Florida Seeks to Regulate Domestics’ Affiliated Managing General Agents

Florida's search for solutions to its property insurance market dilemma has led to an examination of the managing general agents affiliated with domestic insurance companies.

Insurance Commissioner Kevin McCarty recently requested more regulatory oversight of affiliated transactions between insurers and their MGAs.

McCarty's office has been examining the annual reports of insurers, including their relationships with MGAs. Recently the Office of Insurance Regulation ordered Southern Oak Insurance Co. to amend its agreement with affiliated MGA, Southern Oak Management LLC. The insurer consented to reduce the commissions it pays to the MGA.

"There will be more orders or consent orders to follow," McCarty told Florida Cabinet officials.

Some insurers are suspected of funneling too much money to their affiliated MGAs, allegedly taking money away from the insurance company that is supposed to be available to pay claims and instead lining the pockets of executives and investors, according to critics. It has not been a welcome sight for regulators to notice companies posting underwriting losses but MGA profits.

"Are there some bad players? Yes. We acknowledge that," said Samuel Miller, executive vice president of the Florida Insurance Council. "But to make it seem like every penny is stolen from insurers by its own executives and put into MGAs -- that simply isn't accurate. The MGA system is a good one but like anything else, there is some abuse."

McCarty agreed when questioned recently by the Florida Cabinet, but he also pointed to the affiliated transactions as one of many reasons some companies in Florida are reporting losses. To protect the bunch from a few bad apples, McCarty said he is working with lawmakers to make sure the OIR has some say when it comes these "shenanigans," as he called it. McCarty wants to know when funds are being transferred, with the ability to stop the money from moving.

"The problem right now is that once the money leaves, we have no authority to regulate it," said Brittany Benner, OIR spokeswoman.

Locke Burt, chief executive officer of Security First Insurance Co. and a Florida Property Casualty Association board member, said to do business in Florida, domestics normally operate using a holding company with two subsidiaries -- an insurance company and a MGA. The OIR approves the agreements and payments to MGAs, he said. MGAs are designed to manage finances of these relatively new companies operating in a tough property insurance environment, and be able to give something back to investors gutsy enough to put money into a high-risk venture.

Regulation does not allow insurers to pay dividends until companies have been in business three years, but there is no such restriction on a MGA. This "helps bring new capital to the table," Burt said. In addition, having a MGA -- which typically handles producing, underwriting and advertising costs -- allows an insurer to charge a $25 policy issuing fee.

"That may not seem like a big deal but it's 2% of an average premium in a state where it has been hard to get rate increases," Burt said.

The Florida-Based Property Insurers CEOs Group said "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." The group includes executives from a dozen domestic insurers.

"We know they (lawmakers) are going to do something and we support it," said Miller. "We want to be involved in the process to ensure that any additional regulation does not prevent getting capital in Florida. The wording of any legislation will be critical."

Reform to MGA transactions will not bring stability to the market on its own, insurers said. McCarty said annual financial statements of Florida's 206 insurers revealed that 60 reported reductions in surplus and 100 reported underwriting losses. Insurers are also quick to point out the average rate per $1,000 of exposure has dropped 30% since 2007 while the average non-hurricane loss per policy per year has gone up 65% since the start of 2007 as both frequency and severity have increased. In line with a midyear report he presented, McCarty said cost-drivers remain the same: fraud, mitigation discounts, sinkhole claims, replacement cost methodology and increased reinsurance costs.

(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)