The Sarasota Herald-Tribune conducted a year long investigation into the manner Florida insurance companies diverted premiums and monies as expenses and losses to hide actual profits. This revelation is probably shocking to many who have been told repeatedly that the Florida insurance industry is losing money as a result of "unfair" rates and for other claims related reasons.

Investigative journalist Paige St. John reported in How Insurers Made Millions on the Side, that:

Investors and executives in 2008 moved $1.9 billion in policyholder money out of heavily regulated insurers, where profits are capped and dividends are restricted, to separate companies that are owned by the same people, housed at the same address and sometimes use the same employees.

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Meanwhile, insurance executives complained about losses and state-mandated discounts, and pressured state regulators for permission to charge homeowners more — even to end rate regulation altogether.

I wonder what the response is going to be from those who supported unregulated insurance rate laws. It is human nature to have a hard time admitting mistakes. If anything, this story demonstrates that laws need to be changed to allow much greater oversight by regulators because some insurance executives cannot be trusted to be honest stewards of monies set aside for the payment of claims.

Some insurance lobbyists defend these activities and even provide a justification:

The state industry’s chief trade group, the Florida Insurance Council, defends internal deals as a way to provide quick returns to start-up insurance companies. Regulators bar insurance companies themselves from paying dividends to investors until they have been in business at least three years.

"Investors would simply not provide funding without generating some return each year as they are putting up money with a risk of total ruin," said Sam Miller, vice president of the council.

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The Florida Insurance Council defends MGA profits. After surveying some of its members, the trade association said MGA profit margins are only 3 percent to 5 percent of total premiums — an amount vice president Sam Miller said "is not considered excessive and does not involve a great amount of premium."

I agree with Sam Miller that such a system promotes investment. It sounds like a method of making "gold rush" windfall profits in an industry that usually makes a return of less than ten percent. Insurers are claiming they are losing money in non-hurricane years—but MGA’s (Managing General Agents, those who manage insurers’ daily operations) are expensing themselves for monies paid to their executives and owners. The Sarasota Herald-Tribune noted this discrepancy in Miller’s logic:

calculating MGA profit as a percentage of MGA revenue — the traditional way of figuring business profit margins — shows MGA profit margins ranging from 25 percent to 50 percent.

Anybody reading through this investigative report is going to come to a conclusion that some in the Florida insurance business are playing a "shell game" with money. They are making plenty of cash and at the same time crying that no money is being made. We noted this in last week’s post, Are Florida Insurance Companies Really Losing Money? Are Investors Using Management Companies To Take Profits and Leave Little Surplus for Policyholder Claims? Julie Patel, of the Sun-Sentinel, followed up on that in her post, Florida Insurer Agrees to Regulators’ Demand to Lower Fees Paid to Affiliate, and documented that more insurers are under investigation for doing the same thing:

Separately, regulators will require Homeowners Choice Property & Casualty Insurance Co. to pay a $10,000 fine for failing to provide information about an agreement for back up coverage it had with its affiliate. They want the affiliate to return more than $9 million to the insurer.

Regulators are also reviewing other insurers’ MGA fees. Officials from Demotech, an insurance rating agency, said they have been telling insurers to lower their MGA fees to leave more money to pay for claims and other costs.

Many previously giving the insurance industry the benefit of the doubt may now find that legislation allowing unregulated rates cannot be passed, given the uncertainty as to whether these insurers can act fairly in an unregulated environment. Further, Legislators should reconsider repealing laws that require prompt payment of replacement cost benefits when one of the reasons for repealing the laws is the protection of insurance industry profits. Instead, recent evidence suggests that laws should be promulgated to stop these financial practices and provide much greater transparency through regulation which protects Floridians and policyholders.

And, I am certain that not all insurers have acted so deceptively. There are fiscally conservative insurance executives that are proper stewards of policyholder surplus, banking money away for that day when the hurricanes come back and the money is needed. Laws should be enacted to support these good stewards rather than laws that encourage short term "gold rush" schemes.