Kevin McCarty: Protecting Florida’s consumers
Aug 9, 2010
The Tallahassee Democrat published the following letter to the editor by Florida Insurance Commissioner Kevin McCarty on August 8, 2010:
The Office of Insurance Regulation has endured many attacks from detractors regarding its solvency review for homeowners insurance companies and for measures taken by the Office prior to a company being placed into receivership – the most recent attack was from Eli Lehrer of the Heartland Institute printed in the Tallahassee Democrat. Many of these attacks have been either disingenuous or completely wrong. At best, many of these “experts” clearly do not understand the risk based solvency framework that has been successfully utilized by U.S. state insurance regulators, including Florida, to resolve issues with financially troubled companies.
On April 7, 2010, the Office of Insurance Regulation referred Northern Capital Insurance Company (Northern Capital) into receivership. In his My View published July 29, Eli Lehrer used this example to conclude that the Office is not protecting consumers. To the contrary, this action illustrates the Office’s consumer protection. Despite the failure of this company, consumer claims will be paid.
Eli Lehrer clearly does not understand the regulatory process and has inadvertently propagated myths used by those who want to eliminate rate regulation and increase premiums. For example, Mr. Lehrer mentions he is concerned that “insurance rates are still sky high” but fails to understand that eliminating rate review will force insurance premiums even higher. He mentions Northern Capital owed its creditors $3 million, but fails to explain this is owed to international reinsurance companies, and will not be paid by the Guaranty Fund. Finally, he accidentally propagates the myth that insurers were in danger in the summer of 2009; this is not true – the company was not impaired or insolvent, and had purchased adequate reinsurance. If a storm had hit – the claims of Northern Capital’s policyholders would have been paid.
Within the U.S. and Florida framework, the primary consideration is policyholder protection, which requires the regulator to begin a series of increasingly stringent supervisory interventions as a company’s financial position begins to deteriorate. The goal is to work with financially troubled companies to rehabilitate the company if possible, arrange a sale or assumption of business if a feasible rehabilitation program cannot be created, and then if the company is not viable, arrange an orderly liquidation of the company with guaranty fund protection.
The Office executed a Consent Order with Northern Capital to place it into administrative supervision on May 27, 2009. Florida law allows this process to be confidential unless the Office determines the disclosure of the supervision would be in the best interest of the public, the insurer, or its policyholders. The company was not insolvent or impaired at this point although the Office did identify negative trends in Northern Capital’s financial statements, and with the reinsurance issues, which required closer monitoring by the Office. At the initiation of this supervision, disclosure of the supervision would not have been beneficial to anyone.
As the Office continued to monitor this company through our solvency analysis of quarterly and audited statements and administrative supervision, the company’s financial position did not stabilize. The Office advised Northern Capital that if this situation continued, the company would need to obtain capital infusions. Though the company was very aggressive in seeking additional capital, it was ultimately unsuccessful. In addition, the Office worked with the company on many different plans to successfully rehabilitate the company. The Office approved some of these plans and rejected other approaches like expansion into commercial lines of business. In December, the Office expanded its role in the administrative supervision beyond the limited role initially instituted. This expanded role included a review of more operational functions.
The Office does not manage a company when it is in supervision. During a supervision, some company decisions are required to have regulatory approval, either specific to the order of administrative supervision or generally required by Florida Law. Supervision allows the Office better insight to understand the company’s position when granting approval or denying a request.
Northern Capital’s financial statements prior to January 2010 did not show an insolvency or impairment. The January statement produced to the Office on February 25, 2010 did show an insolvency of ($1,083,132). The company also reported two unforeseen events: the company recorded a $7.2 million reserve adjustment and the company sustained an underwriting loss of $3 million. By the first week of March, a narrow list of candidates had been identified to potentially purchase Northern Capital and one conducted the due diligence. Due diligence continued furiously on the sale; however, by the end of March, the potential buyer informed the Office that it would not pursue the transaction. The Office made the referral to receivership the following week, April 7, 2010.
The Office kept these proceedings confidential for the benefit of the policyholders of this state to prevent the proverbial “bank run.” If the Office adopts the approach that all company problems are public domain, it is inimical to sound public policy to promote the domestic marketplace in our state, and undermines competition. The global trend among regulators is to increase regulatory confidentiality. In fact, U.S. insurance regulators, especially the Florida Office, are being criticized by European and Asian regulators for their inability to keep information confidential. Relative to the rest of the world, Florida offers a much higher degree of transparency than virtually any other regulatory jurisdiction.
One of the criticisms of the Office is that the adjudication of an insolvency and receivership action for Northern Capital left policyholder claims unpaid and the guaranty funds liable. While Northern Capital did meet the definition of statutory insolvency, assets of the company paid all return premium claims and currently estimated by the receiver to pay policyholder claims from the $64 million in assets the receiver currently holds. The guaranty fund’s liability may be negligible depending on how the claims develop for this company. An insurance company must book an estimate of its anticipated claims as a loss, which is commonly referred to as a reserve number. When Northern Capital made the reserve adjustment in February, it anticipated its policyholder claims and booked an increased liability.
Some have also argued that Northern Capital should not have been able to renew business because the company was insolvent and allege that the Office was derelict in allowing the renewal. This comment by Eli Lehrer seems to imply the company was impaired or insolvent in May 2009. The Office had no evidence for impairment during this timeframe, and this was not the basis for supervision. It was only in 2010 that the Office had evidence of impairment. In addition, a company cannot non-renew a policy in Florida without appropriate notice which is generally 100 days nor does the Office have the ability to order a company to break the law. Notice of a renewal is required to be sent 45 days before the policy is set to renew. Under the notice requirements of Florida law, it is impossible to begin non-renewing policies effective the next day. Northern Capital would have already issued the renewal notices for policies renewing through mid-April.
The reasoning for not disrupting the process was twofold: the company is required by law to issue policies for which it has not given appropriate notice of non-renewal; and any sale of the company would necessitate keeping the book of business intact. The Office knew that if the sale of the company were not successful, the company would be in receivership within the next month, and that the Court could order the cancellation of policies much quicker than the company could cancel under the law.
The truth is that there is not one single policyholder claim that has not been paid as it has been adjusted and adjudicated to date and only development of claims far in excess of the booked reserve number would create a need for the guaranty fund to pay claims funded through an assessment. This is a far better result than in many insolvencies and only reinforces the argument that the solvency regulation of Northern Capital was successful. Regulators cannot prevent all insolvencies, but the best possible outcome is to intercede early to protect policyholders and limit the exposure to our state’s guaranty fund if the company is unable to continue in business. Therefore, it is simply not true or accurate to suggest that consumers were “put at risk by regulators.”