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

More documents

Recommendations

Info

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
amounts are summarized in Table 4. Estimates for loss reserves can be substantial as reflected by the difference in columns (2) and (1) for the 2001 year, where incurred losses are about 22% greater than paid losses. 12 [Table 4 about here] To explore “by peril” effects, the dollar value of a property loss claim from 1996 to 2001 is reported in Table 5, “Texas Statewide HO Loss Information by Peril.” In this table, the dollar amount of loss is normalized per policy and by the dollar value of exposure in each year; the latter being a statistic that is sensitive to changes in building costs and inflation. 13 Examining columns (1) and (2) reveals that the magnitude of wind and water claims bears a substantial weight in total loss costs. Furthermore, while fire, wind, theft and VMM have been relatively stable contributors to loss costs over time, the magnitude of water losses more than doubled between 2000 and 2001 on a per policy and a per $1,000 of exposure basis. The Other and Liability categories showed an increasing percentage change in severity from 1996 to 2001 on a per policy and per $1,000 exposure basis. 14 [Table 5 about here] [Figure 3 about here] 12 The substantial differences between paid and incurred losses during the latter years of the period examined might exist due to the protracted settlement process of mold claims. 13 See http://www.casact.org/pubs/dpp/dpp90/90dpp559.pdf . 14 The information used in the Table 5 and Figures 3 through 5 was found originally (2002) at the Texas Department of Insurance Web site, http://www.tdi.state.tx.us/general/forms/tdirpts.html, that, according to Gary Gola at the TDI r 11
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 and 10: with the NAIC, and were sourced for
Page 11: To further explore the Texas settin
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 ...

Create successful ePaper yourself

Delete template?

Save as template?