My guest this week is Joe Petrelli (mp3, youtube), the founder and CEO of Demotech, a rating agency based in Columbus, Ohio. This interview was a particular delight for me, folks, because I’ve finally found a real example of classic Clay Christensen Disruption in Insurance. Demotech has been quietly disrupting what he calls “the legacy rating agencies” for decades.
THIS is what real disruption looks like:
JP: We were actually the first company to review and rate independent regional insurance companies. The Legacy rating agencies back in the late 80s, the Legacy rating agencies would rate a small independent company if it was part of a large group but there was no one reviewing and rating independent Regional and specialty companies. And we heard that from Fannie Mae and Freddie Mac about smaller companies that they had been doing those sorts of analysis on their own to qualify a company for offering homeowners insurance coverage in the in the secondary mortgage Marketplace selling off the the mortgage of the home that was insured [DW: the mortgages needed homeowners coverage from a “rated” insurance company to qualify for the secondary mortgage market]
…
JP: and at that point in time they contacted the Legacy rating agencies who would not rate the independent Regional and Specialty Company so we got to talk..
DW: So these companies had no rating.. like a small Mutual company.. because you know what’s amazing because I think of that these days as being kind of the bread and butter for let’s say an AM Best, a Regional Mutual insurance company that’s all they’ve got and they’ve been around for a long time but they’re very small I mean were those guys also excluded from this or is this mostly newer organizations?
JP: No, it was, ah, the smaller independent companies all of them were not rated and actually after we’ve been approved by Fannie and Freddie I actually had a conversation with Arthur J Schneider the president chairman CEO and largest shareholder… the conversation I had with the Arthur J Schneider II was they never wanted to rate the smaller companies.
DW: because you’d think that’s where the rating agency would offer the most value, right, because the smaller companies are the ones perhaps are a little less certain..
- Underserved, low end market? Check.
- Looks like a ‘toy’ product that no serious player should consider? Check.
- Slowly creeping upmarket against all odds? Yep.
That’s disruption kids. And he did it at least two more times with Florida Homeowners and Title insurers. Astonishing. Joe should be an insurance innovation celebrity.
Another amazing point is Demotech’s track record, a much under-publicized fact.
JP: So for A” [DW: called double prime] we said for A”, a hundred percent of the companies we rate A double Prime will survive at least 18 months after we withdraw that rating. At least 99% of the A primes, at least 97% of the A’s at least 95% of the S’s and at least 90% of the Ms after if we withdraw the rating and it goes from rated to unrated you got at least 18 months and those are the survival percents. In terms of what we do to show people that we have confidence in a rating, we have self-published our record from 1989 to date annually updating it.
And this last year year end 2016 and getting a 2017 update, we retained two distinguish professors both of whom had worked with the National Association of insurance Commissioners. Robert Klein was their Economist for years and he’d been at the Michigan Insurance Bureau, he’s a Georgia State University, Dr. Robert Klein and Dr. Michael Barth is I think assistant Dean at the at the Citadel, he’s another PhD, he’s also CPCU. He was at the NAIC and developed was actively involved in the development of the risk based capital framework.
So we got two distinguish Insurance profession we gave them every one of our ratings from 1989 to date and said check our math and they did it and they publish the report in February of 2018 and they basically said we hit our marks every year from 1989 to date.
Here is a link to the latest version of the report. And another to some graphs. Demotech is one of the most fascinating and underrated stories in insurance innovation and in the insurance market in general. Thanks to Joe for his time!
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