How Insurers Make Millions On The Side

By Paige St. John

Herald Tribune

Today, nearly half of Florida’s home insurance is provided by companies whose primary profit comes not from insuring homes but from diverting premiums into a host of side ventures.

Investors and executives in 2008 moved $1.9 billion in policyholder money out of heavily regulated insurers, where profits are capped and dividends are restricted, to separate companies that are owned by the same people, housed at the same address and sometimes use the same employees.

As soon as the money is moved, it is beyond the reach of homeowners who might need it to rebuild after a disaster.

It is also free to be paid to investors and owners as profit without interference from regulators.

Meanwhile, insurance executives complained about losses and state-mandated discounts, and pressured state regulators for permission to charge homeowners more — even to end rate regulation altogether.

The payments to themselves, by and large, were legal.

As Allstate and State Farm have fled the state and left homeowners scrambling for coverage, Florida lawmakers have intentionally relaxed rules designed to police insurance company profits. Regulators hoped the promise of profits would persuade investors to start more insurance companies.

The Herald-Tribune spent more than a year investigating the Florida insurance industry, including reviewing the financial filings of more than 70 Florida-only companies that now provide nearly three-quarters of the private property insurance in the state.

  • Overhead costs — expenses not related to hurricanes or other disasters — are 50 percent higher in Florida than the national average. The higher overhead cost Florida homeowners an added $900 million in 2009 alone.
  • In cases where the Herald-Tribune could see both sides of the ledger, the overhead charges were inflated. Of the $72 million in management fees that Southern Oak paid its affiliate over five years, nearly half — $35 million — was profit, insurance regulators now say. Three other carriers paid themselves an average 44 percent profit.

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