Responding to questions from state Chief Financial Officer Alex Sink, Florida Office of Insurance Regulation Commissioner Kevin McCarty offered a presentation to the Cabinet on Tuesday on what his office has done about two financially unstable insurance companies.
Sink sent McCarty a letter April 23, asking about recent decisions from the OIR finding Northern Capital Insurance insolvent and starting the process of putting that company into receivership, as well as OIRs monitoring of Magnolia Insurance Companys precarious financial condition. Sink also had questions about an OIR memo ending some requirements for property insurance companies to have specific forms of catastrophic reinsurance -- an important issue with the 2010 hurricane season starting on June 1.
Many of these actions by OIR appear to represent a fundamental shift in strategy with regard to the regulation of property insurance companies, wrote Sink.
McCarty responded back to Sink in a letter April 29.
All of the actions taken by the Office are intended to support and promote the private insurance marketplace in Florida while protecting policyholders, he wrote.
He responded to Sinks comments about changes in catastrophic reinsurance in the letter.
In the past, the Office has focused on the large-storm scenario similar to Hurricane Andrew, and has included a 1-in-100 year mega-storm as one of its stress tests, wrote McCarty.
McCarty said this standard was commonly accepted but it needed to be changed. The Office has learned the use of this standard as a stress test has created unintended consequences, wrote McCarty. Specifically, it has given international reinsurers an advantage in the negotiation process, which has allowed them to charge exorbitant rates for the highest levels of insurance coverage.
Since those letters have been exchanged, Magnolia, a Coconut Grove-based insurance company founded in 2008, was liquidated, leaving 30,000 Floridians without property insurance as of May 30.
In his presentation to the Cabinet, McCarty elaborated on his offices actions.
McCarty touched on changes in catastrophic reinsurance. Noting that property and causality insurance companies managed their finances differently from other insurance companies in requiring more liquid capital, McCarty said too many insurance companies were prepared to deal with large, catastrophic hurricanes but not as prepared for multiple smaller hurricanes -- a scenario more likely to impact Floridians.
Generally, insurers are very well-protected from the very big storm, said McCarty, but he noted that companies did not focus as preparing for a procession of lesser storms. We are encouraging insurance companies to look at smaller events as well as the big ones.
McCarty provided the Cabinet with data detailing the economic condition of both Northern Capital and Magnolia Insurance.
Following up on questions she had asked in her letter, Sink said too many Floridians were not having their insurance renewed while McCartys office administered companies that were fiscally unsound. Thats very disruptive in the market, said Sink.
Its imperative that your office is more transparent, she told McCarty.
McCartney agreed with Sinks comment about the importance of transparency
It is very difficult when we allow companies to non-renew citizens, he said, referring to the decision to pull the plug on Magnolia. But the market has changed.
The real challenge is going to be hurricane season, with so many companies in Bermuda purchasing their reinsurance, said McCarty.
Attorney General Bill McCollum agreed with the claim in McCartys letter that reinsurers were leading to higher fees.
The big driver for all the costs is reinsurance, said McCollum, who noted that with so many companies based overseas, there is little the state could do.
Some of the private companies divested themselves of the most expensive properties on the coast, said Charles Bronson, state agriculture and consumer services commissioner. If we were to have a another large disaster of major magnitude, there will be another assessment to the citizens of Florida.
Reach Kevin Derby at kderby@sunshinestatenews.com or (850) 727-0859.
