Leveling the Playing Field For Unrated and Under-Rated Insurance Companies: Demotech, Inc.

In 1985, Demotech was founded as a financial analysis firm. The company’s original goal was to bring professional actuarial services to independent, regional and specialty insurers. At the time, the national actuarial firms focused on the larger property and casualty insurers, and smaller carriers were at a four-fold, competitive disadvantage when procuring actuarial services:

• The cost of actuarial services was extraordinarily high compared to the relative personnel cost at regional and specialty insurers.
• When regional and specialty insurers sought cost concessions from actuaries, too often the lower cost resulted in a diminution in quality.
• Often the statistical information required by the actuaries was not readily available from the regional and specialty insurers.
• The business models of the regional and specialty insurers were unique or bespoke; and the actuaries were not familiar with the business models.

Having worked for the largest rating bureau in the world (then ISO), a smaller, independent regional and specialty insurer, and one of the largest insurance companies in the US, Joe Petrelli (President and Co-founder of Demotech, Inc) was uniquely positioned to provide actuarial services to regional and specialty insurers.

In 1988, when the government sponsored enterprises, i.e., Fannie Mae and Freddie Mac asked A. M. Best to assign financial ratings to independent, regional and specialty insurers, we were told that A. M. Best’s response was “it was impossible.” When the Demotech team heard this through a third-party in the insurance industry, they leveraged their financial analysis expertise as well as their familiarity with the variety of business models utilized by regional insurers.

“We believed that this uniquely qualified us to develop an approach to review and rate the regional insurers. The rest is a 32-year history!” said Joe Petrelli, President and Co-founder of Demotech, Inc. We recently interviewed him to know more about the company. Read on for the excerpts from the interview.

Q. How are you solving the problems of the insurance industry?

In the insurer ratings sector, there was and remains a structural monopoly with regard to insurer ratings. Fortunately, for independent, regional and specialty carriers, this will not deter Demotech from identifying financially stable insurers. As such, we now have a thirty-year history and a track record that is, rating level by rating level, as good as anyone. Our solution was to address the ratings needs of insurers by understanding and focusing on their business models and the execution thereof. This is often independent of their size.

Q. What makes Demotech relevant in today’s times? Could you give us some context?

Our relevance today flows from two driving forces; the Mission Statement we developed on September 9, 1985 and our name! Our mission statement says, “Demotech, Inc. will become the leading provider of innovative solutions to financial analysis issues by focusing our resources on niches presenting opportunity for corporate growth.” In 1989, when we entered the insurer rating sector, we were the first to review and rate the independent, regional property and casualty insurers that needed a rating agency that understood them. We were the first to review and rate self-funded public entity liability insurance pools, health maintenance organizations and Title insurance underwriters. We then began to review and rate smaller life and health insurers including fraternal insurance companies, with their business model reflecting non-profit status. Our most recent endeavor, although it is not in the insurance sector, demonstrates our relevance.

Healthcare sharing ministries have been a non-insurance alternative to health insurance. Demotech was the first to establish a process to review and rate healthcare sharing ministries, HCSMs. When others were making direct comparisons of HCSMs to health insurance companies, we studied the business model of one of the largest HCSMs in the United States. We expect to issue our initial report on a HCSM no later than February 2022.

How can our name have influenced our relevance? Our name is an abbreviation for “Demography” and “Technology.” Having saved the name “Demographic Technologies, Incorporated,” since 1985, our belief has been that “demography” and “technology” were the influencers of the economy. Today, thirty-six years later, technology has re-invented our workflows, as well as our lives outside of the office. Concurrently, InsurTechs have formed in all sectors of the insurance industry; life, health, title, property and casualty. Today, we review and rate more than a dozen of these important entrants to the insurance industry.

Q. How are your solutions leveling the playing field in insurance?

Our solution, i.e., Financial Stability Ratings^® (FSRs) are increasingly accepted as a supplement to the ratings of the structural monopoly. Demotech reviews 450 insurers in the US. Of the more than a dozen rating agencies in the US, studies have demonstrated that only one insurer rating service uniquely rates and reviews more insurers than we do.

Q. How have you evolved since your establishment in 1985?

We have evolved from an actuarial services firm to a financial analysis company that focuses on rating insurers based on their business model, not their size.

Q. What are FSRs? Could you tell us a bit about your rating process?

In order to sustain an FSR, an insurer must meet our financial criteria on a quarterly basis. Further, the insurer must provide information on its reinsurance program and access to a senior officer to discuss operating results, when necessary.

Our review and analysis process includes the use of multiple years of historical public financial information to assign a Preliminary FSR. If we receive the information necessary to finalize a PFSR:

• Each quarter’s financial statement is analyzed to ensure that the investment portfolio remains liquid and of a high quality, loss and loss adjustment expense reserves remain consistent with the estimate underlying the opinion of the Company’s actuary, financial leverage remains within reasonable tolerance, and other financial metrics continue to meet our standards for the FSR assigned to the insurer.
• Each quarter, management affirms that key personnel or service providers remain in place. The functional areas where we focus include Sales, Underwriting, Risk Management, Claims, Pricing, Financial Reporting, Information Technology, and Reinsurance. Demotech utilized an Enterprise Risk Management approach before the term was coined!
• Annually, we review the independent audit, statement of actuarial opinion as regards loss and loss adjustment expense reserves, reinsurance treaties, and other mandatory reporting requirements with the opportunity to contact the professional authoring the analysis.

Q. Could you tell us a bit about Demotech’s company culture?

We pride ourselves on the breadth, depth and scope of our professionals as well as their tenure. Our top four analysts have more than 150 years of insurance experience; seventeen college degrees and credentials. Equally important, these four analysts have accumulated 115 years at Demotech. We have the institutional and corporate memory that our clients and potential clients deserve.

Q. Will Demotech be expanding, bringing on any new services that we should be aware of?

In 2022, we will be expanding our coverage of healthcare sharing ministries as well as introducing  ourselves to fraternal life insurance companies. Concurrently, we will be seeking to expand our existing coverage of independent, regional and specialty P&C insurers, especially those writing coastal property, pools, life insurers and the other niches that we have created.

About the Leader

Prior to forming Demotech, Petrelli was employed by Nationwide Mutual Insurance Company, Countryway Insurance, and ISO.  Petrelli is a member in good standing of the Casualty Actuarial Society, American Academy of Actuaries, and the Society of Actuaries.

Joe also has an MBA from Ohio State University and a Bachelor’s of Science from The College of Insurance at St. John’s University.

Joe resides in Columbus, Ohio with his wife, Sharon, who is a credentialed insurance professional and a co-founder of Demotech. They have two adult children, Vickie and Joe, and four grandchildren, JJ, Marissa, Luca and Ellis.

“In 2022, we will be expanding our coverage of healthcare sharing ministries as well as introducing ourselves to fraternal life insurance companies.”