Insurer Payments to Affiliates Under Scrutiny
Introduction to the Issue
Property insurance companies would face increased scrutiny by state regulators over payments they make to parent and affiliate companies — which critics say can be used to cloud profits and justify rate increases — under a bill unanimously supported by a House insurance committee.
Supporters say the measure, if enacted by the full Legislature, will save policyholders money by preventing insurers from paying excessive fees.
Background of the Bill
The bill, sponsored by Pinellas County Republican Kimberly Berfield, addresses findings and recommendations in a study that surfaced last year and was later investigated by the House Insurance and Banking Subcommittee.
The study, by Risk & Regulatory Consulting LLC, covered three years — 2017 to 2019 — after hurricanes Irma and Michael, when many insurers sought rate increases by claiming they lost money on claims and litigation.
It found that during that period, 19 insurers based in Florida or surrounding regions funneled billions of dollars in fees to holding companies and other affiliates that were not “fair and reasonable,” as defined by various industry rules. The insurers were not identified in the study.
Key Findings of the Study
The study showed that insurers paid investors $680 million in dividends and accepted $951 million in capital contributions from affiliates, clouding regulators’ abilities to determine insurers’ actual financial health.
House Bill 1399 would require insurers to submit records to the Office of Insurance Regulation every three years “demonstrating that all fees, commissions, or payments to affiliates are fair and reasonable.”
Legislative Progress
The Insurance and Banking Subcommittee, which consists of 13 Republicans and five Democrats, voted 17-0 to advance the bill (one member was absent). It is next scheduled to be heard by the Commerce Committee en route to a vote by the full House. A companion version in the Senate, filed by Rep. Carlos Guillermo Smith, an Orange County Democrat, has not yet been heard by any Senate committees.
Impact on Policyholders
Asked by Rep. Yvonne Hinson, a Democrat representing parts of Alachua and Marion counties, how the bill would reduce costs for policyholders, Berfield explained that it would ensure “that the insurance companies who are collecting our premiums are actually utilizing it for what that premium was intended for.”
Berfield added, “And that is probably the best way we can make sure that we, as individuals, or our constituents, are not charged a higher rate or not taken advantage of in any way.”
Rep. Hillary Cassell, a Republican representing parts of Broward County, said the ability to define fair and reasonable would be “life changing for consumers.”
“Having that definition is where we are going to start to see savings to consumers by defining what that term is, what those rates should be, (and) what is reasonable compensation for providing those services. Those savings are going to get passed on, because right now they’re getting to charge excess rates with no oversight.”
Industry Reaction
Contacted by email after the meeting, Amy Bach, executive director of United Policyholders, a California-based consumer rights group, lauded the bill, saying that homeowners have the right to trust that state regulators are verifying that insurers’ assets are solvent “and not paying excessive fees to affiliates that deplete their ability to pay claims.”
A bill analysis explains that the definition of fair and reasonable would be based on the cost of services provided by affiliates, the financial condition of the insurer and its affiliates, the amount of dividends paid by the entities, and whether the payment contracts benefit the property insurer and its policyholders.
Regulatory Oversight
Contracts between insurers and their affiliates authorizing dividends and payments for services would have to be approved every three years if the bill is enacted.
The bill would allow insurers to be penalized for violations, charged administrative fees of up to $10,000 per violation, and lose their licenses to sell insurance.
Representatives of two industry trade organizations, the Florida Insurance Council and the American Property Casualty Association, submitted comment card declaring opposition to the bill but neither chose to explain their reasoning.
Conclusion
In conclusion, the proposed bill aims to increase transparency and accountability in the insurance industry by requiring insurers to demonstrate that payments to affiliates are fair and reasonable. This move is expected to save policyholders money by preventing excessive fees and ensuring that premiums are used for their intended purpose. As the bill progresses through the legislative process, it is likely to face opposition from industry groups, but its potential to benefit consumers and promote a more transparent insurance market makes it a significant development worth watching.
FAQs
Q: What is the purpose of House Bill 1399?
A: The purpose of House Bill 1399 is to require insurers to submit records to the Office of Insurance Regulation every three years demonstrating that all fees, commissions, or payments to affiliates are fair and reasonable.
Q: How will the bill affect policyholders?
A: The bill is expected to save policyholders money by preventing insurers from paying excessive fees to affiliates and ensuring that premiums are used for their intended purpose.
Q: What is the current status of the bill?
A: The bill has been unanimously supported by a House insurance committee and is scheduled to be heard by the Commerce Committee before being voted on by the full House.
Q: How will the definition of "fair and reasonable" be determined?
A: The definition of fair and reasonable will be based on the cost of services provided by affiliates, the financial condition of the insurer and its affiliates, the amount of dividends paid by the entities, and whether the payment contracts benefit the property insurer and its policyholders.
