The insurance rating company, frequently relied on by Fannie Mae and Freddie Mac in determining whether to accept mortgages, has a troubled history of misjudging insurer solvency in communities on the front lines of climate change

Demotech's lack of ratings credibility raises serious concerns about risks to the U.S. housing finance system in the face of mounting climate threats

Washington, D.C.-Today, Senator Sheldon Whitehouse (D-RI), Ranking Member of the Environment and Public Works Committee; Senator Ron Wyden (D-OR), Ranking Member of the Finance Committee; and Senator Elizabeth Warren (D-MA), Ranking Member of the Banking, Housing, and Urban Affairs Committee launched an investigation into Demotech, an insurance rating company that evaluates the financial strength of dozens of smaller insurance companies responsible for a substantial share of homeowners' insurance underwriting in climate-vulnerable states. Demotech-rated insurers are more likely to go insolvent and have underperformed relative to peer insurance providers on metrics of financial and operational strength. As part of their investigation, the Ranking Members are also requesting answers from Fannie Mae and Freddie Mac about how the mortgage giants assess and manage risk for accepting mortgages when the underlying asset is insured by a Demotech-rated insurer.

"It's becoming a familiar story: climate change makes property insurance unpredictable, so insurance prices soar, insurers withdraw from high-risk regions, and fake or flimsy insurers populate the market. As the insurance market fails, so does the mortgage market. Property values fall, and that cascades into a 2008-style financial crash, or worse. It's another house of cards, this time propped up by Demotech's ratings. Demotech needs to explain its role, and Fannie Mae and Freddie Mac need to explain whose ratings they accept and why-or we'll all pay the price," said EPW Ranking Member Whitehouse.

"The climate crisis is fueling more dangerous and destructive disasters across the country. The result is a homeowners' insurance market that is an economic bomb waiting to detonate, and instead of bringing in the SWAT team to diffuse it, companies like Demotech are doubling down by rating homeowners' junk policies that aren't worth the paper they're written on. I'll continue calling for maximum transparency and accountability to protect homeowners, taxpayers, and our economy," said Finance Ranking Member Wyden.

Amid mounting risks from climate change, insurance companies are raising homeowners' premiums and canceling policies across the country. Not only is this adding to the cost-of-living squeeze many Americans are facing, but unaffordable or unavailable insurance threatens mortgage markets and risks cascading into a collapse in property values that undermines the entire economy. As extreme weather and climate disasters trigger greater losses to insurers, the stability of the U.S. housing market is becoming increasingly reliant on the credibility of insurers' financial strength ratings.

"Despite the importance of insurer financial strength ratings, Demotech's practices and rating methodologies raise significant concerns. Your company has drawn growing scrutiny for its opaque practices and history of assigning strong ratings to small, undercapitalized insurers-many of which later collapse, leaving behind billions in unpaid claims. As large insurers retreat from markets facing escalating climate risk, Demotech has filled a growing void, often serving as the sole industry measure of the financial stability of small insurers operating in high-risk states," wrote the Ranking Members in a letter to Demotech.

Across the country, millions of homeowners hold policies with Demotech-rated insurers. About half of Florida's homeowners' insurance premiums, about a third in Louisiana, and nearly a quarter in Rhode Island, South Carolina, and Texas are paid to Demotech-rated insurers.

A recent investigation by the Wall Street Journal found that "Demotech-rated insurers 'were 30 times as likely to become insolvent as those graded by its main rivals.' " Since the 1990s, Demotech has been the main rating provider for many small Florida insurance companies, and a recent report from the Florida Legislature revealed "serious deficiencies in Demotech's operations and practices." Researchers at Harvard found that Demotech-rated insurers "underperformed compared to their … peers [rated by other agencies] across every observable metric of financial and operational strength."

In seeking to understand the U.S. housing market's exposure to climate risk, the Senators are also requesting documents and information from Fannie Mae and Freddie Mac related to their treatment of Demotech. Despite Demotech's problematic track record, neither of the mortgage giants has reexamined the company's practice or methodology.

"[T]here is no indication that Fannie Mae or Freddie Mac has ever reevaluated whether Demotech's methodology meets modern risk standards, let alone raised the minimum threshold or required a dual rating. Continued reliance on Demotech's frequently inaccurate financial strength ratings leaves the Enterprises and taxpayers vulnerable to systemic shocks. A climate-fueled insurance collapse in a state like Florida could ripple through mortgage-backed securities, trigger defaults, and destabilize the market, threatening a repeat collapse of the Enterprises such as what we saw in 2008," wrote the Senators in a letter to Fannie Mae and Freddie Mac.

Central bankers, economists, insurance industry executives, financial experts, academics, state and local leaders, and others have warned that sea level rise and more intense storms could make more than $1 trillion in coastal real estate uninsurable, and therefore unmortgageable; that more frequent and intense wildfires could result in a similar death spiral for Western property values; and that climate-related losses are making it harder for the insurance industry to price risk, which has already led to skyrocketing premiums and growth in non-renewals.

The Ranking Members are requesting documents and information related to Demotech's business practices, financial management, balance sheets, and ratings methodology. From Fannie Mae and Freddie Mac, the lawmakers are requesting documents and information related to risk management controls for mortgages backed by Demotech-rated insurers, including the agencies' review of the rater's methodology, ratings thresholds, and other relevant metrics.

Responses are requested no later than January 13, 2026.

The letter to Demotech is available HERE. The letter to Fannie Mae and Freddie Mac is available HERE.