Montemayor Confident Reforms Will Level the Field for All Participants

Texas Insurance Commissioner José Montemayor and the Texas Department of Insurance have a big job ahead of them in implementing the regulatory reforms put in motion by the 78th Texas Legislature. In a recent interview with Insurance Journal, Montemayor shared his views on those reforms, expressed his confidence in his staff’s ability to implement them and commented on the additional authority given him by the legislature to oversee the insurance industry in the state. Following are excerpts from that interview:

Insurance Journal: From your perspective as insurance commissioner, can you describe the impact of the insurance measures passed by the legislature on the industry in Texas?
José Montemayor: Well, I will tell you. From my perspective, I think the measures passed by the legislature particularly in Senate Bill 14 were huge, were historical in nature. And I would definitely consider that to be landmark-type legislation.

For the first time, really, in our history—in our history—we’ve got every single personal lines carrier subject to rating standards, which we never had before. We had all of those exceptions and loopholes and, well not loopholes, but they were exceptions, where certain types of companies were just not subject to any kind of rating standard. That was a big deal. The fact that they’re all subject to rating standards is a huge step forward.

The second thing that’s huge is, really, for the first time in our history, it gives me the ability to either intervene if their rates are excessive or unfairly discriminatory or unreasonable to the risk to which they apply. That’s huge as well.

The third thing they did is they also provided for some incentives to encourage additional competition, primarily through the advent of more forms. And now that we have got everybody subject to rating standards, the worry about particular products not being fairly priced largely goes away. … That, coupled with a number of consumer protections, as it pertains to credit scoring and to several other aspects of the rating … I can’t imagine a stronger bill anywhere in the country that gives as many protections to consumers as this one. And as balanced as it turns out to be in terms of trying to get the industry to play by a level playing field.

IJ: What grade would you give the legislature regarding its insurance initiatives and why?
JM: What grade would I give them? I would give them an A+. No question about it. … They stayed their course. I think the governor, the lieutenant governor and the speaker deserve an enormous amount of credit for staying the course and keeping us all on track. And keeping this process rational.

IJ: Was the department involved in crafting the legislation?
JM: We were consulted a lot, we were used as technical resources a lot. And I’m very pleased because we were able to diffuse early on this whole concept of just simply by law going back to an appointed time and rolling back rates. And it was pretty easy to explain: ‘If you’re going to do that, why don’t you just roll the NASDAQ back to 2001 levels … and if you’re going to do that, why stop at 2001? I like 1957 a lot, can we go back to 1957?’ And it was fairly easy to be able to explain through those concepts what was rational and what was not.

To their credit, they (legislators) were under a lot of political pressure and there was demagoguery to be spared on both sides. And they were able to withstand that and stay the course. I’m very proud of that.

IJ: What more can be done to improve competition in the Texas property/casualty market while preserving affordability and fairness to consumers?
JM: I am sure that as good as this particular bill is we will learn things as we go about implementing it that will allow us to make further recommendations for the next legislative session. I think if we can get through the implementation of it, we will have gone a very long way to restoring some balance to the market. And I think that to the extent that there are lessons to be learned, to the extent that there are further opportunities for improvement, we will pick those up and be fully prepared to recommend those. But I don’t know of anything that we would have wanted to have, that we recommended, that is not in this law. Which is a big deal in my book. I think that they took every one of our recommendations, and they balanced it, they stayed the course—it’s as good as it gets.

IJ: SB 14 also handed the department a lot of responsibility.
JM: Yes it did. Without a doubt it handed us an incredible amount of responsibility. And, yes, I’ll probably be under a lot of pressure both from the industry and the consumer groups to do something fairly different.

Unfortunately I don’t have a better model to offer the legislature in terms of what makes sense. You’re either going to have a regulator or you don’t. To the extent that you do, then you’ve got give him some tools to work with. I think they did a very nice balancing job in doing that.

I will stay the course, although I’m sure at the end of the day the industry will be blasting at me for taking too much and the consumers for not doing enough. But you can be very sure that we will try our level best to be balanced and to be fair.

And to fulfill those responsibilities. I don’t have a better model to offer anybody, in terms of how could this be done, without taking the responsibility as well as the authority.

IJ: Will you have to add staff?
JM: We are going to be able to do a couple of things that will be very, very useful. First of all, since the benchmark system will be going away, and it’s very labor intensive, I will be able to basically re-deploy those resources into this. And secondly I will have research capability vis-à-vis our outside contractors or actuaries … I think this first, initial filing, that it will be very, very labor intensive. But we can get through it. … I’m very confident that we are adequately resourced.

IJ: What comes first?
JM: On June 11th when the governor signed the bill into law, it started the clock. Twenty days later I will have been required to get a filing from every insurance company writing homeowners. Forty days later I have to render a judgment on anybody that writes $10 million or more, which are some 40 companies, and then within 90 days, with day one being June 11th, I will have had to review everybody. And there’s something like 110 companies. We will get through it though.

We will get through it. We’re working on it. My hope is that we’re able to do a fair and balanced job. At the end of the day as I said we will probably not have anybody happy with us, but we would have discharged it as best as we could. Given our understanding of the market, given our understanding of claims, given our understanding of the competitive forces that may or may not be there, cost of capital, etc., we will arrive at fair prices.

As to what people expect, I’m hard pressed to give you a number as to what individuals should expect. But the one thing they should expect, is no matter where they go, who they buy from, what product it is, they can be very sure that it’s going to be fairly priced. Because we would have reviewed it and passed an opinion on it, and we would have the authority to intervene if it’s not fairly priced.

IJ: After Dec. 1, 2004, when new companies come in, will they be able to file rates and use them or will they have to be pre-approved?
JM: The way I read the law, is that I can certainly go immediately to a file and use to anybody coming in, into the market at this point. Because they will be brand new to the market and they can take a totally different approach. And I would expect that some people would. I’m expecting a few companies to file.

I really expect us to have a modernized market, one that is much more responsive to the needs of the market. Plus, one that allows more competition among the companies. And I think if you’re a consumer, what you can expect is, you can expect fair pricing, no matter where you go or what you buy. We haven’t been able to make those guarantees before.

I think everybody, everybody, is convinced that competition is what works best. Sometimes when competition stops functioning and becomes unraveled it eventually corrects itself. But it takes a little bit longer than if you had a backstop, or some sort of regulatory authority or structure to catch it. That basically allows it to correct itself quicker. And I think that’s what this bill does. It allows us to bring the system back in control and allow competitive forces to restore themselves.

I think essentially we have turned the corner on homeowners already. … Most of the steep losses are down, although we have had a few cats this year, due to hail or whatnot. But even there, I think the market has turned but it took a few years to make a correction. Probably could have happened a lot quicker had I had these tools in hand to begin with.

IJ: After these changes are implemented, do you see the big carriers, like State Farm and Farmers, coming back in?
JM: I hope so. I hope they see this as a leveling of the playing field where they do have an opportunity to provide coverage at a fair price and to get a decent return back. And to make sure that everyone’s providing it on a level playing field, as opposed to being at a competitive disadvantage. That’s how they view themselves in some lines of insurance currently.

IJ: SB 14 gives more authority to the insurance commissioner for regulating homeowners and auto rates in Texas. How do you combat criticisms that it hands too much power to the office?
JM: The reality is in order to be effective you’ve got to have some authority, and with authority comes a lot of responsibility. And we’re prepared to accept both, the authority as well as responsibility. We’re stewards of that authority.

IJ: Do you think the office of the Insurance Commissioner will ever be an elected one here in Texas?
JM: Well there certainly have been debates. In front of the National Conference of Insurance Legislators, I was representing the appointed side, and Carroll Fisher from Oklahoma was representing the elected side, and we both sort of gave our views on it. Certainly it would represent a totally different dimension. And I know that my fellow commissioners that are elected have got an enormous role to do raising capital for their political race. I would see that as a real hindrance, a real burden as a commissioner.

On the other hand, they have a lot more latitude if they’re elected as opposed to appointed. But you know, the way that it’s done in Texas, realistically, it’s probably the best of both worlds. You have a nomination from the governor, you have confirmation from the senate, and you are basically locked into a term. … (The term) is every two years. It’s pretty brutal. You’ve got go through a confirmation process. …

I’ve got to tell you there’s advantages and disadvantages to both. I think the way Texas does it right now is probably as effective as you can get.
IJ: Do you see a political life beyond that of insurance commissioner?
JM: You know, I’m having difficulty seeing beyond the next two years. Senate Bill 14 implementation is going to take a lot. While I do think about it, I enjoy public service a lot. Certainly political life allows you to do a lot of public service, that’s what you do. But the reality is that I’m very focused just doing this job over the next two years. And that’s going to be my entire focus.

But it’s an interesting question, I should give it some more thought.

Topics Texas Legislation