Reactions to a recent Wall Street Journal article, which faulted the Demotech rating agency for giving top marks to
insurers went insolvent in recent years, has been mixed and muted.
After outrage from carriers, regulators and agents in 2022, when Demotech surprised the industry with unofficial w
arnings that some 16 Florida insurers were in financial trouble, concerns about the rating agency seemed to be old news.
“I don’t have any comment on the WSJ article. There isn’t anything new on that topic,” said Kyle Ulrich, pres
ident and CEO of the Florida Association of Insurance Agents, a group that had posted an angry letter about Demotech and its methodology in 2022.
Demotech Responds
Demotech President Joe Petrelli provided this article, written in response to the WSJ examination o
Demotech’s rating system. Petrelli said Demotech has no financial interest in 4WARN, mentioned below.
Here is the reality u
nderlying the proximate cause of the insolvencies referenced in the July 27 Wall Street Journal article. This information was made available to those whose byline
was on the article. The insolvencies are not the story, the proximate cause of the insolvencies is the story. The proximat
e cause was tech-enabled claim instigation. This phenomenon and business model was unearthed through a research project sponsored by D
emotech, Inc.
When the insolvencies occurred, this “tiny company” (as the WSJ calls Demotech) reviewed its files and I validated our rating and review process. What I f
ound was that these carriers, who had received unqualified independent audits and determinations of reasonable provision on statements of actuaria
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l opinions every year-end, other than the year of their failure, had seen new, annual, litigated claims rising meteorically. Their market share on new annual litigated claims was 3 to 5 times their market share of dire
ct premium written or policies in force.
It was this fact that led us, in April 2022, to devise a research project to determine how such a growth rate in new,
annual, litigated claims could exist. Our project was undertaken by Todd Kozikowski, a data scientist and technologist with experience in the insurance sector. He is CEO of 4WARN, a company that work
s with insurers to reduce litigation from tech-enabled claims. What he unearthed was the business model that we now call “tech-enabled claim instigation.”
Tech-enabled claim instigation is an online business model developed and harnessed by opportunistic plaintiff law firms to transition what would have been a policyholder reported claim to contested or litigated status. The business model harnesses search-engine optimization, pay-per-click advertising, sponsored ads, and online efforts to supplement the firm’s litigation platforms and online marketing to secure contested claims that might otherwise be policyholder reported.
The first law firm “caught” using tech-enabled
Many Florida insurance agents have long reg