Florida Eyes Insurer Payments to Affiliates

April 5, 2010

Florida Gov. Charlie Crist wants the state insurance regulator to have authority to prevent excessive payments by home-based insurance companies to affiliate managing general agencies and other entities.

“I’d like to be able to sign that,” Crist told Insurance Commissioner Kevin McCarty after McCarty said he is working with lawmakers on a bill to catch overpayments to affiliates before they happen.

At a March meeting of the Florida Cabinet, Crist said the state needs legislation to “peel the skin back from that onion,” suggesting he’d like more transparency about transactions that have been used to enrich upstream MGAs or other affiliates at the expense of an insurer’s claims paying ability.

The Sarasota HeraldTribune recently reported that half of the state’s insurers are making money not from insuring homes but by diverting premiums into side ventures. Typically, in these arrangements, an insurance company will pay fees to an affiliated MGA, reinsurer or other affiliate.

McCarty told the Cabinet members that the Office of Insurance Regulation does not now have authority to require notice that upstream transfers are being made so regulators often can’t judge if they are reasonable until it’s too late and the money is gone. “We have no way of knowing if money has been upstreamed,” said McCarty, adding he would like authority to be able to catch the money before it is taken out of the insurance company.

But McCarty stressed that any such authority would have to be exercised so that does not scare away investors that insurers need.

McCarty also said that, while there may be some abuses, “MGAs in and of themselves are not bad” and do provide useful services, often bringing expertise to a young insurer that its investors might not have.

Insurers, too, are wary of legislation that might go too far. “Allegations of inappropriate activity by some insurers warrant appropriate regulation, but reforms should not have the effect of drying up investment in the Florida market,” said a statement from a group, Florida-Based Property Insurance CEOs.

Attorney General Bill McCollum wanted to know if any of the carriers that received some of the state’s capital incentive funds have made unreasonable upstream payments. He said he is concerned about possible fraud.

OIR does not yet know but is looking into it. According to Deputy Insurance Commissioner Belinda Miller, some of the carriers that received incentive funds from the state do have structures with MGAs. “Our issue is when these fees add a profit to an MGA when the insurance company showed a loss,” Miller said.

Without waiting for new authority, the OIR is examining domestic carriers’ relationships with affiliates. In the past few weeks, the OIR has ordered one insurer to adjust its writings and cut its agency management fee, another to restructure a reinsurance deal and a third to recoup investment funds.

Southern Oak will stop writing policies in high-risk south counties until it reduces its wind risk there to less than 30 percent of its total exposure. It has also agreed to reduce the fee it was paying its MGA.

McCarty ordered Homeowners Choice Property & Casualty Insurance Co. to pay a $10,000 fine due to questions about a reinsurance agreement with its affiliate Claddaugh and ordered the insurer to have the Bermuda company return more than $9 million in premiums.

In the third case, a director and part owner of Hillcrest Insurance Co. was ordered to return $600,000 in policyholders’ money he used in February 2009 to buy stock in a bank he founded and part owned. By September, the stock’s value had fallen to $0, resulting in a $600,000 loss for Hillcrest.

The March 24 order gave Hillcrest 21 days to have Smith return the money plus pay a $10,000 penalty. McCarty also ordered the executive, Vernon Smith, to divest himself of all interest in Hillcrest.

McCarty said more orders like these could be expected.

Topics Florida Carriers Legislation Insurance Wholesale

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