Sun Sentinel House Keys Blog: What Do Home Insurers Do With Your Premiums?

Ever wonder what your home insurer does with all the premiums you pay?

Many Florida insurers send some of the money to management companies, often an unregulated affiliate of the insurer, and another big chunk is sent to reinsurance companies, which are not regulated by insurance commissioners in states like Florida because most are based abroad. Reinsurers provide backup catastrophe coverage for insurance companies; It’s insurance for insurers.

If there’s enough money left, some is saved in the insurers’ claims-paying funds.

A recent Sarasota Herald-Tribune story re-ignited a debate about Florida insurers’ reliance on reinsurance, which the story reports is greater than ever.

Criticism of what has been called the “Wild West” of the insurance industry is not new. In 2007, legislators expanded a state fund that sells cheaper reinsurance to insurers so they could pass the savings to customers after private reinsurers increased rates by 76 percent after the 2005 hurricanes.

(Reinsurance industry representatives note that rates decreased 8.6 percent after the 2004 hurricanes, 9.1 percent in 2007, and 16 percent in 2008, according to estimates from Guy Carpenter, one of the largest reinsurance brokers.)

Many of the questions raised about reinsurance during the past few years have remained unanswered, in part because the industry is largely unregulated.

Do reinsurance companies “fix” prices? U.S. Rep. Bill Posey from Rockledge said at a legislative meeting in March that reinsurers don’t play by free-market rules: The year after the 2004 and 2005 hurricanes in Florida “every single reinsurance company had the exact same identical rate…What a coincidence.”

Barb Carroll, a spokeswoman for the Reinsurance Association of America, said reinsurers rates are not regulated the same way insurance companies’ rates are because the coverage is negotiated between “sophisticated” companies not an average consumer. “If rates appear similar, it is because the property catastrophe market is a ‘subscription’ market; brokers, representing the buyer, go into the market and put together capacity from several reinsurance sources. If there is a lead company, the broker may ask other reinsurers to match the lead price. According to broker reports, this process has in fact led to reinsurance rate decreases in recent years,” Carroll said.

Why have national insurers scaled back from Florida while investing in reinsurance companies that cover Florida? Does it have anything to do with the fact that the latter is not subject to Florida regulation? Carroll said national insurers may have merely invested in reinsurance to diversify their portfolio of investments but they have not made major investments in reinsurance.

Should more taxes be imposed on foreign reinsurance companies? Rep. Richard Neal of Massachusetts, has proposed a bill, HR 3424, that would require insurance companies that buy a significant amount of reinsurance from companies abroad to pay taxes on the profit from the reinsurance and any investment income that results from it. Consumer advocates oppose the bill because they say it would lead to rate hikes in Florida.

Should international trade groups find a way to regulate reinsurance? Over the past few years, Florida Insurance Commissioner Kevin McCarty struck pacts with insurance regulators in the Cayman Islands, United Kingdom, Mexico, Bermuda and Germany to agree to share information about insurance in an attempt to provide some oversight of reinsurers abroad.