McCarty Critical of Consultant’s Report on MGAs, as Average Premiums Drop in Florida
Amid an uproar over reports that Florida property insurance companies had shifted profits to affiliated firms while rates rose and carriers slid into insolvency a half-decade ago, former Florida Insurance Commissioner Kevin McCarty weighed in on the controversy.
A consultant’s 2022 report for the Florida Office of Insurance Regulation, first reported by Florida newspapers, has raised some red flags that need to be addressed, but the analysis did not back up its conclusions and left out key information, McCarty told Insurance Journal. The claim that profits were diverted to managing general agents while carriers imploded is an erroneous conclusion and would have been akin to “killing the goose that laid the golden egg.”
He urged legislators to hold off on using the report as a reason to undo landmark litigation reform and attorney-fee limits enacted in 2022.
“The worst thing you could do now is overreact and upset the fragile balance of investments in Florida. That’s the real fear,” he said.
McCarty, appointed by then-Gov. Jeb Bush in 2004, served as commissioner until 2016, after many years at the OIR and its predecessor agency. He has never been seen as an apologist for the industry and is considered an expert in insurance regulations. He is now head of Celtic Global Consulting, which includes insurance organizations as clients.
McCarty last week spoke with IJ about pending legislation and about the tempest over MGAs. Below are some highlights. The consultant’s draft report, made available through the Tampa Bay Times’ news articles, can be seen here. The report was produced by Jan Moenck, with Risk and Regulatory Consulting. She could not be reached for comment.
IJ: What’s your take on the concerns about the report on MGAs taking revenue from troubled insurance companies?
McCarty: I understand that the Legislature is pretty ginned up over the report. It’s unfortunate that it took so long for it to become public. I think the fact that the report was not completed is problematic, obviously. If the report is asserting that compensation was excessive, I think you would have to have demonstrated how you came to that conclusion, because it doesn’t in the report.
Plus, it shows the amount of money that went to the MGAs but it neglected to mention that 15% goes to commissions and 10% goes to policy assurance. It’s a fair criticism that there could have been a shifting of money, but they didn’t demonstrate it. That’s problematic.
Had they gotten further along and got the report to where it was not a draft, but completed, those issues would have come up. The NAIC doesn’t offer any guidance. It just says it needs to be transparent and arm’s length (with MGAs). These are portfolio companies and affiliates, so they’re not going to bid them out.
There’s a move to make it more transparent than what we have. The documents had been protected in a bill in 2022-23, allowing exemptions to public records law. There’s now legislation to undo some of those exemptions.
IJ: The report also notes that some MGAs waived their fees and gave money back to carriers in capital investment, as much as $951 million, from 2017 to 2019. That’s an aspect that has not received as much attention from critics.
Absolutely. That’s oftentimes a source for the holding company. An insurance company can’t borrow $20 million, like another company could. Because it would have on the opposite side of the ledger “$20 million owed,” so you would have zero capital in surplus. So, it has to come through a holding company. It collateralizes the loan with the stock of the company. And the MGA contracts out work. You set up a company. You have a company to do policy issuance, and all that has to be managed by an MGA.
It’s hard to explain to people. There’s a legitimate role for an MGA, subject to oversight. Many companies return fees to the insurance company by their own initiative or sometimes by order of the OIR.
It would have been helpful if the report had taken a dollar-per-premium look, and said, “this is the amount that goes to commissions. This is the amount we pay for reinsurance. This is the amount we pay,” so you could see where that dollar is going. On an aggregate basis, it’s relatively small.
It’s also misleading to say the state caps insurance carrier profits at 4.5%, because that’s not true. You can ask for a profit contingency of higher than that. Which most companies do. So it makes it sound like people have circumvented the 4.5%. No one’s going to put their money at risk for 4.5%. They’re just not.
IJ: A number of people associated with the insurance industry in Florida have said it would be absurd for an insurance holding company to siphon money away from its carrier to give it to the MGA and let the carrier go insolvent. Do you agree?
If you go back, the non-standard auto industry, which is where the MGA model began, they had a lot of affiliated transactions. You had a policy issuance company, a maintenance company, a technology company, and they would all be getting fees. And the insurance company maintained minimal capital and surplus. But people made money. They were taking the money out through affiliated transactions. But it makes no sense to kill the goose that laid the golden egg. Without the insurance product to sell, none of the other entities would make money.
You may not grow the capital of the company that way. And from a regulatory perspective, you like to see the capital grow with the company.
In a fair agreement, since the MGA is not assuming the risk and the insurance company is, the company should see part of the profit from that risk. So there should be slow growth in the capital and surplus of the company. But to their point, they are right: It makes no sense to take capital out of the company to the point that it’s insolvent. Because then, not only have you lost your source of revenue, but you’ve also left people unemployed, and you’re banned from the business of insurance. That does not make sense to do that. And listen, if there were good profits, don’t you think we’d have 300 companies trying to do business in Florida?
It’s difficult to analyze, particularly when there’s no definition of what are “fair and reasonable” fees paid to affiliate companies.
IJ: That definition is part of pending legislation, and it will probably come up in subcommittee hearings in the House this week.
Yes. Some questions so far (at the first House Insurance and Banking subcommittee hearing, March 14), have been overly critical, but certainly probing and appropriate. Because the report raised red flags that needed to be addressed. The current commissioner’s position is that they have been, because we enacted legislation in 2016-2017. Those suggestions have already been implemented.
The question has been raised: Where did the money go? I think if you went through each of the companies, you would be able to find out that much of the money goes to effectively operating an insurance company, and some of the money was returned to the insurance companies in forgiveness of fees.
Was some of it used to pay stockholders? Of course. If stockholders don’t get paid back, there would be no one to loan money. There would be no one with surplus notes.
The worst thing you could do now is overreact and upset the fragile balance of investments in Florida. That’s the real fear.
IJ: That subcommittee just passed House Bill 1551, which would revise the 2022 changes and allow more attorney fees for prevailing parties in insurance claims litigation.
So, none of this (MGA arrangements) has to do with attorneys’ fees. What are you going to do, make it more expensive by putting attorney fees back in? It’s not that claims are not being paid. There’s no data to support that. Litigation is down. You want to undo one of the most consequential legislative reforms in 30 years? You need to see what the data says before you revert back to a system in which 70% of the litigation but only 8% of the claims came from Florida. That’s a very inefficient way of paying claims.
The report didn’t say anything about that (attorney fees). They’re unrelated events. There’s no question that there was a disproportionate amount of litigation in Florida relative to other states. If companies are taking money to the MGAs, that bill (on attorney fees) doesn’t fix that problem. Assuming that it is a problem. I’m not sure it is. I prefer to make decisions on facts, rather than feelings.
What they are doing would scare away investors, because it will return Florida to being a litigious environment. And we will be an outlier. No other state provides attorney fees like Florida did (before the 2022 reforms). It will lead to a lot of losses.
In 2016, when I left office, insurance rates in south Florida went up even though there were no hurricanes. That was the first sign of water claims and litigation over water claims that had just ballooned. So they (the 2022 special legislative session) fixed a broken system but we haven’t given time to collect all the data and see if rates go down and people still get the benefits of their policies.
The Legislature enhanced the commissioner’s ability to do market conduct reviews, and he’s been extremely aggressive on that. So, it’s premature to make recommendations on legislation when it is beginning to bear fruit.
Editor’s note: The average premium charged by many Florida-domiciled property insurers dropped in the fourth quarter 2024, compared to Q3 and Q2, according to OIR quarterly data that was analyzed separately by the South Florida Sun Sentinel and by Insurance Journal. American Integrity Insurance Co., for example, reported an average Q4 premium of $2,278, for all policies, commercial and personal lines. That’s down 12% from the $2,597 reported in Q2 of 2024, the OIR’s data show (total direct premium divided by number of policies in force). Not all carriers reported lower premiums. Heritage Property & Casualty Insurance, for example, showed an average premium increase of 2.7% from Q2 to Q4.