I previously wrote about Florida’s secrecy surrounding insurer-affiliate information and questioned why so much information affecting policyholders can disappear behind claims of trade secret and confidentiality in Who Is Florida’s Senate Protecting? Following the Money, Lobbyists and Votes Behind Insurance Secrecy. The speculation is over because we have the actual 159-page affiliated-fee analysis commissioned by the Florida Office of Insurance Regulation. Having read it, my reaction is that nobody needs to embellish this report. The facts in it are interesting enough.

The Florida Office of Insurance Regulation (OIR) retained Risk & Regulatory Consulting to study fees domestic property insurers paid to affiliated companies. The review covered 2017 through 2019 and ultimately included 53 insurers. Forty-one of those 53 used a managing general agent or attorney-in-fact to administer policy or claims operations, and three of the insurers examined had already been liquidated by the time the report was completed in March 2022.

Why does that matter? Because in many Florida insurance groups, the insurance company is only one piece of the economic enterprise. The regulated insurer collects premiums and assumes the insurance risk, while related companies may perform underwriting, administration, claims handling, investment management, inspections, technology services, and other functions. Those affiliated companies get paid for doing that work.

There is nothing inherently sinister about that arrangement. There are plenty of legitimate reasons to use affiliated managing general agents and service companies. The important question is whether the amounts paid by the insurer to companies under common ownership are fair to the insurer and ultimately to the policyholders whose premiums provide the money.

OIR asked its consultant to investigate these payments and arrangements. The consultant found a striking financial divergence. The 53 insurers collectively reported approximately $61 million in net income during the three-year review period, but one insurer accounted for $493 million of income. Remove that outlier, and the insurers collectively lost about $432 million. Affiliates providing services to those insurers reported approximately $14 billion in net income, although two national-company outliers greatly inflated that figure. Remove those two, and affiliate income was still approximately $1.8 billion.

The consultant divided the insurers between single-state or regional companies and those affiliated with national insurance groups. Of 35 single-state or regional insurers, 19 were classified as having affiliated fees that were “not-fair and reasonable,” while another five could not be determined because complete information was not provided. Only one of the 18 national-company arrangements received that classification, although information was incomplete for 11 others.

The sentence that jumped off the page most forcefully to me was the consultant’s observation that the majority of the single-state and regional insurers appeared to use MGAs “as a revenue stream for the holding company.” MGA compensation ranged from 20% to 34% of premium, while total affiliated fees ranged all the way up to 63% of premium.

The money also traveled in both directions. Affiliates waived approximately $208 million in fees and contributed approximately $951 million in capital to insurers. Meanwhile, insurers paid approximately $680 million in dividends and $48 million on surplus notes, reducing the capital of 29 insurers by $728 million.

This is one reason simplistic descriptions of what happened are not helpful. The report does not paint a cartoon where money simply went out one door and disappeared. In some instances, affiliated companies were putting substantial amounts of money back into insurers.

But that led me to ask, “Why were some insurers repeatedly dependent upon their affiliates forgiving fees or putting capital back into the insurance company?” The consultants asked essentially the same thing.

They reported that some capital infusions were made to replenish lost capital and prevent regulatory intervention. They suggested OIR consider whether Florida’s regulatory standards concerning an “unsound condition,” or a condition hazardous to policyholders, should apply to insurers exhibiting those financial results. They also found inconsistencies among various financial reports and affiliate disclosures and recommended additional examination.

Then, the consultant said that MGA fee structures “could be used to circumvent insurer dividend requirements.” It recommended reviewing, amending, or replacing affiliated agreements and requiring documentation demonstrating that the fees were actually fair and reasonable.

“Could be used” is important language. It is not “were used.” I think it is the most important point about this newly available report.

The report does not prove fraud. It does not prove that affiliated fees caused any insurance company to become insolvent. It does not prove that OIR knowingly ignored its consultant’s recommendations. To know that, we need to see what OIR did after receiving them.

It certainly does not prove that campaign contributions caused legislators or regulators to take or not take particular actions. Those are significant accusations, and this report does not establish them.

What the report establishes is that the OIR commissioned a sophisticated review of affiliated transactions. Its consultants identified widespread concerns, particularly among Florida’s regional property insurers. They repeatedly questioned whether affiliated fees were fair and reasonable. They identified incomplete and inconsistent financial reporting. They found insurers relying upon capital contributions and fee forgiveness. They warned that MGA structures could potentially be used to get around dividend restrictions. They recommended targeted examinations, revised agreements, closer monitoring, and business model reviews. They even raised the possibility that the financial circumstances of some insurers implicated Florida’s regulatory standard for an unsound condition. Some of those insurers eventually failed.

What bothers me almost as much as the substance is what appears across the top of the report itself: “INFORMATION CONTAINED HEREIN IS CONSIDERED CONFIDENTIAL AND/OR TRADE SECRET.” The report specifically cites sections 624.4212 and 624.4213 of the Florida Statutes.

Florida law currently protects qualifying proprietary business information held by OIR from public disclosure, and separately establishes procedures through which material submitted to insurance regulators can be claimed as a trade secret. There are sound reasons for some of those protections. Insurance companies should not have to surrender genuinely proprietary information to competitors simply because they are regulated.

There is another side to this trade secret balance which needs to change. When the information concerns whether hundreds of millions of policyholder premium dollars are flowing to affiliated companies on terms a regulator’s consultant questions, whether an insurer is repeatedly dependent on capital infusions, whether financial reports are inconsistent, or whether a company’s condition may endanger policyholders, the public interest in disclosure becomes much stronger.

The Legislature therefore has a real policy question whether Florida’s current confidentiality and trade-secret protections are drawn too broadly when information bears directly on insurer solvency, affiliate transfers, and the financial security of policyholders. One possible reform would preserve legitimate trade secrets while requiring greater public disclosure of aggregate affiliate payments, material findings that affiliate transactions are not fair and reasonable, regulatory findings concerning solvency, and the disposition of recommendations arising from financial examinations. Genuine proprietary formulas or competitively sensitive details could remain protected without turning an entire regulatory investigation into a black box.

There is a similar question about investigative authority. Florida law today expressly says that a managing general agent may be examined as though it were the insurer, and OIR has authority to require insurers to file extensive financial information. The 2022 report itself recognized statutory changes expanding OIR’s ability to examine affiliated MGAs and obtain affiliate-transaction information. florida-affiliated-fee-analysis

So, the question is not simply whether the Insurance Commissioner needs “more power.” It is whether the law gives OIR sufficiently clear authority and sufficient obligations to follow the money through an entire insurance holding-company structure, obtain complete financial records from every material affiliate, test whether charges reflect market value, require corrective action when they do not, and report enough of the results publicly for policyholders and lawmakers to understand what is happening.

The most important documents now are probably not contained in these 159 pages. They are the documents that came afterward.

Did OIR update this analysis annually as the consultant recommended? Did it require affiliated agreements to be changed? Did it conduct the suggested examinations? Did it determine whether the fees became fair and reasonable? Did it require new business plans where the consultant raised concerns about long-term viability? What did OIR do regarding insurers that were depending on capital contributions to avoid regulatory intervention? And what happened when companies identified in this process later became insolvent?

Those questions have answers somewhere. Florida Senate President Ben Albritton made a statement when he became Senate President that seems particularly fitting here. He said, “Florida has a great framework for accountability and transparency… I believe in continuous improvement. We can always do better.”

I think this report gives Florida lawmakers a very good opportunity to test that principle. Trade-secret protection should protect real trade secrets. It should not unnecessarily protect the public from learning whether its insurance regulator discovered serious financial concerns involving companies insuring millions of Floridians. At the same time, regulators need sufficient tools to investigate the entire economic enterprise surrounding an insurer rather than stopping at the insurer’s corporate front door.

You don’t need to presume corruption, fraud, regulatory capture, or political favoritism to ask for that. There is only a need to remember who insurance regulation is ultimately supposed to protect.

Thought For The Day

“Florida has a great framework for accountability and transparency… I believe in continuous improvement. We can always do better.”
—Florida Senate President Ben Albritton