An Order by the Office of Insurance Regulation shows one method some Florida insurers may use to “poor mouth” losses to the public and our legislators in Tallahassee while taking millions home through shell accounting techniques. Many of the smaller insurers operate as three corporations–the insurer, a managing general agent, and a holding company. It does not take a financial genius to figure out that investors and managers can siphon off profits by simply charging excessive fees through the managing general agent. The insurance part of the jointly owned enterprise then claims it cannot make any money for various reasons which we have been hearing about in the press and from some insurance lobbyists looking to raise rates and reduce benefits to policyholders.

Here is the important part of the Order showing the scheme:

SOUTHERN OAK has entered into an MGA agreement which the OFFICE finds
…to adversely affect the interests of policyholders by being both unfair and unreasonable. Since inception, the MGA agreement has generated approximately $35 million in profits while the insurance company has consistently generated underwriting losses. While the existing MGA agreement was initially approved based on projections of profitability of the insurance company, representations made to the OFFICE regarding the fee structure have not proven to be accurate.

…

SOUTHERN OAK shall show cause why it should not return the excessive profits in the amount of $10 million earned from the MGA agreement.

Yesterday, the insurance industry press picked up on this important story in Florida’s Southern Oak Told to Correct Its Business Plan; Other Companies Are Being Examined. That story reported:

Florida’s Southern Oak Insurance Co. has some explaining to do and several other of the state’s property insurers may be soon to follow.

…

The OIR is reviewing annual financial statements of all companies and "is currently conducting examinations of a few companies, including the review of MGA agreements," said Brittany Benner, spokeswoman for the OIR, which "intends to conclude these examinations, taking corrective action if necessary…

Insurance companies wanting to raise rates may find a number of ingenious arguments and methods, as exemplified in State Farm’s Freakoutnomics. Some reasons and concerns may be legitimate, such as the one raised by Florida Senate Banking and Insurance Chair Garrett Richter regarding the wind mitigation credits having no sound actuarial basis. Given this new revelation, many would suggest that our regulators and elected officials initiate a full investigation and require much greater financial transparency before trusting the Florida insurance industry’s arguments that rates have to go up while policyholder benefits disappear.