For most of the last 20 years, Texas regulators have battled homeowners’ insurers, attempting to block “excessive” rates. The losers in these battles have been consumers, who have been harmed by the instability injected into the market by over-regulation.
However, a better homeowners’ insurance market awaits consumers, depending the outcome of the current sunset review of the Texas Department of Insurance (TDI). The findings of the Sunset Advisory Commission’s recent staff report on TDI are instructive.
In 2003, the Texas Legislature shifted insurance regulation to a file-and-use system, where insurers could apply rates immediately after filing with TDI rather than filing a rate request and waiting for TDI to approve.
But the staff report found that “the Legislature cannot judge the success of the shift to file-and-use rate regulation because the system has not been fully implemented.” Instead, TDI often exercises its statutory authority to reject rates filed but not in use; in essence, a type of prior approval.
A better market is one governed by a true file-and-use system, where rates and products are more responsive to consumer demand, regulatory costs are lowered, and insurance availability is increased. By taking away TDI’s ability to disapprove rates prior to their use, a major regulatory impediment to true competition in the insurance industry would be removed.
Another problem is TDI’s statutory authority to reject rates for being “excessive” if the rates are “likely to produce a long-term profit that is unreasonably high in relation to the insurance coverage provided.” But if consumers think rates are excessive or that insurance companies are earning too much profit, they can switch their coverage.
The over-emphasis on “excessive” rates has often left insurance rates inadequate for the risk they cover, putting overexposed insurers in jeopardy of insolvency. The Texas Windstorm Insurance Association (TWIA), the “insurer of last resort” for coastal properties, is a perfect example. Due largely to inadequate rates, TWIA’s exposure was $65.2 billion at the end of May, but TWIA can cover just $2.3 billion in losses, leaving Texas taxpayers on the hook for the remainder of losses from a major storm.
A better market is one where insurers and consumers set insurance prices, as risk-based pricing protects consumers’ insurance coverage instead of artificially suppressing rates. This also better protects taxpayers, who are the ones likely to pick up the bill in the case of TWIA not being able to pay claims if a large hurricane hits Texas.
Another type of regulation – the oversight of coverage offered in policy forms – artificially inflates insurance prices, slows the introduction of coverage into the marketplace, and discourages market entry and capital investment by insurers. Our research shows that TDI’s policy-form regulation, along with abuse of the civil justice system, cost Texas ratepayers almost $900 million during the Texas “mold crisis.”
A better market is one in which TDI focuses on the wording and clarity of an insurance form (i.e., how an insurer describes the coverage provided under a form) rather than the content of a form (i.e., what risks are covered/insured under a form). The lesson of the mold crisis is that loosening restrictions on insurers – freeing them to run operations as they see fit – leads to efficiency gains, lower insurer costs, and consumer savings.
The time is ripe to make policy changes crucial to the health of Texas’ homeowners’ insurance market. Fully implementing a file-and-use system, repealing the Commissioner’s authority to reject rates he deems “excessive,” and loosening the restrictions on insurance forms are simple ways to increase the competitiveness of the Texas insurance marketplace and expand the availability of insurance products.
The Sunset Commission has the opportunity to begin transforming the homeowners’ insurance market when it meets next week in Austin. Since the commission’s recommendations are likely to set the stage for action in the next legislative session, consumers should take notice of these discussions and demand that the legislature act to give consumers more choice and a path toward lower rates – both of which can only happen if competition takes hold.
Drew Thornley is an economic freedom policy analyst at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.