Florida does financial autopsies on failed insurance companies.
Few people read them
Article Courtesy of The Miami Herald
By Lawrence Mower
May 20, 2022
As state lawmakers meet next week to try to fix the
spiraling property insurance market, they could draw on the lessons of
the graveyard of insurers that have failed in recent years. If only they
knew what those lessons were. Florida’s Department of Financial Services
does a financial autopsy on every insurance company that fails. But once
finished, the reports are effectively shoved in a drawer.
Few people, including top lawmakers, trade groups and the state’s
insurance consumer advocate, were aware of their existence before being
contacted by a reporter. The reports aren’t even automatically sent to
the state’s Office of Insurance Regulation. The oversight is another
sign of dysfunction in Florida’s handling of the state’s property
insurance crisis, said Sen. Jeff Brandes, R-St. Petersburg.
Floridians across the state are being squeezed by double-digit rate
increases, canceled policies or requirements that they replace their
roofs before signing up, something that can cost tens of thousands of
dollars out of pocket. Insurers say the crisis is man-made, a result of
a surge in litigation and rising rates of reinsurance, which companies
purchase to pay out claims after storms. Since 2018, the last time a
named hurricane hit Florida, seven property insurers have been declared
insolvent — four of them in the last 13 months.
Several others are struggling, with Sunrise-based FedNat Insurance Co.
announcing last week that it was canceling 68,000 policies as part of a
restructuring plan. Gov. Ron DeSantis cited those insolvencies among the
reasons why he’s recalling lawmakers back to Tallahassee on Monday to
address the crisis. “Part of the problem is these companies fail and we
don’t learn anything from them,” Brandes said.
After the smallest plane crash, the Federal Aviation Administration
produces detailed reports about what went wrong and how it could have
been prevented, he noted. “But the property insurance company that has
100,000 policies that goes down? Nothing,” he said. “This whole thing is
just a big, gigantic mess.”
Insolvent insurers can cost Floridians regardless of
whether they had a policy with the failed company. When Orlando-based
St. Johns Insurance Co. went under this year, the Florida Insurance
Guaranty Association levied a 1.3% assessment to pay off the company’s
outstanding claims — a fee that hits every policy sold in Florida, from
homeowners’ insurance to flood and malpractice policies.
Last year, the association levied a 0.7% assessment to cover claims for
two other insolvent property insurers.
The Department of Financial Services, led by the state’s elected chief
financial officer, Jimmy Patronis, does produce a report on each
insurance company that fails. Those reports are required under a Florida
law entitled “prevention of insolvencies.”
“To aid in the detection and prevention of insurer insolvencies or
impairments,” the law states, the department must produce a report on
“the history and causes of such insolvency, including a statement of the
business practices of such insurer which led to such insolvency.”
Patronis spokesperson Devin Galetta did not answer when asked who sees
the reports or where they’re sent. An Office of Insurance Regulation
spokesperson said the office receives them “upon request.” (Galetta said
the Department of Financial Services will begin posting the reports
online before the special legislative session on Monday.)
When asked about the existence of the financial “autopsies” last year,
state Insurance Consumer Advocate Tasha Carter said she wasn’t aware of
them, and her spokesperson did not answer questions last week about
whether that had changed. Multiple trade groups the Herald/Times spoke
to also said they weren’t aware that Florida produces the reports.
That includes representatives from the Federal Association for Insurance
Reform, a Fort Lauderdale-based advocacy group with trial lawyers,
insurance companies and contractors on its board. “The Legislature is
constantly trying to improve the property insurance market,” said Paul
Handerhan, the association’s president.
“Having some creditable data from a governmental institution on why
specific insurance companies failed would be a valuable resource for the
Florida Legislature.” He said his organization would advocate during
next week’s legislative session to amend state law to require the
reports be completed in a timely fashion and be presented to the
Legislature annually. Lawmakers have not yet released any proposed
legislation for the upcoming session.
Sen. Jim Boyd, R-Bradenton, an insurance agent who is expected to
sponsor the legislation next week, said conducting more rigorous
postmortems on failed insurers was a good idea, but he said he didn’t
think it would make it onto next week’s slate of bills.
REPORT FOUND UNAUTHORIZED PAYMENTS
The financial autopsies aren’t usually released until years after a
company fails. The Herald/Times requested insolvency reports from the
Department of Financial Services on five property insurers that have
gone under since 2014.
The department has finished only one report, on the 2014 failure of
Jacksonville-based Sunshine State Insurance Company, according to
That 73-page report found the company’s demise was, in part, because it
was sending millions of dollars in fees to its affiliated companies,
which were not approved by the Office of Insurance Regulation.
Sunshine State Insurance had about 37,000 policies when it was found
insolvent by the Office of Insurance Regulation in 2014. Earlier that
year, it told regulators that it had discovered an accounting error that
cost the company the ability to meet Florida’s surplus requirements,
according to a report at the time by Insurance Journal.
Consultants hired by the state delved into the company’s officers,
finances, emails and board minutes — and allegations against the company
brought by a whistle-blower.
They found Sunshine State Insurance’s parent and sister companies were
taking millions of dollars out of the company through written and
“verbal” agreements. In the 10 months before the company was liquidated,
Sunshine State Insurance paid its parent company $708,830 in two
separate “corporate recharges” that were based on oral, not written,
Under Florida law, such payments were required to be written and
pre-approved by the Office of Insurance Regulation, but the company’s
executives never sought such approval, the report notes.
Sunshine State had another agreement, also not approved by the Office of
Insurance Regulation, with a sister company to pay “markup fees” of more
than $1.5 million between 2009 and 2014, the report states.
And in 2013, the year before the company was liquidated, Sunshine State
paid another sister company $13 million for fees, payroll and expense
Sunshine State’s CEO and president received bonuses based on how much
the insurer paid its sister company, which the report states “may be an
inherent conflict of interest in his fiduciary duties.” Nine months
before the company was liquidated, Sunshine State’s CEO was telling the
sister company’s board that he felt he deserved a $600,000 bonus for the
amount of money the insurer paid.
He received a $200,000 bonus that year. The report’s authors concluded
that accounting errors and millions of dollars in unauthorized fees sunk
the company, and it was insolvent as early as 2005.
None of the sister companies mentioned in the report are operating in
Florida. Last year, lawmakers at the request of the Office of Insurance
Regulation passed a law that allowed the office to seek more information
about insurers’ relationships with affiliated companies.
Insurance is one of the most complicated topics for state lawmakers,
made no less simple by the insurance companies, trial lawyers and other
powerful interest groups who lobby on the issue. (The year before
Sunshine State Insurance was liquidated, it and its parent company spent
between $20,000 and $40,000 on lobbying in Tallahassee, records show.)
Only two lawmakers — Brandes and Rep. Evan Jenne, D-Dania Beach — have
been sent the reports, according to Galetta. At the least, the reports
should be sent to other insurance companies, who would better understand
their significance, Jenne said. “I don’t know why you wouldn’t want to
get that out to people as quickly as possible,” Jenne said.
Brandes this year had an amendment to a bill that would have required
the board of directors of an insurer to hold a public hearing within
three months of the insolvency about what happened and give
recommendations about how to prevent it.
He withdrew the amendment to work out some additional details but said
recently that he plans on reintroducing it next week. Brandes said the
issue speaks to fundamental problems in how the state regulates
Unlike most states, Florida splits regulation between two entities, the
Office of Insurance Regulation and the Department of Financial Services,
and it appears that neither side is communicating well.
“People have no clue how much reconstructive surgery the insurance
market needs,” Brandes said of Florida’s insurance market.
“We’re like a race car driver of a state that’s driving a 1979 Pinto and
the engine is three squirrels.”