A Texas state senator recently asked, “How might we offer something to consumers that at least gives them the opportunity, albeit for less coverage, to be able to pay less price” for homeowners insurance?

That’s a good question. Texas has some of the highest insurance rates in the country. Of course, some of that has to do with the fact that between hurricanes, hail, floods, and tornadoes we have some of the worst weather in the country. Another reason, however, is that Texas also has some of the heaviest insurance regulation in the country.

Heavy regulation of homeowners insurance forms, i.e., coverage mandates, by the Texas Department of Insurance (TDI) caused the mold crisis of 2002-03 that cost consumers at least $900 million. Then the Legislature “solved” the mold crisis by regulating homeowners insurance rates, which led to years of more heavy-handed regulation by TDI. More recently, the Legislature has suppressed windstorm insurance rates, forcing insurance companies and consumers to subsidize policyholders along the Texas coast.

All this has increased the cost of capital for insurers and made them very hesitant to commit capital to the Texas homeowners insurance market. Basic economics teaches that a restricted supply in the face of increasing demand means higher prices.

There are two main ways to address this and reduce homeowners insurance prices in Texas.

First, change the law to eliminate rate and content regulation.  Consumers are quite capable of bargaining with insurance companies about what coverage they want and what price they are willing to pay.

Second, we have to reduce the excessive regulatory structure at TDI. Since TDI is largely funded by “self-leveling” fees levied on regulated companies, it has faced very little of the budget pressure that other state agencies have over the last few years. Whatever the budget is for TDI, for the most part the agency has the authority to set its fees at the level needed to fund its operations. The Legislature should eliminate the self-leveling aspect of all TDI’s fees, and subject its budget to the same scrutiny that most other agencies face.