Several of Florida's insurers with affiliated managing general agencies (MGAs) have come in for criticism recently but there is no widespread problem with the MGA model, regulators and insurance industry executives agree.
In a new Insurance Journal video interview, they also agree that insurance company-MGA relationships are critical for the future of Florida's property insurance market, as they represent one of the few ways the hurricane-prone state is able to attract insurance capital.
The issue of Florida insurers diverting profits into management and reinsurance companies they own was the subject of a Sarasota HeraldTribune special report.
Earlier this year, the Office of Insurance Regulation questioned the deals two insurers had with their MGAs. OIR told Southern Oak Insurance Co. to reduce the payment it was sending to its MGA. A director and part owner of Hillcrest Insurance Co. in Gainesville was ordered to return $600,000 in policyholders' money. Another company's payment to its own reinsurance arm was questioned. A few of the companies that have failed are among those suspected of questionable deals with affiliated companies.
But there have not been a lot of cases of internally-owned MGAs profiting while the insurance company loses money.
"It's definitely a problem. The extent to which it is a problem is a little bit more of a debate. There have been some companies, some of those who have failed that did bad things. They basically, loaded up the back-door and took a lot of the surplus out of the company and left it dry when it came time to pay the claims or to honor its obligations," says Jeff Grady, president of the Florida Association of Insurance Agents, in the interview with Insurance Journal's Andy Simpson from the FAIA office in Tallahassee.
Insurance Commissioner Kevin McCarty thinks the problem is manageable and does not involve a lot of companies.
"I do not think it's a widespread problem," McCarty told Insurance Journal. "I can assure you those that are gaming the system, they'll be found and that's just, and that will be rectified.
"What we're talking about is really a handful of people who are gaming the system, where they're using the holding company and the affiliated parties to move money out of the insurance company into the MGA and some of those have been unsigned deals, some of them have been through overestimating the profitability of the company, and what we're here to ensure is that we have no problem with engaging services of an MGA or engaging the services of an affiliated as long as it's an arms length deal and the money is not going outside the company to the detriment of the policy holders," McCarty says in his interview.
The state appeasr to have good reason to keep the problem in perspective.
"Because of the situation we have in Florida, it is really the only mechanism that attracts capital to Florida, this internally-owned MGA," says Grady. "So when you paint them all with the same brush, and you make them all out to be bad guys, you kill the only thing that we have left which is the manner in which we bring capital to our state. And there are a lot of good actors there. And we can't afford to do that."
James Graganella, president/CEO, Southern Fidelity and Capitol Preferred, says the state would be in even more trouble than it is now with property insurance if it were to discourage MGAs.
"We need the MGAs to be profitable and the insurance companies, too, because that's what attracts capital to Florida. Let's face it, we are in a high catastrophe prone area and after '04 and '05 if we didn't have that provision in our statute I can promise you we wouldn't have been able to attract capital to Florida," Gragaenlla says. "We have to do that. If we don't have the ability to attract capital to Florida then Florida's insurance market will not survive. So that's very important, but it's also not fair for investors to make a profit while the insurance companies are losing money."
According to Jay Newman, chairman, Sawgrass Mutual, MGAs were responsible for a lot of new capital in the 1990s and then again after the big storms of 2004 and 2005.
"It just shows you that this is a model that can be used to bring capital to the state of Florida. In fact, it's probably the only workable model for bringing capital into the insurance market in Florida that we know about," Newman says.
McCarty agrees with the industry that MGAs are critical to the marketplace—and not just because of their capital-raising potential.
"[M]anaging general agents play a major role in our marketplace and are very important from issuing the policies to negotiating reinsurance and there are some very, very good ones and we're glad to have them because they bring some enormous expertise and talent into the business," McCarty says.
The OIR has not had the authority to inspect upstream transactions by insurers and now only finds out about them after they happen. But that could soon change.
Recently passed omnibus property insurance legislation, SB2044, includes a provision giving OIR access to more financial information on transactions between insurers and their affiliates. The final bill requires insurers, if requested by OIR, to submit information on any affiliated managing general agencies or other affiliated companies to which they have made payments. "The acts of the managing general agent are considered to be the acts of the insurer on whose behalf it is acting. A managing general agent may be examined as if it were the insurer," states the bill. Current law exempted MGAs solely representing a single domestic insurer from scrutiny.
"I'd like to be able to sign that," Gov. Charlie Crist told McCarty at a Cabinet meeting after he said he was working with lawmakers on the bill.
But the MGA provision is part of the omnibus measure, SB2044, which contains multiple parts and some provisions Crist may not like. He has not yet indicated if he will sign SB2044, although McCarty, Grady and others have urged him to do so.