Marketplace & Regulation
Florida's Department of Financial Services and Office of Insurance Regulation
The Department of Financial Services, headed by Florida's Chief Financial Officer, and the Commissioner of the Office of Insurance Regulation oversee the insurance industry in accordance with the provisions of the Florida Insurance Code. They each have administrative (enforcement), quasilegislative (rule-making) and quasijudicial (hearing and penalty) powers in order to carry out their responsibilities.
The Florida Legislature adopted a Policyholder Bill of Rights to protect the insurance buying public. The Bill of Rights sets forth a series of aspirational goals to guide the Department and Office in their day-to-day operations. The Policyholder Bill of Rights can be found in the Florida Statutes, Chapter 626.9641.
The public relies on insurance policies to address the financial uncertainties of life. Insurance policies are only of value to the public if there is a high probability that the company will be able to fulfill its promises far into the future. One of the primary reasons for state regulation of insurers is to ensure the financial integrity of insurance companies operating in the state. The focus of Florida’s Insurance Code and the Office of Insurance Regulation is to monitor the continued solvency of insurance companies. The Office requires companies to file annual reports, and the Office will audit a domestic insurance company's complete financial and operating situation at least every three years.
Occasionally, an insurance company will fail, i.e., be declared insolvent. When this happens, the Office of Insurance Regulation will appoint a receiver to handle the liquidation or reorganization of the insurer in a process similar to bankruptcy. Upon liquidation, the Florida Life and Health Guaranty Association – an organization comprised of all authorized life and health insurers in Florida — will take over the duties of the failed insurer: collecting premiums, servicing the policy and paying claims. The association assesses its member firms to fund those payouts. Through this association, the industry collectively “bails out” the occasional failed firm. The Association will pay claims against the failed company’s traditional life insurance products (but not variable policies or contracts). The Association will pay up to $300,000 in death benefits for life insurance ($100,000 in cash value) or $300,000 for fixed annuity payments. These limits represent the total amount payable per insured life, not per policy.
While these organizations exist to provide an extra level of protection for policyholders, Florida law prohibits agents from referring to this protection as part of their sales presentations.
Insurance companies collect premiums from contract owners and invest those funds. These investments, which make up part of the “general assets” of the insurance company, back the company’s promises to its fixed annuity contractholders. Income from investments offsets the total cost of future claims. The Office of Insurance Regulation imposes investment guidelines on insurance companies to safeguard those assets and income – and mandates methods for valuing those assets for financial statement purposes.
The general account of life insurance companies may be invested in obligations of the federal, state or local governments, corporate bonds, real estate mortgages, real estate, corporate stocks and policy loans. These long-term investments balance the long-term commitments insurance companies make to their policyholders. These categories of investments also provide the degree of safety of principal, yield and liquidity desired by insurers. The Office imposes minimum ratings for corporate bonds held by insurers, and severely limits so-called “junk bonds” in the portfolio. Companies issuing equity indexed annuities will also invest in equity indexed options to hedge their liability under these contracts. These options are held in the company's general assets.
Variable annuities are backed by investments in “separate accounts”. The investment guidelines mentioned above apply to the general assets of the company – and not those held in the separate account. The only requirement for assets held in these separate accounts is that it have a “readily determined” market value –- that is, the investment be publicly traded (such as stocks on a stock exchange).
Legal Reserve System
Florida’s Insurance Code requires insurers to charge themselves a minimum liability on their financial statements — known as the legal reserve — for all policies and contracts currently in force. This liability amount represents future claims by policyowners. The Code has a standard valuation provision that dictates the assumptions and procedures insurance companies must use in calculating the size of their legal reserve.
The legal reserves appear as a liability on the company’s balance sheet. The legal reserve is a measure of the insurance company's future liability under the contract. To remain solvent, insurers must maintain assets (investments) equal to – and hopefully greater than — the legal reserve.
The Florida Insurance Code is a broad set of regulatory principles. It sets general policy, but leaves the details of regulation to the Department and Office. For example, the Insurance Code states that advertising of insurance products should be balanced and not misleading. How that general principle is interpreted in day-to-day operations is spelled out in rules promulgated by the Department of Financial Services or Office of Insurance Regulation. Rules will answer detailed questions such as: When are testimonials permitted? How are statistics to be used?, Must agents obtain insurer permission prior to placing an advertisement?, etc.
The Department of Financial Services focuses its regulations and authority on consumer and agent issues, such as agent licensing and anti-fraud efforts; while the Office of Insurance Regulation concentrates on regulation of insurance companies and contract terms. The Department and the Office are empowered to investigate complaints, audit industry participants, and, if need be, rehabilitate insolvent insurers. Let's take a quick look at a few regulations Florida imposes on insurance companies and agents.
Certificates of Authority
An admitted insurance company is one that the Office of Insurance Regulation has licensed to transact business in Florida under the provisions of the state laws. Another way of stating this is that an “admitted” company has a certificate of authority to operate in Florida. For this reason, admitted companies are also called “authorized” companies.
Insurance companies that have not been authorized by the Office are said to be “nonadmitted”. Agents and the public should be aware that a nonadmitted insurance company does not come under the jurisdiction of the Florida Office of Insurance Regulation with regard to examination of its financial soundness, nor the examination and approval of types of coverages offered, nor of its advertising through the mails. Florida's Life and Health Guaranty Fund (described below) only covers the liabilities of authorized insurers, so anyone purchasing policies from unauthorized or unlicensed companies would be at risk if those insurers could not meet their claims. Some states, including Florida, will hold the agent personally liable for any insurance contract he or she places with an unauthorized insurer.
The Department of Financial Services imposes severe penalties on agents who aid and abet these illegal operations:
¨ Conviction of a third-degree felony,
¨ Liability for all unpaid claims, and
¨ Suspension or revocation of all insurance licenses.
The Office of Insurance Regulation imposes similar penalties for acting as an insurer without proper licensure:
¨ Conviction on charges of up to a first-degree felony,
¨ Liability for all unpaid claims, and
¨ Suspension or revocation of all insurance licenses.
Florida Policyholders’ Bill of Rights
(1) The principles expressed in the following statements shall serve as standards to be followed by the department, commission, and office in exercising their powers and duties, in exercising administrative discretion, in dispensing administrative interpretations of the law, and in adopting rules:
(a) Policyholders shall have the right to competitive pricing practices and marketing methods that enable them to determine the best value among comparable policies.
(b) Policyholders shall have the right to obtain comprehensive coverage.
(c) Policyholders shall have the right to insurance advertising and other selling approaches that provide accurate and balanced information on the benefits and limitations of a policy.
(d) Policyholders shall have a right to an insurance company that is financially stable.
(e) Policyholders shall have the right to be serviced by a competent, honest insurance agent or broker.
(f) Policyholders shall have the right to a readable policy.
(g) Policyholders shall have the right to an insurance company that provides an economic delivery of coverage and that tries to prevent losses.
(h) Policyholders shall have the right to a balanced and positive regulation by the department, commission, and office.
(2) This section shall not be construed as creating a civil cause of action by any individual policyholder against any individual insurer.