Do insurers funnel Florida funds to parent companies while claiming need to raise rates?
Wake up and good morning. Remember when Florida's elected leaders used to stand up against the property insurance industry's relentless drumbeat that higher rates were the only answer to "fixing" this state's crumbling homeowners' insurance problems? Even after what is four-plus years with no hurricanes, the insurance industry's mantra is unchanged: We are not charging enough and woe to Florida when a big hurricane hits.
In the war of attrition, it's Florida insurance industry: 50. State government: 0. Even Gov. Charlie Crist (photo, right), who built part of his "I want to be your governor" campaign on fighting property insurance demands for more, more, more has mentally moved on. And state legislators, increasingly pro-business, are too busy introducing measures to weaken state insurance regulation and give insurers more leeway in charging what they want. Welcome to government by attention deficit disorder.
Which makes for an interesting historical backdrop to an analysis by the South Florida Sun Sentinel. The newspaper found that while Florida property insurers press state legislators to allow them to raise rates without regulator approval, citing losses in recent years, many are funneling fees and payments to unsupervised affiliates -- money that could have been used as reserves against claims from storms. Here's the key detail:
"A Sun Sentinel review of 26 Florida-based insurers found that the companies collectively reported a $87.8 million drop in claims-paying reserves last year and a $206.9 million underwriting loss, incurred when premiums don't offset expenses.
"Yet, all but four paid a total of nearly $300 million last year to managing general agents, or MGAs, that were affiliates."
The affiliates provide legitimate services to the Florida insurer -- to a point. Critics say some of these payments are inflated. And once these funds end up with an affiliate, they can easily be funneled to the parent company which can do whatever it wants -- including paying these funds out to shareholders as dividends.
Unlike the insurers, the Sun Sentinelpoints out, their MGAs are not subject to regulatory restrictions on profit and dividends, and they aren't required to file audited financial statements. Notes the newspaper:
"The 26 insurers accounted for nearly a third of Florida's residential property insurance market last year and participated in state programs to bolster the private insurance market. Since 2006, they received more than $247 million in low-interest loans from the state and more than $52 million in bonuses for taking policies from state-backed Citizens Property Insurance Corp."
Florida Insurance Commissioner Kevin McCarty (photo, left) has pointed out this trend, using phrases like "shell games" by the insurers to "move money out through their MGA and upstream that to their holding company."
The Florida Property & Casualty Association – a group of Florida-based insurers, including most of the 26 participating in state programs – told the Sun Sentinel the companies, with help from MGAs, fill the gap left by major national insurers that scaled back in the state. Here's former State Sen. Locke Burt, who is on the group's board:
"The severity and frequency of claims are going up, rates are not keeping up with the risk, the big guys don't want to be here, [a few] of the small guys went out of business. It's not because it's a great market and everyone is making a fortune."
The sick joke in some of these transactions is that some of the large insurance companies years ago deliberately created separate subsidiaries in Florida to insulate the parent company from obligations to fund Florida claims in the event of serious hurricane damages. However, the Sun Sentinel analysis suggests parent companies are only too happy to siphon up any excess funds from Florida operations in these non-hurricane years and still cry poverty. Shame on Tallahassee for being so easily snookered by an industry. Here is the complete Sun Sentinel story, which includes this comment from Tampa attorney Chip Merlin (photo, right), who represents policyholders:
"Now we know how insurance companies with the highest rates in the country, expecting hurricanes, can [appear to] make no money even when hurricanes do not strike. We would have been better off just keeping those policies in (state-run) Citizens (Property Insurance Corp.) if this is how the private market operates."
-- Robert Trigaux, Times Business Columnist