Can Politicians Put the Homeowners Market Back Together Again’

As what could become one of the most competitive election seasons in recent Texas history takes shape, it should come as no surprise that the homeowners crisis affecting consumers virtually statewide has taken on prime political importance. With both a gubernatorial election in November and a new legislative session set to begin next January, politicians are scrambling to stake out their positions on the issue.

But given that homeowners rates are increasing for constituents regardless of their political persuasions or economic class, the issue does not lend itself to the usual antagonism between Democrats and Republicans—at least in the sense that there isn’t one party in favor of some form of homeowners market reform and another against it. The question now seems to be not whether more regulation of the market occurs, but when and what sort of regulation. Of course, that’s not to say that candidates, especially in the gubernatorial race, don’t see opportunities to make political hay out of the issue.

By now, both Republican Gov. Rick Perry and Democratic challenger Tony Sanchez have unveiled proposals to address the crisis. In substance, they bear considerable similarities to one another, which points to the fact that both right- and left-leaning constituencies have both felt the effects of rate increases.

Sanchez makes the first play
Tony Sanchez made his insurance reform plan public in February, decrying the fact that increasing numbers of homeowners are having to pay higher premiums for less coverage. Specific provisions of Sanchez’s plan include drafting new laws requiring insurers to justify proposed rate increases—including county mutuals and other units not currently subject to state regulation—as well as empowering the Texas Department of Insurance (TDI) to secure lower rates for homeowners. Also, the candidate’s plan calls for new laws requiring carriers writing business in Texas to offer regulated HO-B policies to consumers, as well as restricting companies’ ability to transfer their policyholders into unregulated units (where 95 percent of all Texas homeowners policies are currently written).

In addition, Sanchez’s plan would restrict use of credit scoring and other “inappropriate” underwriting criteria in considering new policy applications, and set up a fast-track appeals process for consumers whose homeowners claims have been denied. The insurance commissioner would also be granted authority to deny carriers with substantial market share the ability to write other lines of coverage if they stop writing homeowners policies.

Perry: unafraid of the “R” word
Gov. Perry announced his own homeowners market proposal in May, following a report by Attorney General John Cornyn and a TDI investigation of insurance marketing practices, which suggested unfair or fraudulent pricing practices and inconsistent uses of credit scoring, respectively, by some insurers.

Perry’s reform plan included empowering TDI to review all insurers’ rates, as well as to impose either across-the-board or company-specific rate freezes during the rate review process, which would last 45 days. The plan would also ban using credit scoring to set rates—except when direct correlations between consumers’ credit histories and insurance risks can be shown.

The governor’s proposal also calls for the use of more policy forms such as the HO-W, which he contends will provide rate discounts between five and 40 percent, and also allow consumers to pick and choose which coverages to include on their policies. Perry also proposes faster claims responses, which would include licensing and regulation of mold remediators, as well as state oversight of public adjusters. TDI would also have the authority to order carriers with records of historically slow claims responses to address claims within 48 hours. Furthermore, Perry’s plan proposes tort reforms to prevent collusion between lawyers, remediators, and public adjusters to inflate claims.

Legislators to tackle crisis
Regardless of the outcome of the gubernatorial race this fall, the Texas Legislature will be the ultimate arena in which any proposals to address the homeowners crisis, including the next governor’s, will be hashed out and turned into law. There, lawmakers will weigh the insurance industry’s likely argument for less, or certainly no more, regulation against consumer advocates’ and, apparently, either Perry’s or Sanchez’s push for more oversight of carriers.

Sen. Mike Jackson, R-La Porte, has already initiated hearings on the homeowners issue as chairman of a subcommittee looking into the crisis. “I got appointed as a subcommittee chairman to study this issue for both homeowners insurance and automobile insurance,” he explained. “Our charge is really to look at this shift from regulated to non-regulated. We’re in the middle of taking testimony on that issue now, with a report for the next legislative session.

“We’ve taken on this task, to hear from the companies,” Jackson continued. “We’re going to also hear from people that are affected by it, as well. We’re gonna get a cross-section of everybody affected by it. Anybody that’s interested, that wants to testify, we’re gonna hear from.”

As far as the national forms hailed by Gov. Perry and various industry representatives as ways to alleviate the current crunch consumers are experiencing, Jackson commented, “We hear that, but the question is, how long? Right now, we’ve seen homeowners with a doubling of their premiums, without any claims at all. But yet, your homeowners insurance is gonna double.”

Sen. Leticia Van de Putte, D-San Antonio, will also be closely involved with the homeowners issue in the next legislative session, and serves on the same committee as Jackson. “I think the industry is going to have to be very aggressive in a public relations effort, because legislators are not going to shoulder it on their own,” she explained.

Providing some perspective on how the current crisis evolved, Van de Putte said, “Many things have contributed to rising costs. Certainly increased claims (play a part), but the nature of the market—companies were wanting to be very competitive, and they may have had a loss ratio of $1.07 for every dollar they received in premium.

“But they turned around those premium dollars and invested in the market, and got better than the $0.07, so it didn’t matter,” the senator continued. “I think since the downturn in the market, bad real estate investments on the West and East Coasts … they can no longer afford $1.07 in payout on a dollar premium.”

Increased rates are not the only issue on Van de Putte’s radar, however: “I think the Legislature is going to be looking at the issue of credit scoring, as most companies are now using that sort of model.”

The options
Interesingly enough, Jackson the Republican seemed to decry the effects of deregulation more fervently than Van de Putte.

Jackson identified what will likely prove the major point of contention in the upcoming legislative debates: “What we’ve really got the choice of is just totally deregulating everything, which—I find that argument a little bit hard to believe from the insurance companies, that if you do that, it’ll be better. If you look at it right now, 95 percent of all the homeowners policies in the state of Texas are not regulated—they’re in that arena already.

“Where’s the beef?” the senator continued. “Basically, that’s what we’re looking at: Do we totally deregulate from one end of the arena, to obviously what we have right now with a benchmark system and the ability for a company to go above or below that benchmark? That’s not working, because they’re all escaping that type of system.”

Sen. Jackson then named market reforms likely to be considered in the next legislative session. “Another system is a file and use system, where a company gives information on what they’re going to do and then the commissioner O.K.’s that. Another one is prior approval, where the companies submit everything they’re gonna do, and that’s probably the most regulated environment that they could get in, where everything has to be approved prior to them writing any policies in the state.

“I certainly haven’t made up my mind yet, but from testimony and everything that I’ve heard so far, total deregulation—we’ve seen examples in other states where deregulation has lower prices compared to the more highly-regulated states,” Jackson said. “Again, I get back to my old question: If 95 percent of policies are written outside of regulation, how come we’re going through the roof with claims? I don’t have that answer yet—we’re certainly going to be delving into it with a whole lot of interest, and hopefully a whole lot of participation from both sides of the aisle, from insurers to the insureds.”

Van de Putte identified similar, if not identical, priorities for the next session. “What the Legislature will be willing to do depends on how badly people complain,” she said. “I have not been a fan of the benchmark system. I would rather we bring everybody under the umbrella—Lloyds, county mutuals—and not do anything about rates but let the market prevail. I want the insurance commissioner to have solvency and market conduct—if you’ve got tough market conduct and solvency, I think the rates will take care of themselves. I think we’re spinning our wheels on the benchmark system.”

A non-partisan issue
Both Jackson and Van de Putte used personal examples to show just how wide-ranging the effects of the homeowners crisis have become: “I don’t see anything partisan about it—my personal policy was canceled,” Jackson said. “I was sent a notice of non-renewal. I had an HO-B policy, and then they decided they weren’t going to do that anymore. You’re basically being asked now to pay higher premiums for less coverage, and higher deductibles, and—without any doubt in the world—a whole lot less coverage.”

Van de Putte, who spent the entire 2001 session out of her house because of mold infestation, noted how the homeowners crisis has reversed some political leanings on the committee: “I can tell you, my two colleagues on the committee—I’ve never heard Sen. (Troy) Fraser and Sen. Jackson be as angry … They’re pretty free-market guys, and they are talking about regulations.

“I don’t represent anybody that has a $350,000 home, and they do,” she continued. “The insurance industry has problems when Leticia Van de Putte, who’s a Democrat representing an inner city, is more of a moderate on the issue than Jackson and Fraser.”

Bracing for a long haul
Both senators predicted lengthy deliberations before any substantial policy addressing the crisis would materialize.

“I would think that we will all probably be on the same page, from the committee’s perspective,” Jackson said. “When you get to the full Senate, anything goes. We’ll make our recommendations based on the most informed on the issue, and then look at alternatives on where we can go, and try to make a decision based on good public policy. Then the House of Representatives has its say, as well.

“This could take a while,” Jackson continued. “This issue affects just a very big percentage of the population in the state. You talk about homeowners, but you also talk about the people that are in apartments. The landlords there also have to buy insurance, so that affects the monthly rate that people pay for housing.”

Velma Cruz Silva, legal counsel for Van de Putte, noted, “I don’t think anyone doubts how important insurance will be, and how in the forefront of people’s minds insurance issues and regulation will be in the upcoming session. Most of the big players in terms of legislators will be back, and so with everyone in the state—every legislator in the state has constituents that are being affected by this. By the same token, I know Dan Lambe at Texas Watch and Rob Schneider at Consumers Union are also kind of formulating their way to go with this for the next session. There is no way that it’s not going to be just a big, huge, fat, hairy deal.”

Crisis already averted?
The probability of legislation next year affecting the homeowners market isn’t lost on the insurance industry, but it’s not exactly playing defense yet. Many industry representatives have instead touted the introduction of national policy forms into the market as the best way to address the problem—additional regulations would only hinder the market recovery.

Ernie Stromberger, executive director of the Independent Insurance Agents Association of Texas, reacted in a statement to the gubernatorial candidates’ proposals for greater market oversight, “The candidates are doing a good job of talking about the symptom of the problem, which is rapidly increasing rates paid by consumers, but they are not talking about the cause of the problem, which is rapidly increasing claims resulting from Texas’ unique prohibition against allowing consumers the option to lower costs by choosing to buy less coverage.

“The irony of Gov. Perry’s advocacy of rate controls to solve the problem is that he has already solved the problem,” Stromberger continued. “He deserves credit for taking a leadership role in removing that prohibition against consumer choice in policy coverage, through TDI actions allowing companies to offer forms other than the coverage-rich HO-B form. Once the changes he has championed are implemented in the next 12 months, the homeowners market should begin to regain stability.”

Sandra Ray, public affairs director for the Southwestern Insurance Information Service, explained the industry’s perspective on how the current crisis came about: “The Texas insurance industry has been fraught over the years with catastrophe claims and weather-related claims. Insurers expected that, and tried to write their premiums in accordance with future predicted loss. We had a benchmark system that had been put in place in the early 1990s, which put restraints on insurance companies.

“The benchmark system gradually used data that was two years old,” Ray continued. “Between 1995 and 1999, we had rate decreases and very small increases, as costs continued to rise … Then insurers were blindsided by mold. Suddenly they see on top of what their exorbitant losses already are—insurance companies have lost billions of dollars over the past two years. Just recently, insurers have been asking the TDI to address this problem—they saw it coming a year and a half, two years ago, when the first round of mold claims came out…”

Regarding the proposals made by Perry and Sanchez, Ray said, “I guess it took a gubernatorial campaign, or an election year, to bring this out into the forefront, to get the TDI and the legislature to address this issue. If that’s what it takes, then insurers needed to have this issue addressed.

“Just recently, the TDI allowed companies to write broader forms of coverage, to use a different form other than the normal state-mandated form,” Ray continued. “That sent a very positive message to insurance companies who were thinking of leaving the state of Texas because they could not afford to stay.”

Playing defense
As far as the gubernatorial candidates’ reform plans and the pending legislative session gearing up to take on the issue, Ray commented, “These two proposals (from Perry and Sanchez) amount to a considerable amount of political football. Homeowners right now are very concerned about their rates, as insurance companies are concerned about how much they’ve had to raise rates—insurance companies don’t like to raise rates. They do this based on business decisions. They have to be able to pay the claims of all policyholders, including the one percent that has filed mold claims and continues to file mold claims.”

Ray continued, “We do expect that the Legislature will be addressing the issue. We hope that as the legislators become more educated on the insurance situation here in Texas, that they will not try to re-regulate markets, because regulation forces artificial prices in the marketplace. It would not be conducive to keeping insurance companies financially solvent and able to do business in the state.”

Calls for more regulation
Consumers Union Southwest Regional Office Senior Staff Attorney Rob Schneider isn’t sold on the notion that national policy forms alone will solve the homeowners crisis.

“I think there’s some agreement—I’d guess I’d put it, not any disagreement about things like establishing some time frames for water damage claims, enhanced penalties, things like that,” Schneider said. “Some better oversight of public adjusters … I think the real conflict between the consumer side and the industry side has to do with what form of regulation we have.

“Some in the industry are still touting how the Illinois model—a kind of hands-off deregulation model would best protect Texans, which is a pretty ridiculous claim at this point,” Schneider continued. “We’ve had our experiment in deregulation for homeowners, and the result is that rates have shot throught the roof, and people don’t have predictability or stability in rates. To me, that’s a lot worse—that’s as bad or worse a problem than Texas having the highest rates in the nation.”

Responding to the contention that new policy forms will ease the homeowners problem, Schneider said, “I disagree—I think that Texans understand what’s going on, and they understand that the reason that they may not see as large an increase with the new policy form is that they’re getting less coverage. It’s not that the costs or repair from damages go away, it’s merely who pays for it that’s changed … I agree with both (gubernatorial) candidates when they talk about the need for real choice in forms, but at least Gov. Perry has been touting these new policy forms that come online as choice for consumers, and we disagree with that.

“Those choices have really been only insurance company choices, because companies are free to set whatever rates they want, and if they don’t want to sell, for example, remediation coverage, they just price it at a point that’s not affordable,” Schneider said.

“One thing that typifies the homeowners insurance market from year to year in terms of losses—in a regulated system, you take steps to spread those losses over a longer period of time,” Schneider continued. “Consumers are essentially paying more in good years and less in bad years. What this past year showed us was, when given the opportunity, many insurance companies will try and recoup all of their losses in a single year. That has really profound policy implications for the ability to afford a new home, the ability to plan budgets from year to year, and so forth.”

Credit scoring battle looms
Schneider also said Consumers Union would be setting its sights on insurers’ use of credit scoring in Texas: “I don’t know if Sanchez has said this or not, but Perry has said that we need to do something about credit scoring. We agree with that—again, the devil is in the details. I think until companies can provide a rationale, a connection between a person’s credit history and how likely they are to be struck by a hailstorm, then they’re going to have a tough row to hoe to justify the use of credit scoring in homeowners insurance.”

Push for prior approval
Dan Lambe, executive director of Texas Watch, echoed Schneider’s argument that deregulation of the homeowners market has not worked. He explained what many consumer advocates would be pressing for in the next legislative session: “As far as solutions, the thing we’re looking at as the most important piece of the pie is how we’re gonna bring the homeowners marketplace back under regulation. I think everybody has to be included in the process—the Lloyds have to be included under the same program, the same as all the standard companies.

“What we’re looking at is a prior approval system,” Lambe continued. “We believe that right now, with the deregulation of forms, with the lack of oversight in the rate setting process, we believe that with the increasing diversity of policies … the commissioner’s office should be having the first whack at looking at what these companies want to charge—before they start charging them.”

Topics Carriers Texas Auto Legislation Claims Homeowners Market