When it comes to insurance, Florida is the land of Oz. You might think you know what risk transfer is, or how insurance companies operate, but the rules change as soon as you enter the Sunshine State. We already described Florida's strange approach to property coverage, where the state has pretty much self-insured for the inevitable catatrophe (which may be approaching, as we write, in the form of Hurricane Ike). Whereas the state has taken on too much risk in the property line, they have severely hobbled the ability of carriers to function in commercial lines.
Under the guise of eliminating "excessive profits" in workers compensation, employer liability, commercial property and umbrella coverages, Florida allows insurance companies an underwriting profit of no more than 5 percent over a three year year period. Anything above that amount must be returned to policy holders. (You can find the statute, 627.215, here.)
Florida Insurance Commissioner Kevin McCarty recently ordered six workers' compensation insurance companies to return $4.2 million in these "excessive profits" to their policyholders.
"This is further evidence that the workers' compensation insurance reforms implemented by the Florida Legislature in 2003 are working," said McCarty. "These policyholders are businesses that will get back some of the premium they've been paying for the past three years."
The six companies that have been ordered to return premiums to policyholders are: Alaska National Insurance Co. ($144,488), American Interstate Insurance Co. ($3,027,030), Church Mutual Insurance Co. ($768,259), Harco National Insurance Company ($4,819), Midwest Employers Casualty Co. ($218,337) and Petroleum Casualty Co. ($94,329).
Those mandated refunds look like chump change compared to the bill for The Chubb Group: McCarty issued a Consent Order requiring Chubb to refund over $13 million in excess profits to its customers. What was Chubb's sinful three-year loss ratio? An admirable thirty three percent.
Florida could use a little education in the basics of insurance. Yes, insurance companies seek to make a profit - we call this capitalism: like it or not, it's the way this country functions. Insurers make money by operating in the following manner:
1. Rate setting (where permitted by state law): carriers charge premiums that are likely to result in profit. Because the market is competitive, they cannot charge whatever they feel like. In fact, most rates for workers comp are significantly deflated by state regulation and local market competition.
2. Underwriting: carriers try to select only the best risks. Insurance companies want to sell insurance to people least likely to need it. It's a crap shoot at best, but some companies have a real knack for it.
3. Claims management: ideally, insurers try minimize comp costs by speeding recovery and getting people back to work; they might also arbitrarily deny claims, restrict treatment and make life difficult for claimants.
4. Claims reserving: by setting accurate reserves, carriers balance the books and avoid the future shock of under-reserved claims.
Insurers have good years and bad years. The problem with the "excessive profits" approach is that it severely limits profits in good years, which are required to offset losses in bad years. Florida does not care if a carrier loses money: when it comes to underwriting losses in the Sunshine State, the free market prevails! Thus Guard Insurance, running a five year loss ratio of 115 percent, and Safety National Group, with a whopping 184 percent, simply have to absorb the losses on their own. NOTE: Data provided by AM Best.
One final irony in Florida's approach: carriers must return "excessive profits" to all insureds, even those who have incurred substantial losses. So an employer with a three figure loss ratio (losses exceed premiums paid) actually gets money back. Isn't that sweet!
For many years, Florida's "excessive profits" statute has been dormant, as most carriers were losing money or barely breaking even. Now that changes in the comp statute have helped carriers turn the corner on profits, the day of reckoning is at hand. The carriers who have done the best job of pricing insurance, screening risks and managing claims are going to be hammered the most. Sometimes trouble comes in dramatic form, as with Hurricane Ike. Sometimes, it sneaks in through the back door, in the Ozian legislative kibosh entitled "excessive profits."