Florida Insurers Steered Money to Affiliates While Claiming Financial Hardship
TALLAHASSEE — A new study has revealed that Florida insurance giants were making billions of dollars through their affiliated entities while seeking rate increases from policyholders by claiming massive financial losses. The concealed 2022 study, obtained by the Times/Herald, examined the finances of Florida’s homeowner’s insurance market during the period between 2017 and 2019. This was a time when the state was reeling from the devastation of Hurricanes Irma and Michael.
The study, which was never made public, was released after a two-year wait for public records. It paints a picture of an industry that was faring much better than its public face suggested.
According to the report, while insurers presented a picture of financial hardship, executives distributed $680 million in dividends to shareholders and diverted billions more to affiliate companies. The flow of money to affiliated companies and the distribution of dividends to shareholders occurred even as the firms were struggling financially, according to the study.
Category 4 Hurricane Irma approaches the southwestern coast of Florida on Sept. 10, 2017.
The study’s author concluded that the actions of executives at most Florida-based insurers violated state regulations, leaving some companies financially weakened. This occurred even as the state’s insurance market teetered on the brink of a crisis.
Lawmakers never saw the study which was produced months before lawmakers met in emergency legislative sessions in 2022 and left in a “draft” status. Both the then-insurance commissioner and Governor Ron DeSantis focused on reforms that made it more difficult to sue insurers. The study’s author’s recommendation that regulators repeat the study has not been implemented.
Doug Quinn, executive director of the American Policyholder Association, called the findings a “smoking gun.”
“These companies are crying poverty in order to raise premiums or justify insolvency: ‘It’s litigation, it’s fraud,’” Quinn said. “This is money shifting from their left pocket to the right, and crying poverty while their right pocket bulges.”
State regulators, including Florida Insurance Commissioner Mike Yaworsky, contend that the market has changed. Additional oversight of affiliate companies has been pushed for by Yaworsky, including changes to how insurers pay their affiliates. However, concerns remain.
Paul Handerhan, founder of the Federal Association for Insurance Reform, whose members include insurance companies, disputed the notion that executives were moving money in a deliberate manner.
“This notion that they’re fleecing their policyholders and offshoring the money to their affiliates is just not happening,” Handerhan said. “None of these guys [sic] did this as a strategy.”
Rep. Hillary Cassel, a former lawyer for insurance companies, who now sues the industry, noted that lawmakers previously lacked detailed data about affiliate companies. These companies, often known as “managing general agents,” are used by insurance companies to handle the management of policies.
“All of us informed on the issues knew (managing general agents) were a problem,” Cassel said.
Insurers in Florida have used complex financial structures to reward investors. State regulators cap the profits that companies can make at about 4.5% — hardly enticing to some investors, considering the risk of hurricanes.
Financial workarounds, such as sister companies, reward investors. These affiliate or sister companies can charge the insurance company for essential services like claims handling, underwriting, accounting, and issuing policies. The parent company of the insurer often owns and operates the affiliate companies.
Arrangements between insurance companies and affiliates must be approved by the state and are required to be “fair and reasonable,” although this term is not defined in state law. These structures are frequently complex. For example: when FedNat Insurance went insolvent in 2022, it was one of nine corporations under a parent company.
The National Association of Insurance Commissioners have stated that this type of setup, while common, can be abused and require greater regulatory scrutiny. This is because the owner of the insurance company also typically owns the affiliate, creating an incentive for executives to overcharge the insurance company for the services provided.
Between 2017 and 2019, data showed that the insurers in the study, excluding outliers, had a net loss of $432 million. However, the affiliate companies recorded a net income of $1.8 billion.
With all 53 companies included, the industry recorded a net income of $61 million, while the affiliates made approximately $14 billion. Those figures likely include national carriers that also provide auto insurance.
Birny Birnbaum, executive director of the Center for Economic Justice, has questioned why regulators would allow such a complex financial arrangement.
“It’s unclear why (the Office of Insurance Regulation) isn’t doing anything about it,” Birnbaum said.
Regulators are asking lawmakers to define “fair and reasonable” to include the actual cost of the service provided, the overall health of the insurer and how much in dividends were paid out. Regulators asked for that in 2023 but lawmakers rejected it, claiming it would “upset the apple cart” of Florida’s insurance industry.
The office’s proposed legislation would also require fees to affiliates be paid in dollar amounts, instead of percentages. Affiliates will typically charge the insurance company fees of between 20% and 34% of premiums, which results in more money for the affiliates when premiums go up.
