By JS Contributor, Don Brown
The recent Law360 article titled “Fla. Report Draws Serious Accusations of Insurer Misconduct” raises significant concerns about the financial practices of certain Florida insurance companies (See Note #3 below). Specifically, the article highlights how some insurers may be using Managing General Agents (MGAs) and other affiliated entities to mask profits while simultaneously justifying rate increases to regulators. This practice presents a legitimate concern for Florida’s policyholders and merits thorough investigation.
However, as we consider how to address these issues, we must be mindful of the potential unintended consequences that could arise from hasty or overly broad regulatory responses. Florida’s property insurance market already walks a tightrope between affordability and availability – any destabilizing action could tip the balance in ways that ultimately harm the very consumers we seek to protect.
This analysis draws on insights from “The 9 Guideline Principles to Enact Change: A Legislator’s Memoir from Outhouse to State House,” which offers valuable perspectives on navigating complex policy challenges in Florida’s insurance landscape. The book’s examination of risk, uncertainty, and political decision-making provides a framework particularly relevant to the current MGA controversy.
The MGA Issue in Context
The state-commissioned report revealed by the Miami Herald and Tampa Bay Times investigation shows a troubling pattern: while 53 insurers reported a combined $61 million in net income from 2017 to 2019, their affiliated companies reported $14 billion in net income over the same period. Without one outlier insurer that reported $493 million in net income, the remaining insurers would have collectively reported a $432 million net loss.
The report also found that fee arrangements between insurers and affiliated entities were deemed unfair and unreasonable for 19 out of 35 single-state or regional insurers analyzed. These findings suggest that some insurers may be shifting profits to affiliated companies to present a less favorable financial picture to regulators when seeking rate increases.
This practice, if proven to be widespread, represents a serious regulatory concern. Insurance companies have a responsibility to accurately represent their financial condition, and practices that obscure the true financial health of insurers undermine the regulatory system designed to protect consumers.
Insights from “The 9 Guideline Principles to Enact Change”
The book “The 9 Guideline Principles to Enact Change: A Legislator’s Memoir from Outhouse to State House” explores numerous policy challenges faced during legislative service, including the complex dynamics of Florida’s insurance market. Two chapters are particularly relevant to the current MGA controversy:
- Chapter 17: Risk vs. Uncertainty – Examines the fundamental economic concepts first articulated by Dr. Frank H. Knight and applies them to Florida’s catastrophe insurance challenges
- Chapter 29: Florida’s Shifting Paradigms – Chronicles the evolution of Florida’s approach to hurricane risk and insurance regulation through several distinct eras or “paradigms”
These chapters provide crucial context for understanding why careful, measured responses to the MGA issue are essential for maintaining market stability.
The Risk of Overreaction: Knight’s Framework
Chapter 17 of “The 9 Guideline Principles to Enact Change” explores Dr. Frank H. Knight’s seminal distinction between risk and uncertainty. This framework proves invaluable for understanding the potential consequences of regulatory responses to the MGA issue.
In Knight’s framework, risk refers to situations where probabilities can be calculated and managed, while uncertainty involves unpredictable events that cannot be measured or quantified. Florida’s property insurance market already contends with significant risk from natural catastrophes. Adding regulatory uncertainty could push the market further into “Knightian uncertainty,” potentially triggering capital flight from the state.
As noted in Chapter 17, “to the same extent one moves across that spectrum from risk toward uncertainty is the same extent to which capital will flee.” This observation is particularly relevant when considering potential legislative responses to the MGA issue. Abrupt or sweeping changes to the regulatory environment, especially those that paint all insurers with the same broad brush, could create precisely the kind of uncertainty that drives capital away.
The Rattlesnake Story: A Lesson in Careful Problem-Solving
To illustrate the delicate nature of addressing these issues, Chapter 29 shares a powerful metaphor known as the “Rattlesnake Story”:
“Now, back in Freeport, Florida, we used to have a Rattlesnake Rodeo every year. Weeks before the big day, the community men would start searching for gopher holes in the woods, where rattlers often make themselves at home.
I’m not talking about a little furry rodent when I say gopher holes. I’m talking about a land tortious, a powerful creature that can dig a hole 15 feet deep into the sandy soil of Northwest Florida, seeking a cooler place to live on the hot summer days of mid-July. The men hunting these gopher holes would take bullis vines from the creek’s swamps, tie a hook to one end, and run it down the gopher holes, hoping to snag a tortoise or two. Of course, tortoises are protected these days, but back then, they were pretty good with dumplings and rice.
Now, about those rattlesnakes. The men would run a garden hose down the gopher holes, pour in some gasoline, and wait for the snake to slither out. Then, with a long stick with a string on the end, they’d catch the snake by the head and drop it in a Crocker sack or drum in preparation for the big event.
On Saturday, hundreds of folks would come from all around to enjoy the food, music, and games before the main event—the rattlesnake handler. We kids would gather around the fence and watch as the handler blew up balloons for the snakes to pop, milked their venom for medicine, and showed how to skin them for cooking. But the most important lesson I learned from that whole ordeal was simple: when you catch a rattlesnake, you’ve got to grab it by the head. If you catch it by the tail, you’re gonna end up getting bit.
You may ask, what’s this got to do with insurance? Well, just like that rattlesnake handler would tell us back then, you’ve got to catch the problem by the head, not the tail. If you don’t properly identify the real issue, you’ll be bitten by unintended consequences. So, as we tackle policy challenges here in Florida’s homeowners’ insurance market, let’s make sure we identify the core problems and address them carefully, ensuring we’re not catching the wrong end of this snake.”
This story from “The 9 Guideline Principles to Enact Change” perfectly encapsulates the challenge before us. The MGA issue is indeed a “rattlesnake” that needs to be handled – but we must grab it by the head, not the tail. If we misidentify the problem or apply the wrong solution, we risk being bitten by unintended consequences that could make Florida’s insurance crisis even worse.
Lessons from Past Paradigms
Chapter 29, “Florida’s Shifting Paradigms: Navigating Through the Storms of Change,” describes various approaches Florida has taken to hurricane risk and insurance regulation over time. The “Charlie Crist Paradigm,” characterized by artificially suppressing rates and expanding Citizens Property Insurance Corporation, offers a cautionary tale. These politically popular reforms had significant unintended consequences, increasing the state’s financial exposure and crowding out private insurers.
As the chapter notes, this era represents “Florida’s Grand Experiment” – a gamble with public money that fortunately wasn’t tested by a major hurricane during that period. The lesson is clear: well-intentioned but poorly conceived regulatory interventions can create more problems than they solve.
A Balanced Approach Forward
The MGA issue requires attention, but our approach must be measured and targeted. Rather than sweeping legislation that could create market uncertainty, we should:
- Conduct targeted investigations of insurers with suspicious MGA arrangements, focusing on those with the most concerning fee structures identified in the report.
- Strengthen existing regulatory frameworks for MGA oversight, building on the improvements already implemented by the Office of Insurance Regulation since 2022.
- Enhance transparency requirements for affiliated transactions without imposing onerous new restrictions on all insurers regardless of their practices.
- Consider targeted reforms to address specific abuses without creating broader market disruption.
- Support the “Resilience Paradigm” described in Chapter 29, which balances affordability with sound risk management and encourages private market participation.
Conclusion
The revelations about MGA practices by some Florida insurers represent a legitimate concern that merits thorough investigation and appropriate regulatory response. However, we must approach this issue with the care and precision of an experienced rattlesnake handler, grabbing the problem by the head rather than the tail.
By properly identifying the specific issues and targeting our responses accordingly, we can address abusive practices without creating the kind of regulatory uncertainty that drives capital away from Florida’s insurance market. The goal should be to foster a healthier insurance marketplace that balances consumer protection with the financial stability needed to withstand future storms.
As we navigate these challenges, let us remember the wisdom from “The 9 Guideline Principles to Enact Change” – proper problem identification is essential to avoid being bitten by unintended consequences. Florida’s property owners deserve nothing less than this careful, thoughtful approach to insurance regulation.
##end##
About the Author, Don Brown
The author served in the Florida Legislature, where he played a key role in developing insurance policy reform. His book, “The 9 Guideline Principles to Enact Change: A Legislator’s Memoir from Outhouse to State House,” draws on this extensive experience to provide guidance for effective policymaking in the complex and often challenging arena of state government. The insights on insurance regulation, risk management, and political decision-making contained in the book reflect decades of hands-on involvement with Florida’s unique insurance challenges.
Footnotes
- “The 9 Guideline Principles to Enact Change: A Legislator’s Memoir from Outhouse to State House,” Chapter 17: “Risk vs. Uncertainty: Insights from Dr. Frank H. Knight.”
- Ibid., Chapter 29: “Florida’s Shifting Paradigms: Navigating Through the Storms of Change.”
- Law360, “Fla. Report Draws Serious Accusations of Insurer Misconduct,” March 6, 2025.
Leave a Reply
You must be logged in to post a comment.