The recent decisions by Farmers Insurance and Allstate Insurance to withdraw their proposed homeowners’ insurance rate increases in the face of opposition from the Texas Department of Insurance are an unfortunate turn of events for Texas consumers and taxpayers.
The regulation of homeowners’ insurance in Texas has for years produced poor results for consumers.
Remember the mold crisis earlier this decade when rates skyrocketed because 70 percent of all mold claims in the country were filed in Texas?
Two things were behind the high rates: trial lawyers and a mandate by TDI that all Texas homeowners’ policies cover mold and other water-related damage. Once the department removed the mandate, rates began to fall rapidly.
More recently, the state’s rate regulation has undermined the ability of insurers to adequately account for costs and risk. The three largest property insurers in the state-State Farm, Allstate, and Farmers-are effectively unable to adjust their rates based on market conditions, instead having to seek “prior approval” from TDI for any rate adjustment.
Allstate’s filing sought to account for rising construction costs since Hurricane Katrina that have increased the costs of claims. Anyone who has recently built or remodeled a home could testify to this problem. Yet TDI indicated it would not approve the increase.
At the center of TDI’s opposition to Farmers seems to be the company’s plan to differentiate the rates paid by homeowners in areas of the state with less risk, including North Texas, and those who live in high risk areas, such as the hurricane-prone Gulf Coast.
“The increases are heavily weighted toward the coast, which may be appropriate because of the risks,” said TDI spokesman Ben Gonzales. “But we need to see more documentation.”
In fact, the risks along the coast are well documented by the approximately $125 billion in damages caused during the 2005 hurricane season.
Nowhere is the hesitancy of TDI to allow insurers to adjust for risk more evident than in the case of windstorm insurance.
For years, TDI has kept rates offered by the state’s Texas Windstorm Insurance Association well below the level needed to cover losses from a major storm. While TWIA is supposed to be a provider of last resort, these below-market rates have resulted in a dramatic increase in policyholders and exposure.
Policyholders at TWIA have gone from 68,756 in 2001 to 173,404 earlier this year. A Rita-like hurricane strike on Galveston could expose TWIA to $5 billion in claims, but because TWIA can only cover around $1 billion in losses, Texas taxpayers would pay the rest.
Besides creating this substantial risk to taxpayers, TDI’s rate regulation has forced ratepayers across the state to subsidize both homeowners’ and windstorm policies along the coast.
The focus on rate regulation has also diverted resources from ensuring the solvency of companies. Much like TWIA, companies forced to offer below market rates may be unable to cover claims against their policies, leaving many homeowners at risk of having no insurance at all.
Ultimately, TDI’s regulatory stance has brought about reduced investment and competition in the Texas insurance marketplace. Insurers assess risk years into the future, but today they can’t even predict what their income will be next year. This has a chilling effect on Texas’ ability to attract capital and new insurers; over time, the absence of both will keep rates artificially inflated.
In the world of cell phones, electricity deregulation, and e-commerce, Texas consumers are sophisticated shoppers accustomed to making thoughtful decisions about our purchases. Insurance is no different.
The upcoming sunset review of TDI provides the Texas Legislature a great opportunity to end the department’s role in rate regulation. It should take advantage of this-TDI’s efforts at consumer protection do more harm than good.
Bill Peacock is Director for the Center for Economic Freedom with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.