Eye of the storms: Florida insurance commissioner wields far-reach power

April 29--It is the most powerful job in state government most people can't name.

Florida's insurance commissioner has the unfettered ability to affect the cost of living in the state. From the property insurance policy of every homeowner, to the workers' compensation plans of every employer, to millions of automobile, life insurance, medical malpractice and health care claims, the insurance commissioner has the final say on how much those rates will rise, and how much they fall -- if at all.

The 262-person Office of Insurance Regulation touches nearly every aspect of life in Florida, from birth to death. It acts as the state's financial sleuth, deciding if every one of those companies is financially sound enough to take on new customers, and when they are troubled enough to be shut down. And with the stroke of a pen -- and within the confines of the policies written by the Florida Legislature -- the commissioner has the final say on which losses customers will pay -- and which ones insurance companies must reimburse.

For the last 13 years, the job has been held by Kevin McCarty, a 27-year state bureaucrat, lawyer and graduate of the University of Florida, who steered Florida's complex insurance market past so many obstacles he has become one of the most recognized experts in managing catastrophe in the country.

On Tuesday, McCarty, 57, will officially retire from the agency, to be replaced by David Altmaier, 34, McCarty's deputy commissioner for Property Casualty Insurance. But for the last four months, the two Cabinet officials who by law must agree on McCarty's successor -- Gov. Rick Scott and Chief Financial Officer Jeff Atwater -- were locked in an unprecedented feud over whose candidate will replace him.

The standoff underscored the political potency of the job, which not only impacts people's pocketbooks but is a crucial cog in the state's economic engine.

At an emergency meeting of the Cabinet Friday, Atwater and Scott overcame their impasse to select Altmaier from among three of McCarty's deputies. They asked McCarty to stay on in an unofficial capacity as an adviser and "mentor" for 60 more days.

The timing is important. June 1 begins another uncertain hurricane season, and a recent Florida Supreme Court ruling on workers' compensation has prompted Florida lawmakers to discuss convening a special legislative session to avoid a potential 30 percent increase in that market.

"Being insurance commissioner is not for the faint of heart," said McCarty, a day before his replacement was picked.

"It's not a popular job," said Jay Neal, president of the Florida Association of Insurance Reform, who has had his share of disagreements with McCarty. "Almost everything you do you're going to tick off people."

During his tenure, McCarty has been criticized by governors and legislators, demonized by insurance lobbyists, and blasted as a tool of the industry by consumers. He has developed a thick skin, he says, and worked to "listen to all stakeholders and find a balance."

Two years ago, Scott wanted McCarty removed after a lobbyist for Bankers Insurance, Fred Karlinsky, urged Scott to tap Louisiana Deputy Commissioner of Consumer Advocacy Ron Henderson instead. Atwater resisted, and McCarty stayed.

"I have worked for three governors, and three CFOs, attorneys general and ag commissioners," McCarty said. The bosses have shown "different levels of interest in insurance over the years," McCarty said and, "while the governor is the governor, the office was intended to be independent" to implement "the law as enacted by the Legislature."

Although the governor has never explained his rationale for wanting to remove McCarty, many have been left to speculate.

"It fits the bill of him wanting to rotate agency heads," said Jeff Grady, president of the Florida Association of Insurance Agents. "He's kind of done that with everybody."

McCarty is paid $134,157; the governor and Cabinet agreed to pay Altmaier $165,000.

Alex Sink, Florida's former chief financial officer who ran unsuccessfully for governor in 2010, said that McCarty has at times "been perceived to be very much in the pocket of insurance companies" and others times believed to lean too far on the side of consumers.

For example, she said she disagreed with McCarty's hard line against State Farm's request for double-digit increases in its rates after the storms of 2004 and 2005. "He gave them zero; I thought that was wrong," Sink said, noting State Farm subsequently stopped writing property insurance policies in Florida and dumped them onto state-run Citizens Property Insurance.

McCarty was at the helm in December 2006, when legislators convened a special session to freeze Citizens rates on its nearly 2 million policyholders, and even order refunds. And he was still there in 2011 when Scott declared he wanted to get rid of Citizens entirely and appointed people to the company's board who agreed.

"He's been as good as he could possibly be and still keep his job," said former state Sen. Steve Geller, a Democrat, lawyer and former president of the National Conference of Insurance Legislators.

In 2002, McCarty was director of insurance regulation when voters approved a constitutional amendment aimed at buffering the office from the pressure of industry money and politics. That led to a legislative reorganization that required three members of the four-member Cabinet to appoint the insurance commissioner, with a requirement that the governor and CFO agree.

McCarty became adept at understanding the law and finding the tools to build market confidence and stability. A recent example is the stress test his office designed to engender confidence in the property insurance market in the face of unprecedented rise in new Florida-based companies that were taking over policies once held by Citizens.

OIR examined each property insurance company's ability to respond to the impact of historical storm scenarios, including how much surplus they carry that exceeds the minimum set in Florida law. Every company passed but one, and that one passed after it purchased more re-insurance.

"Insurance is heavily regulated. It has always been," McCarty explains, "because buying insurance is not like buying a television set or a toaster because you're buying a promise to pay in the future.

"Almost everybody needs insurance, and regulation is essential to minimize insolvency and predatory practices. But you've got to be careful not to over-regulate. It discourages businesses and drives capital out of the state."

Too many wrong moves on homeowners insurance could stifle affordability and access, jeopardizing the steady recovery of Florida's real estate market. Florida has watched it happen before, when the homeowner's insurance market seized and nearly collapsed after Hurricane Andrew in 1992, and again, after eight storms in 2004 and 2005.

Industry pressure to raise workers' compensation premiums because of the recent court ruling could discourage businesses from expanding in Florida. By contrast, if regulators allow companies to limit coverage, workers who can't get compensation for their injuries could become an increasing burden on the healthcare system.

Insurance "is boring until it's not," Sink said.

McCarty says he is leaving when Florida property insurers are well-capitalized and "markets are good," able to handle a once in 100 years storm event.

Nine years of no hurricanes and the unprecedented low cost of re-insurance has helped to dramatically reduce the size of Citizens Property Insurance, dropping exposure from $511 billon in 2002 to $143 billion, and diminish the likelihood that it could impose an assessment on all other homeowners' policies to recover its losses.

Florida's worker's compensation insurance market and medical malpractice insurance market, both of which were ailing a decade ago, have rebounded and stabilized.

"Florida has been the real success story," McCarty told Insurance Journal, a trade magazine for the property and casualty industry in an interview this month. "Many of our companies have now branched out to other Gulf Coast states because they have an expertise from their experience in Florida in operating in high-risk areas."

But while the state developed a stress test for insurance companies to see how they will withstand the next storm, there has not been one for consumers. Annual reports prepared by Florida's Office of Insurance Regulation show that the department has approved more than 100 rate hike requests a year in homeowner's insurance alone since 2009.

Citizens Property Insurance continues to be the largest insurer in the state, with more than 400,000 policies still in South Florida. Its average premium for coastal wind-only homeowners policies has risen to $2,599 this year, up 8.3 percent from the 2015 average of $2,400. The rate hikes are a reflection of the Legislature's decision to enact a "glide path" aimed at raising rates but capping them at no more than 10 percent per year.

McCarty concedes that as the markets have stabilized, "we have not seen a commensurate reduction in the rates."

The reasons: insurers are putting more money into surplus, purchasing more reinsurance, experiencing a spike in water-damage losses stemming from a push by restoration companies, working with law firms, to file lawsuits, and in some cases "returning more money to policyholders," he said.

In the next storm, homeowners will face "more out of pocket expenses," that could become challenging if there is more than one storm in a season, he warns.

A decade ago, homeowners policies routinely had deductibles of $250 to $500 for all perils, including wind, but now policies have deductibles based on a percentage of coverage and that can be as much as 2 percent or 3 percent per occurrence, not per year.

The goal of the policy was to expand the capacity in the marketplace by encouraging more companies to write business in Florida and encourage homeowners to mitigate damage by purchasing storm shutters, fortifying roofs, and investing in other home-hardening improvements, McCarty said. "If consumers have more skin in the game, they can mitigate potential loses."

Geller warns that the realignment that has allowed rates to increase and coverage to decline could come back to haunt Florida officials in the future.

"The next time there's a major hurricane people are going to be marching on Tallahassee with pitchforks and torches, and Tallahassee will deserve it," he said. "It would have been a lot worse if Kevin hadn't rejected a lot of rate increases and coverage decreases, but he did."

Rep. Jose Felix Diaz, R-Miami, the chairman of the House Regulated Affairs Committee said the Legislature has recognized that realignment and has worked to peel back some of the excessive provisions "that would have decreased rate caps or led to deregulation."

"Insurance companies were starting to get away with murder and drafting anything that would benefit them first," Diaz said. "We had the good luck of having a good insurance commissioner and also having no storms, but probably the Legislature overreacted for several years."

McCarty is ending his career as insurance commissioner with a substantial, national settlement against life insurance companies who failed to pay death benefits even when the companies knew the policyholders had died.

As head of the National Association of Insurance Commissioners' Life Annuities/Unclaimed Property Task Force, McCarty initiated audits of the nation's leading insurance companies and uncovered the systematic, industry-wide practice.

As a result of the investigation, 25 insurance companies have agreed to pay more than $7.5 billion in death benefits and another 35 companies have not settled and remain under investigation.

He has not said what his future plans are. Rumors include that he may be interested in heading the federal government's National Flood Insurance Program or taking over as chief executive officer of the National Association of Insurance Commissioners.

Mary Ellen Klas: [email protected] and on Twitter @MaryEllenKlas

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