Why do Texas homeowners pay insurance rates that are much higher than the national average? And why can’t coastal residents obtain private windstorm insurance coverage?

Weather plays a role – Texas endures arguably the most severe and wide-ranging weather risks in the nation – but so does Texas’ unreasonably burdensome regulatory structure.

The Texas Insurance Code permits the Texas Department of Insurance (TDI) to reject filed rates before they are used in the marketplace. This runs against the Texas Legislature’s stated preference for a file-and-use regulatory system, where insurers may use rates immediately after filing them. Such pre-market regulation costs insurers – and thus consumers – time and money.

TDI’s focus on “excessive” insurance rates also contributes to our current woes. Again with authority from the Code, TDI may reject “excessive” rates, defined by statute as “likely to produce a long-term profit that is unreasonably high in relation to the insurance coverage provided.” But what is “excessive” for one person is not necessarily “excessive” for another. And why should a government agency get to decide what is an “unreasonably high” profit? How often do you hear governmental concern about a business loss being “unreasonably high”?

There is simply no one-size-fits-all solution for insurance prices, and attempts to impose one wreak more havoc on consumers than the supposed problem.

For example, a focus on blocking “excessive” rates risks putting TDI in a position where it cannot ensure “adequate” rates, another call of the Code. The very rates that TDI might reject as unreasonable may be the ones that ensure a company remains solvent.

If “excessive” rates enter the market, consumers retain the option to go elsewhere for more affordable coverage. But if rates that enter the market are too low to keep insurers solvent, consumers are in danger of losing their coverage altogether and doling out even more money to get reinsured.

Consider the current funding crisis of the Texas Windstorm Insurance Association (TWIA), the state’s provider of windstorm insurance. Because of below-market rates and a corresponding failure to enforce TWIA’s status as the state’s provider of last resort for windstorm insurance, TWIA has seen an explosion in the number of policies in force and in its overall exposure. As of August 31, 2008, there were 224,468 TWIA policies in force – up from 68,756 in 2001- and TWIA’s total exposure was $66.6 billion.

However, prior to Hurricane Ike, TWIA could cover less than $2.1 billion in losses. As claims from Ike will eclipse TWIA’s reserves, Texas taxpayers will be forced to bail out the state for losses that should have been covered by TWIA were reasonable policies in place.

Fortunately for Texas insurance consumers, the Texas Sunset Advisory Commission acted on Wednesday to address the shortcomings in Texas insurance law. It recommended measures that will provide insurers greater clarity and predictability during the rate-setting process. More regulatory certainty will attract companies to Texas, expanding the choices available to consumers.

The Commission’s recommendations strengthened the transition to a true file-and-use regulatory system. If the Legislature follows suit next session, rates will respond more quickly to market conditions, and more insurers will compete aggressively for Texas consumers.

The Commission also took important steps to fix our broken windstorm insurance system. TWIA’s rates were too low because its methodology relied exclusively on Texas storm damage from the last 30 years, during which Texas saw only one major storm. But modern hurricane loss models have proven to be reliable tools for setting windstorm insurance rates. The Commission recommended that TWIA be allowed to join the rest of the world in using such models.

Finally, to slow TWIA’s dramatic growth, the Commission recommended that applicants for TWIA coverage be required to provide written proof of two declinations from windstorm insurers writing policies in Texas.

Enacting these measures during the upcoming legislative session will provide Texas consumers the benefits of increased competition and greater insurance availability. Texas’ homeowners’ insurance market will be better equipped to handle – and Texas’ tax dollars will be at much less risk from – the next catastrophic storm to strike our coast.

Drew Thornley is an economic freedom policy analyst at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.