Shifting funds to sister companies hurts Florida insurance industry, GOP lawmaker says

A top Republican lawmaker told colleagues on Tuesday that profit-shifting by insurance companies is a “problem” that state regulators need to address.

Responding to questions by Democratic lawmakers about insurance companies making big payouts to executives during Florida’s storm-free years, Rep. Tom Leek, R-Ormond Beach, hinted that the Legislature could be back with additional fixes.

“I do agree that [insurer affiliates] and offshoring money is a problem, and something [the Office of Insurance Regulation] should be looking at,” Leek told a House committee on the second day of a special session to address the state’s property insurance crisis.

Leek, a chief legal officer for an insurance brokerage who was instrumental in crafting this week’s legislation, told the Herald/Times afterward that it was a “significant problem.”

READ MORE: Some Florida insurance CEO’s earned huge salaries in hurricane-free years

“I think we need to do a better job of tracking it down and finding out where it is and who’s doing it,” Leek said, “and we need to hammer on those folks. I’m on board with that 100%.”

He said the bill adds an additional $1.75 million for state regulators to monitor insurers. The number of state workers regulating insurance fell by nearly 14% between 2016 and 2020, and its staffing and salaries lag behind many other states.

The Herald/Times reported on Sunday that state lawmakers have largely ignored insurance companies moving profits to affiliate companies, which has been directly blamed for numerous past company failures and allowed some executives to make multimillion-dollar salaries.

In 2015, the CEO of Tampa-based Heritage Insurance Holdings made $27.3 million in total compensation, twice as much as the CEO of State Farm made that year. Heritage at the time was overseeing 240,577 policies, compared to State Farm’s 83 million.

In 2017, the CEO for Fort Lauderdale-based Universal Insurance Holdings was the highest-paid property and casualty insurance company executive in the nation, earning $19.3 million in total compensation. He made between $14 million and $25 million each year from 2014 to 2018, records show.

While insurance companies are highly regulated, with caps on profits, many of the small Florida-based insurers that dominate the market create affiliate companies that charge the insurance companies fees for services. The fees can be up to $25 per policy, as well as a percentage fee — usually between 20% and 30% — of policyholder premiums.

That percentage is tied to policyholder rates, so as rates go up, so does the fee. Once the premium leaves the insurer, it’s no longer available to pay claims.

Financial autopsy reports of failed insurers between 2011 and 2018 have repeatedly cited excessive or unusual payouts to affiliated companies for their demise. Auditors have cited instances of officers “stripping the company of cash,” as well as “excessive and unreasonable” fees, “questionable payments” and an “excessive outflow of cash” among the failed companies.

None of the reports cite litigation for the failures. But tamping down on lawsuits against insurance companies is the primary focus of lawmakers’ efforts this week in Tallahassee, their fourth attempt in four years to end the state’s insurance crisis.

Insurance companies and Florida’s insurance commissioner have said that stopping the high number of lawsuits in the state will stabilize Florida’s market, which has the highest homeowners’ insurance rates in the nation. Six insurers have gone insolvent this year.

Lawmakers are poised to vote Wednesday on a bill that would limit attorneys’ fees in lawsuits against insurers, among a slew of other changes that include requiring policyholders with state-backed Citizens Property Insurance coverage to also carry flood insurance.

The changes might lower rates, but not any time soon, GOP lawmakers have warned.

Democratic lawmakers this week have been frustrated by the narrow scope of the legislation and the lack of data they’ve been given. The bill was released Friday night after weeks of backroom negotiations, and GOP lawmakers have limited public input while rushing to get it passed.

“We have been asking for data, something on which we could base our decision and base our actions, and we’re data poor, we don’t have the data,” Sen. Geraldine Thompson, D-Orlando, said Monday.

“Look at all the other pieces to this puzzle,” Rep. Hillary Cassel, D-Dania Beach, pleaded on Tuesday. “All we have done, year after year ... is chipping away at consumers’ rights.”

In 2020, the Office of Insurance Regulation launched a review of insurers’ affiliate companies, but it’s “ongoing” and “confidential,” the state said. This year’s legislation allows state regulators to investigate an insurer if they have “made significant payments” to their affiliate companies after a hurricane.

Rep. Dotie Joseph, D-North Miami, asked Leek on Tuesday if he would be willing, in a future bill, to require state regulators issue a report about insurers’ affiliates regardless of if there is a hurricane.

“I don’t think this is going to be the final expression of what the Legislature does on property insurance,” Leek responded.

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