How it is that Illinois, a jurisdiction not typically associated with a strong commitment to free-market principles, came to be the first state in the nation to allow its insurance rates to be regulated entirely by open competition is something of an accident of history.

Read the full piece here.

ICLE Editor-in-Chief R.J. Lehmann joined The Reload podcast to discuss New Jersey’s new gun-carry insurance mandate and San Jose, California’s gun ownership insurance requirement. He said the requirements, which are the first of their kind, won’t accomplish the goal lawmakers have claimed. Namely, insurance companies can’t provide coverage for criminal acts. That basically leaves damage caused by accidental shootings as the only real option for coverage.

And even accidental coverage is more limited than most people realize. For instance, homeowners’ insurance–which San Jose now claims qualifies under its mandate–will cover accidental shootings, but only for damages done to third parties. That means any harm caused to the homeowner or family members living in the home wouldn’t be covered.

Lehmann said New Jersey’s requirement is even more problematic because it appears to be trying to require insurance against deliberate, and potentially criminal, acts. He said that’s not something any company offers nor is it a policy lawmakers could realistically force companies to offer. It also goes directly against the state’s complaints about “concealed carry insurance,” which are often not actual insurance policies but lawyer co-ops or group retainer plans.

Beyond the practical problems with the mandates, Lehmann said they also face an uphill battle in the courts. He explains why founding-era surety laws are a bad analogue for these modern requirements and why they are unlikely to survive the Bruen test in the long run.

Video of the appearance is embedded below.

ICLE Editor-in-Chief R.J. Lehmann joined On Point, a daily discussion program produced by WBUR radio in Boston, for a discussion of  the nation’s first gun-insurance mandate, which took effect this year in San Jose, California. Gun owners in the city are required to have liability insurance or they could be fined a minimum of $250. But can insurance actually help curb gun violence?

“Insurance in and of itself is never going to cover the kinds of violent events that people imagine it would because insurance can’t cover things that you do on purpose,” R.J. Lehmann says.

Guests

• Mayor Sam Liccardo, former mayor of San Jose, California. He championed the city’s first in the nation ordinance requiring gun owners to have gun liability insurance. The insurance mandate took effect Jan. 1st. (@sliccardo)
• Jennifer Mascia, senior news writer and a founding staffer at The Trace, which is a newsroom dedicated to covering gun violence. Read their article: Will Requiring Gun Owners to Buy Insurance Improve Firearm Safety? (@JenniferMascia)
• R.J. Lehmann, editor-in-chief and senior fellow of the International Center for Law and Economics. Read their article: Nation’s First Gun-Insurance Mandates Take Effect. Will They Hold up in Court? (@raylehmann)

Audio of the full episode is embedded below.

The Sarbanes-Oxley Act of 2002 (SOX)—named for its chief sponsors, former Sen. Paul Sarbanes (D–Md.) and former Rep. Mike Oxley (R–Ohio)—was intended to restore trust in the transparency of publicly traded companies after the collapses of WorldCom and Enron Corp. revealed that their auditors had certified financial reports that overstated the firms’ assets and massively understated their liabilities.

But, of course, “transparency” isn’t quite the same thing as prudential safety and soundness. In the insurance space, more specifically, transparency doesn’t necessarily equal solvency.

Read the full piece here.

As the calendar flips to 2023, among the scores of new laws taking effect are a pair of legislative mandates that would, for the first time anywhere in the country, require firearms owners to obtain and maintain liability insurance. What remains to be seen, however, is whether either measure will survive Second Amendment challenges, particularly given the standard handed by the U.S. Supreme Court in its June 2022 New York State Rifle & Pistol Association Inc. v. Bruen decision.

Read the full piece here.

California has a wildfire crisis. Arguably, the entire Western United States has a wildfire crisis, but California’s crisis is of an entirely different magnitude.

Read the full piece here.

Introduction

The International Center for Law & Economics (ICLE) is grateful for the opportunity to submit these comments in support of FTX’s application to amend its DCO registration to allow it to clear margined products directly for retail participants.

The vast majority (some 96%[1]) of global crypto derivatives trading takes place outside the U.S., much of it on platforms operating non-intermediated retail models similar to that proposed in FTX’s application—but with one crucial difference: these offshore exchanges are largely unregulated. The reason for the disparity in domestic vs. foreign trading volumes is clear: regulatory constraints and costs in the U.S. make the operation of such platforms impossible or unviable. FTX’s proposal would pave the way to bring the technology and business models currently employed to facilitate virtually the entirety of the world’s crypto derivatives trading into the regulated structure of U.S. derivatives markets. The only thing standing in the way is the possible inflexibility of that regulatory structure in the face of disruptive competition.

The obvious market benefits of FTX’s proposal are that:

1. It would free capital that would otherwise be pledged as collateral, which could greatly expand liquidity in crypto markets or could be deployed elsewhere in the financial system;
2. It would introduce a competitive alternative to the current exchanges, thus providing investors savings on what they would otherwise pay in commissions, account origination fees, etc.; and
3. It would offer clear product differentiation: e.g., by introducing a new mechanism for counterparty risk mitigation and by offering direct access to retail investors (with inherently lower costs of participation, more and cheaper information, and technological enhancements like a direct-access mobile interface).

The latter two of these benefits (and to some extent even the first) go particularly to the enhancement of competition in U.S. derivatives markets.

Concerns that markets lack sufficient competition are at the forefront of current policy debates. Legislators are currently working on draft bills that seek to promote competition in digital markets, and President Biden recently issued an executive order advocating for a “whole of government” approach to competition.[2]

Unfortunately, the renewed focus on how governments may boost competition has a significant blindside when it comes to government-created barriers to competition. Rather than offering a solution, government regulations are all too often the cause of reduced competition. This is notably the case when regulation artificially narrows a market by preventing new and innovative firms from disrupting entrenched incumbents.

In other words, if the “whole-of-government” approach to promoting competition means anything, it means that regulatory agencies should work to remove state-created, artificial barriers to market entry that are not absolutely required to accomplish core regulatory functions. The CFTC has precisely that opportunity with FTX’s application.

The market for crypto (and many other) derivatives is currently a lucrative duopoly, dominated by the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). Both firms have long been shielded from robust competition by a protective, if well-intentioned, moat of government regulation. The CFTC now has a unique opportunity to open this duopoly to disruptive competition.

FTX’s application would bring both technological and business-model innovation to the derivatives market, carrying with them the promise of increased competition, reduced risk, more efficient pricing, and lower costs for investors. There is always reluctance to embrace the new, particularly in areas that deal so intrinsically with risk. But a sensible measure of caution must not be allowed to morph into costly intransigence.

FTX’s application, while ambitious in its aims, is, in fact, quite modest in its mechanisms. It is respectful of the existing, overarching regulatory paradigm implemented to protect consumers, investors, and the financial system as a whole; it contemplates significant protections and backstops to shore up any increased risk it might introduce; and it ensures that ongoing oversight by the CFTC is readily facilitated.

Indeed, approval of FTX’s application would not entail the abandonment of the CFTC’s core principles, but merely a recognition that the specific implementation of those principles may not be optimal for certain novel business models and technology. As Chairman Benham recently remarked:

[T]he digital asset market would benefit from uniform imposition of requirements focused on ensuring certain core principles, including market integrity, customer protection, and market stability. At the CFTC, we have seen that a regulatory regime focused on core principles can be successful in overseeing a wide variety of markets, and have no reason to think those same principles cannot be applied to digital asset markets.[3]

In short, the CFTC should jump at this opportunity to introduce some well-regulated experimentation into the derivatives market: the likely social benefits of this effort significantly outweigh the potential harms.

Read the full comments here.

[1] See, e.g., Philip Stafford, Crypto industry makes push into regulated derivatives markets, FINANCIAL TIMES (Feb. 21, 2022), https://www.ft.com/content/364dee59-fb51-400b-acd2-808d4ec41ab3.

[2] Executive Order 14036 on Promoting Competition in the American Economy, § 2(g) (Jul. 9, 2021) https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition- inthe-american-economy (“This order recognizes that a whole-of-government approach is necessary to address overconcentration, monopolization, and unfair competition in the American economy.”).

[3] CFTC Chairman Rostin Behnam, Letter to the U.S. Senate Committee on Agriculture, Nutrition, and Forestry and House Committee on Agriculture (Feb. 8, 2022) at 4, available at https://www.agriculture.senate.gov/imo/media/doc/2022%2002%2008%20Ag%20committees%20digital%20asset%20res ponse%20letter.pdf.

ICLE Editor-in-Chief R.J. Lehmann joined the Heard Tell Show to discuss Elon Musk’s bid to buy Twitter, shareholder rights, platform moderation, and regulatory review of the transaction. The full episode is embedded below.

https://youtu.be/6uhTJL6g9uY?t=835

 

With the March 11 scheduled close of its regular session fast approaching, the Florida Legislature remains so focused on putting the finishing touches on its various culture-war signaling bills that one might think Tallahassee hasn’t noticed that the state’s property insurance market is rapidly hurtling toward utter collapse.

The causes are multi-pronged: a uniquely challenging set of catastrophe risks, all increasingly magnified by the combination of rapid development and climate change; a litigation environment in which claims disputes drag on years beyond the events that initiated them; a reputed epidemic of questionable claims, many related to roofs; and a primary market that, more than a decade past its last major crisis, remains far too reliant on thinly capitalized domestic companies with insufficient geographic diversification.

All of this is, as they say, coming to a head. The latest in a series of concerning indicators came with the Feb. 25 order by Circuit Judge Angela Dempsey appointing the Florida Department of Financial Services as receiver for the Orlando-based St. Johns Insurance Co., which Insurance Commissioner David Altmaier had deemed insolvent. Dempsey subsequently issued a Feb. 28 order approving the transfer of 147,000 St. Johns policies to Slide Insurance Co.

St. Johns adds to the growing list of recent liquidations of Florida property insurers. The department last year ordered liquidations of both Gulfstream Property and Casualty Insurance Co. and American Capital Assurance Co. And several other domestic writers similarly evince signs of teetering on the brink of insolvency:

• As it previously did with St. Johns, ratings agency Demotech has pulled the rating for Avatar Property & Casualty Insurance Co.
• Tampa-based Lighthouse Property Insurance Corp. has ceased writing new Florida business, just a month after it had raised $65 million to recapitalize.
• While not yet pulling back on underwriting, Clearwater-based Southern Fidelity Insurance Co. is seeking rate increases of 85% and 111%, with CEO Bryon Wells warning that: “Without these increases we would have to have substantial amounts of capital.”
• Florida Farm Bureau Insurance has ceased writing new homeowners business.
• Deerfield Beach-based People’s Trust Insurance has ceased writing new business in eight South Florida and Central Florida counties.

TypTap Insurance Group, a home and flood-focused insurtech subsidiary of Tampa-based HCI Group, had been planning an initial public offering this year. That plan was scuttled in January, with the company citing unfavorable market conditions. TypTap has now likewise ceased writing new business in the state.

The ominous signs don’t end there. Progressive Insurance is non-renewing 56,000 Florida policies covering homes with roofs that are more than 15 years old. And United Insurance Holdings Corp.—the ninth largest homeowners insurer in Florida—announced last month that it also had ceased writing new homeowners business in the state as of Jan. 1.

Given these cascading dominoes, one’s concern must turn to Citizens Property Insurance Corp., Florida’s state-run insurer-of-last-resort. In the month of January alone, Citizens grew by 17,485 policies. Its Jan. 31 count of 776,790 policies in-force was up 75% from the 443,228 policies that were in-force Jan. 31, 2020. At the current pace of growth, Citizens would top 1 million policies—a level it hasn’t seen since January 2014—by the end of 2022.

Which brings us back to the Legislature, which certainly has not given these issues the priority they would seem to merit. But a pair of property-insurance-reform measures—S.B. 1728 and S.B. 186—have slowly been winding their way through the state Senate, and both share a provision that could gain some attention amid the prevailing zeitgeist, even if only in a limited way.

What the bills share is that both would clarify that Citizens’ statutory “glidepath” applies only to an insured’s primary residence. Initially implemented in 2009, the glidepath had limited Citizens’ annual premium increases to 10%. S.B. 76, passed last year, calls for a series of gradual increases in the cap, which was raised to 11% this year and will continue to rise by one percentage point each year until ultimately hitting 15% in 2026.

By limiting the glidepath to primary residences, the legislation currently before the Senate would allow Citizens to immediately charge risk-based rates to the many second homes and vacation homes currently covered by the state-run insurer. The change would serve both to improve Citizens’ financial position and, at the margin, to discourage some policyholders from turning to Citizens who might otherwise be able to obtain private coverage.

Those include, of course, some properties—many of them in Miami-Dade and southern Broward County—owned by the very so-called “oligarchs” that the Biden administration and many Western governments are currently in the process of sanctioning following Russia’s unprovoked invasion of Ukraine. As is well-known, South Florida has been one of the favored spots for wealthy Russians over the past decade or two. Over that time, Sunny Isles Beach has gained the nickname of “Little Moscow,” while spots like tony Fisher Island have similarly drawn interest from Russian billionaires.

Of course, wealthy Russian nationals (much less the smaller group who could be called “oligarchs”) constitute only a small portion of the non-primary residences currently insured by Citizens. And removing vacation homes from the Citizens glidepath, while certainly a step in the right direction, would not be nearly enough to fix problems of this magnitude. Fortunately, the two Senate bills do not stop there.

S.B. 186, sponsored by Sen. Jeff Brandes (R-St. Petersburg), would make several changes to Citizens, including:

• Allowing surplus lines insurers (who, notably, do not participate in the Florida Insurance Guaranty Association) to participate in Citizens depopulation programs, so long as the insurer’s policy count remains above 700,000;
• Increasing the maximum surcharges that can be levied on Citizens policyholders in the event of a projected deficit to any of its three accounts (personal lines, commercial lines, and coastal accounts), with surcharges rising to 20% if Citizens passes one million policies and 25% if it passes 1.5 million;
• Requiring that a policy absorbed by Citizens from an insurer deemed unsound be assessed the higher of either the old premium or the premium that Citizens would normally assess for that given property; and
• Providing that a residential Citizens policyholder is not eligible for renewal if an authorized insurer provides them with a coverage offer that is no more than 20% greater than the Citizens renewal premium.

S.B. 1728, sponsored by Senate Banking and Insurance Committee Chair Jim Boyd (R-Bradenton), shares some features with S.B. 186, including removing non-primary residences from the Citizens glidepath and disallowing renewals for policyholders who receive coverage offers that are no more than 20% greater than their Citizens premium.

It also looks to address the recent explosion of roof claims by allowing insurers to only cover the depreciated actual cash value of roofs that are more than 10 years old. Roofs that are less than 10 years old or that were damaged by named hurricanes or in total loss events would still have to be covered for full replacement costs.

The Brandes bill is currently before the Senate Appropriations Committee, having previously cleared the Senate Banking and Insurance Committee and an Appropriations subcommittee. Boyd’s bill has moved one step further, having cleared both the Insurance and Appropriations committees. It does, however, potentially face challenges in the Legislature’s other chamber, as House Speaker Chris Sprowls (R-Palm Harbor) has expressed opposition.

So, what does this all have to do with Russian oligarchs? Very, very little. But if that framing can help get this Legislature’s attention, it’s worth a try.