demotech’s Florida Ratings
Three US senators have initiated an inquiry into Demotech, an insurance ratings firm, to assess whether its evaluations are putting Fannie Mae and Freddie Mac—and ultimately taxpayers—at increased risk due to climate-related insurer failures.
In a letter sent on Tuesday to Fannie Mae’s CEO Priscilla Almodovar and Freddie Mac’s interim CEO Michael Hutchins, Senators Sheldon Whitehouse, Elizabeth Warren, and Ron Wyden questioned the rationale behind the government-backed mortgage giants’ continued acceptance of Demotech ratings as adequate proof of insurer financial strength. This inquiry comes despite evidence indicating that insurers with these ratings have experienced unusually high failure rates. In a separate letter, they pressed Demotech regarding its financial stability and the sudden threat to downgrade the ratings of up to 27 insurance companies in 2022.
“Demotech’s significant role in the Florida insurance market, coupled with its repeated methodological shortcomings, raises serious governance and reliability concerns,” the senators stated in their letter, as reported by Bloomberg News. They urged Fannie Mae and Freddie Mac to reevaluate their controls regarding insurer counterparty risk.
Fannie Mae, Freddie Mac, and Demotech were not immediately available for comment.
This inquiry emerges as climate change exacerbates hurricanes, wildfires, and other disasters, putting pressure on the property insurance market across the nation.
Together, Fannie Mae and Freddie Mac account for over half of all US mortgages in the secondary market. The government establishes standards for insurance quality on properties to safeguard its investments.
Florida has historically faced challenges in retaining insurers in the market. Founded in 1985, Demotech was created to rate smaller insurance companies that struggle to meet the stringent standards set by larger rating agencies like AM Best and Standard & Poor’s. These larger firms require consistent capitalization and geographic diversification. Demotech provides these smaller firms with more favorable ratings by considering their purchase of extensive reinsurance—essentially insurance for insurers—thus improving their chances of achieving an A rating.
Fannie Mae began accepting Demotech’s “A” rating for mortgage eligibility in 1989, followed by Freddie Mac a year later.
As a result, Florida has heavily relied on insurers rated by Demotech. A 2023 study revealed that over 60% of Florida insurers held a Demotech rating. However, the research, conducted by experts from Columbia Business School, Harvard Business School, and the Federal Reserve Board, also found that nearly 20% of Demotech-rated Florida insurers became insolvent while maintaining an A rating between 2009 and 2022.
The senators cautioned that continued dependence on Demotech could enable private lenders to transfer riskier mortgages to federally backed enterprises, potentially creating systemic risks within the mortgage market.
The lawmakers are requesting detailed disclosures regarding the number of mortgages that rely solely on Demotech-rated insurers, the geographic concentration of those loans, and whether Fannie Mae and Freddie Mac have contingency plans for widespread insurer failures in regions vulnerable to hurricanes or wildfires. They are also seeking comprehensive insights into Demotech’s ratings process.
The letter warns that a collapse in the insurance market driven by climate change in a major housing market could have far-reaching effects on mortgage-backed securities, reviving risks reminiscent of the 2008 financial crisis.
“The homeowners’ insurance market is a time bomb waiting to detonate,” stated Sen. Wyden.
Related: A Year After Uproar Over Demotech Ratings, Little Has Changed But Questions Remain
Citizens’ Cerio Pushes Back Against Senator’s Questions About Insurer’s ‘Solvency’
Copyright 2025 Bloomberg.
Topics
Florida
The most important insurance news, in your inbox every business day.
Get the insurance industry’s trusted newsletter
Three US senators have initiated an inquiry into Demotech, an insurance ratings firm, to assess whether its evaluations are putting Fannie Mae and Freddie Mac—and ultimately taxpayers—at increased risk due to climate-related insurer failures.
In a letter sent on Tuesday to Fannie Mae’s CEO Priscilla Almodovar and Freddie Mac’s interim CEO Michael Hutchins, Senators Sheldon Whitehouse, Elizabeth Warren, and Ron Wyden questioned the rationale behind the government-backed mortgage giants’ continued acceptance of Demotech ratings as adequate proof of insurer financial strength. This inquiry comes despite evidence indicating that insurers with these ratings have experienced unusually high failure rates. In a separate letter, they pressed Demotech regarding its financial stability and the sudden threat to downgrade the ratings of up to 27 insurance companies in 2022.
“Demotech’s significant role in the Florida insurance market, coupled with its repeated methodological shortcomings, raises serious governance and reliability concerns,” the senators stated in their letter, as reported by Bloomberg News. They urged Fannie Mae and Freddie Mac to reevaluate their controls regarding insurer counterparty risk.
Fannie Mae, Freddie Mac, and Demotech were not immediately available for comment.
This inquiry emerges as climate change exacerbates hurricanes, wildfires, and other disasters, putting pressure on the property insurance market across the nation.
Together, Fannie Mae and Freddie Mac account for over half of all US mortgages in the secondary market. The government establishes standards for insurance quality on properties to safeguard its investments.
Florida has historically faced challenges in retaining insurers in the market. Founded in 1985, Demotech was created to rate smaller insurance companies that struggle to meet the stringent standards set by larger rating agencies like AM Best and Standard & Poor’s. These larger firms require consistent capitalization and geographic diversification. Demotech provides these smaller firms with more favorable ratings by considering their purchase of extensive reinsurance—essentially insurance for insurers—thus improving their chances of achieving an A rating.
Fannie Mae began accepting Demotech’s “A” rating for mortgage eligibility in 1989, followed by Freddie Mac a year later.
As a result, Florida has heavily relied on insurers rated by Demotech. A 2023 study revealed that over 60% of Florida insurers held a Demotech rating. However, the research, conducted by experts from Columbia Business School, Harvard Business School, and the Federal Reserve Board, also found that nearly 20% of Demotech-rated Florida insurers became insolvent while maintaining an A rating between 2009 and 2022.
The senators cautioned that continued dependence on Demotech could enable private lenders to transfer riskier mortgages to federally backed enterprises, potentially creating systemic risks within the mortgage market.
The lawmakers are requesting detailed disclosures regarding the number of mortgages that rely solely on Demotech-rated insurers, the geographic concentration of those loans, and whether Fannie Mae and Freddie Mac have contingency plans for widespread insurer failures in regions vulnerable to hurricanes or wildfires. They are also seeking comprehensive insights into Demotech’s ratings process.
The letter warns that a collapse in the insurance market driven by climate change in a major housing market could have far-reaching effects on mortgage-backed securities, reviving risks reminiscent of the 2008 financial crisis.
“The homeowners’ insurance market is a time bomb waiting to detonate,” stated Sen. Wyden.
Related: A Year After Uproar Over Demotech Ratings, Little Has Changed But Questions Remain
Citizens’ Cerio Pushes Back Against Senator’s Questions About Insurer’s ‘Solvency’
Copyright 2025 Bloomberg.
Topics
Florida
The most important insurance news, in your inbox every business day.
Get the insurance industry’s trusted newsletter
