Investors and senators see an opportunity in the Florida insurance crisis

TALLAHASSEE – When Floridians shop for homeowners insurance policies next year, they may find several new companies offering coverage.

Including one company backed by a state senator.

Investors see opportunity in Florida’s depressed insurance market, lured by new laws that make it harder to sue insurance companies and raise premiums in the country. Current and former state officials and other observers said they are constantly being approached by investors looking to make a profit.

“After we finished the last vote in the meeting, I had a couple of people, including lawmakers, asking if I wanted to invest in an insurance company,” Sen. Jason Pizzo, D-Hollywood, told The State. Insurance Commissioner last month.

That’s what state Sen. Joe Gruters, R-Sarasota, said about his colleagues getting him to invest in a homeowners insurance company that has a 165% return on investment over five years.

Investing millions of dollars in one of the nation’s most volatile insurance markets may seem foolish. Storms and floods are on the rise. Meanwhile, many companies have been left untouched by both threats.

But Florida-based insurance company executives use unusual financial structures that allow them to extract huge profits from homeowners.

Those structures, combined with reduced litigation risk, are an attractive combination for at least some investors. And Gov. Ron DeSantis and state regulators see it as a solution to the state’s insurance crisis, hoping free market competition will lower prices.

“The market needs green shoots, and it’s exciting to see new companies,” said former state Sen. Jeff Brands, R-St. Petersburg, was a proponent of tort reform in the legislature.

Pizzo, one of the state’s wealthiest lawmakers with a net worth of $60 million, declined to invest in Gruters’ company. He also turned down about a dozen other pitches from investors, he told the Times/Herald.

“I don’t want to be directly involved in what I think are less restrictive or more favorable conditions for insurers,” Pizzo said.

Opticks said lawmakers who set up insurance companies “probably won’t do well” after passing legislation affecting those companies. But he’s not mad at Grutter for trying.

“I don’t think they’ll care if I get reasonable policies,” Pizzo said.

“A Unique and Profitable Opportunity”

To solve Florida’s insurance crisis, DeSantis and lawmakers have tried to stop people from suing insurance companies, which insurers charge for rapidly rising premiums.

Lawmakers and regulators passed a law in December requiring homeowner’s insurance companies to pay attorneys’ fees when plaintiffs sue and win, though they haven’t proven that lawsuits are driving up prices and driving insurers out of business. This year they extended all the insurance companies.

The legislation has not yet had a meaningful impact on homeowner premiums, which the industry says will not go down now due to factors such as climate change.

But it has immediately created interest from investors who want to put their money into insurance companies.

Barry Gillway, former head of state-run Citizens Property Insurance, said he fields calls from investors at least every two weeks. He said the reduced risk of litigation and the opportunity to start issuing thousands of policies from citizens attracted interest.

“You have a number of different investors looking at this … as a real opportunity,” he said.

Gilway said the market was so active that he considered joining one of the companies.

“If the right opportunity comes along, I’m serious about jumping in,” Gilway said.

One of the new companies is Village Protection Insurance, led by a former executive with reinsurance brokerage firm GuyCarpenter, trade magazine Inside P&C reported.

In May, two months after lawmakers passed the criminal reform bill, the company announced it was raising $75 million from investors, the publication reported. In August, the company reported that its goal had been raised to $55 million. (The minimum to start an insurance company in Florida is $15 million.)

It’s unclear what role Gruters, an accountant by trade, has with the company. His involvement was not previously reported, and he did not respond to calls and text messages for comment.

The Florida insurance market “is facing a transformative crisis, and there is a unique and lucrative opportunity for investors,” the company’s leaders wrote to investors sent by Grueters. They cite an experienced management team with “fresh perspectives” to meet the needs of consumers and investors.

The platform directs potential investors to a financial projection sheet that says the company will take 20,000 policies from Citizens in the next year. In the year By 2028, the company will grow organically and write $475 million in premiums across 99,596 policies, for an average customer of $4,775. (The current statewide average is about $6,000, according to industry groups.)

The platform specifically engages the company’s “Managing General Agent” to an affiliate company that directs investors to a particular financial sector. Village Protection Insurance’s managing general agent charges the company 28% of all premiums, plus a $25 fee for each new policy, a typical rate for Florida-based insurance companies. According to Inside P&C, most of the money will go towards paying a contractor, according to Inside P&C: everything from underwriting to claims management to reinsurance and customer service.

After paying those costs, tens of millions of dollars are left each year to repay investors. In the year The document shows that by 2028, the company will show a cumulative return on principal agent investment of 165%.

“We strongly believe that this innovation provides a unique opportunity to achieve exceptional profitability in an environment of change and growth,” says Peach.

Gruters, along with other senators who work in the insurance industry, voted for the December 2022 bill to require homeowners to pay their attorney’s fees. Senate rules require senators to vote on bills unless they know they will gain “special personal benefit or disadvantage” from the measure. In those cases, senators must explain why they abstained.

Gruters favored this year’s legislation, which would have prevented all insurance companies from paying attorneys’ fees in most cases, but voted for an amendment that would have gutted the bill, paying off most of his party. The update failed.

A recipe for success – and failure

Since Hurricane Andrew in 1992, Florida’s homeowners insurance market has been dominated by small state insurance companies, unlike most other states.

Those Florida-based companies use general agents and other affiliate companies that bill the insurance company for services or fees.

Insurance company profits are controlled by regulators, and while general agent fees are regulated by regulators, the management of general agents is not regulated. State lawmakers tried to pierce the veil on insurers’ affiliates this year, but provisions requiring affiliates to report more information to the state were removed from the law. One key senator said they did not want to “upset the apple cart” of the insurance industry.

This formula is a recipe for success – or failure – for some companies.

He successfully defrauded investors and spawned new insurance companies. But it’s also a consistent theme in many crowded companies.

Forensic accountants employed by the state have repeatedly cited failure of insurance companies to make excessive or unusual payments to partnership firms. Some of the payments were not approved by regulators. Others were charges for overlapping services.

While it is not unusual for insurance companies in other states to use general agents, Florida is unique. By allowing managing general agents to be a sister company with the same management, said Birney Birnbaum, executive director of the Center for Economic Justice and chief economist for the Texas Department of Insurance.

Regardless of whether the insurance company is profitable, the arrangement doesn’t make sense for a large insurer unless the company needs guaranteed cash flow, Birnbaum said.

The arrangement created an “unbelievable conflict of interest.”

“The question is, why do regulators allow it?”

(Editor’s Note: (An earlier version of this story misstated Pizon’s voting record.)