Lessons from the Texas Homeowners Insurance Crisis Bob Puelz ...

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[Figure 1 about here] [Table 3 about here] Further, in Figure 1, it is of interest to note that insurer profitability in a deregulated environment such as Illinois is worse than the regulated Texas and California counterparts. While it may be the case that the deregulated market was composed of a higher-risk profile and pricing that did not anticipate this profile, another view of the Illinois experience is that consumers were benefiting because of the closer relationship between premiums and losses. That is, taking the view that losses arise as random events, then the premium cushion in Illinois was small relative to the Texas and California experiences from 1996 through 2000, suggesting this deregulated insurance market was prone to reasonable pricing. IV. Texas Homeowners Experience Interstate comparisons aside, closer exploration within Texas also yields interesting findings. Recall from Table 1 that the predominant insuring intermediary for the Texas homeowners market was the non-rate regulated entity; hence, overall industry profitability in the homeowners market is heavily weighted toward this business form. While the non-rate regulated insurers had loss ratios in Texas below their rate-regulated counterparts from 1997 through 1999, this legal form experienced deterioration in their loss ratio sooner after 1999. In 2000, the loss ratio was much higher in the non-rate regulated entity, indicating that insurers’ overall operating performance suffered relative to the benefits received by consumers. Note, however, that rate- regulated performance by 2001 nearly caught up, because the slope of the trend line for companies that are rate regulated is more steeply sloped. 8
To further explore the Texas setting, Figure 2 provides a more complete view of profitability by considering approximated “combined” ratios of the top five writing entities in the Texas homeowners market from 1996 through 2001. The entities — State Farm Lloyd’s, Allstate Texas Lloyd’s, Farmers Insurance Exchange, Fire Insurance Exchange and USAA — wrote about 68% of the Texas homeowners market in 2001. The results in Figure 2 illustrate the upward trend in these insurers’ homeowners losses from their most profitable point, 1998. Among the top five writers, USAA was clearly the most profitable entity yet its diminishing insurance profitability trend has been upward, too, though not as severe as their competitors. From 2000, the trend had been particular severe for State Farm Lloyd’s and Farmers Insurance Exchange. In all cases, it appears that it would have been difficult for insurers to continue offering homeowners coverage without raising prices to consumers. [Figure 2 about here] Thus, it is clear that the insurance industry in Texas had been losing money underwriting homeowners insurance in this market, and the rate at which they were losing money was trending higher for rate-regulated companies. This leads to a regulatory conundrum: While capping or lowering rates may be, in the short-run, politically appealing, the prospect of moving to a more rate-regulated environment moves insurance management into a box. On the one hand, insurance firms are about taking risk; that is what they do. On the other hand, no business proposition where a product or service has expected costs that exceed its expected revenue ought to be offered. In this event, management is better off doing nothing rather than participating. 9
Page 1 and 2: Lessons from the Texas Homeowners I
Page 3 and 4: I. Introduction Lessons from the Te
Page 5 and 6: Illinois with company-level data to
Page 7 and 8: [Table 1 about here] might have bee
Page 9: with the NAIC, and were sourced for
Page 13 and 14: amounts are summarized in Table 4.
Page 15 and 16: [Figure 4 about here] One glimpse i
Page 17 and 18: the average household size of an oc
Page 19 and 20: units that have been classified as
Page 21 and 22: as equations in levels. The Hansen
Page 23 and 24: while variations in perils help exp
Page 26 and 27: Table 1 Texas Homeowners Premiums W
Page 28 and 29: "Combined" Ratio $1.80 $1.60 $1.40
Page 30 and 31: Table 5 Texas Statewide Homeowners
Page 32 and 33: 35% 30% 25% 20% 15% 10% 5% 0% 60% 5
Page 34 and 35: Cumulative % of Texas Counties 100%
Page 36 and 37: Table 7 GMM Estimates of Empirical
Page 38: Harrington, Scott E. and Greg Nieha

Lessons from the Texas Homeowners Insurance Crisis Bob Puelz ...

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