Insurance Law

Future insurance payouts are funded, in part, by investment returns.  An insurer receives a premium, pays its initial expenses, puts part of the premium into reserves and the rest goes into the bond and equity markets.  In theory, good insurers put their investments into a broad array of high quality bonds and to a lesser extent into high quality equities.  They generally can't count on investments in an affiliates' bonds as a high quality investment.

Florida's Citizens Property Insurance Company (the biggest home insurer in the state of Florida) invested in a state investment pool.  The problem with the investment pool is  that it is shrinking to the point that Citizens might be the biggest investor in that ever shrinking pool.  From the discussion in the St. Pete times link to below it appears that Citizens has $2 billion in this pool and $5 billion in a safer pool.  My question (and I don't know the answer) is whether a private company could invest this way without the State complaining about its investment strategy? 

In fact, it appears that all $7 billion of the companies reserves are invested with the State of Florida.  Could a for-profit insurer do this? I don't think so, but ...  as Dana Carvey used to say, "It wouldn't be prudent."   

The pool appears to be a pool for state and local government entities to stash their cash and let it earn competitive interest rates. [Why is the state competing against banks?  Why is the state competing against insurers?]

It looks like the depositors (state agencies and city and counties) are withdrawing their funds which leads to a severe cash flow problem for the fund.  The bad news is that the FDIC doesn't insure the fund and the extra bad new for the Florida tax payers is that they do.  The state appears to have concentrated its risk and lowered its hurricane claims paying prospects at the same time.  Where is the Insurance Commissioner's outrage?  Where is the concern about the policy holders?  Where the the other hyperbole that we'd be hearing if an insurer did something that potentially upset the solvency of a major market player?

Check out the fund's homepage with an undated statement in red:

Day Two Update

As expected, we continued to experience outflows in our second day open. These outflows were half the amount of the first day. The size of the total outflows over our first two days is both within our expectations and well within LGIP's available capacity. Another positive development is that no one chose to redeem beyond their allowable liquidity balance.

Based on questions we have received and some stories in the media, we have published a memo to address a number of misconceptions that appear to be out there. See below for that memo.

The big misconception which appears to be true is that "more than half of the securities [backing the fund] are expected to pay  in full."  Ouch.

via  www.sptimes.com.