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

This may have been part of Farmers strategy to announce their intention to not sell homeowners
insurance. 10
While it appears clear that insurers have not done well in the Texas homeowners
insurance market, the aggregate data among market share leaders do not reveal the sources of
their difficulty. To explore the source of losses by peril, a dataset compiled by the Texas
Department of Insurance (TDI) that attributes and isolates Texas losses by peril is examined
across all insurers operating in Texas. The data include loss frequency and loss severity
information for homeowners (HO), farm and ranch owners (FRO), tenants (TN) and dwelling
(DW) for the 1996 through 2001 time period, although only homeowners data are used in the
subsequent analysis. Further, the data are broken down by six perils, in particular, if the cause of
loss was fire, wind, water, theft, vandalism and malicious mischief (VMM), a catch-all “Other”
category for property losses not fitting into these categories and, finally, a liability loss category,
Section II of the homeowners contract. 11
The loss data have the redeeming feature of being broken down by peril; however, losses
represent only paid losses rather than paid losses plus an amount set in reserve for losses incurred
but not yet paid. In other words, the data used in this section make insurers look more
“profitable” than their economic reality. Losses defined as “incurred losses” were reported in the
data used in the preliminary analysis section because they were available and arguably provide a
fuller explanation of insurer contractual responsibility and insurance operating performance.
Because paid losses and not incurred losses are used in this section, distinctions in annual loss
10 The complete answer to Farmers strategy is no doubt more complicated and might have included political
maneuvering, managerial and regulatory obstinacy and other positioning strategies.
11 The data is derivied from the residential stat plan exhibits and includes premium and loss information
associated with the Texas Windstorm Insurance Association (TWIA). According to Gary Gola of the TDI, “the
policy counts and Exposure for TWIA are not included as that would be double counting since the TWIA is a
supplement to a regular Homeowners policy.”
10