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

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Lessons from the Texas Homeowners Insurance Crisis Abstract In this paper the recent crisis in the Texas homeowners insurance market is examined by focusing on three questions. First, how did the dual regulatory system influence insurer behavior? Second, which perils were important in driving the increase in prices observed during the time period of this study? Third, were other non-expected loss factors related to premiums leaving consumers in the potential position of misunderstanding why overall price increases were arising? The findings reported indicate that the market shifted to entities that were not subject to rate regulation and that, among perils, water losses were most important in their association with price levels. In addition, prior period losses and unexpected loss deviations were statistically related to current prices likely exacerbating consumer misunderstanding about why they were experiencing increases in their premiums. An implication from this crisis for regulatory authorities is that quick understanding then communication is crucial to ameliorating market disruption.
I. Introduction Lessons from the Texas Homeowners Insurance Crisis Whenever insurance markets show stress there is an opportunity for researchers to reflect on evident consumer anger, managerial reactions and regulatory responses. Indeed, when the insurance environment is in a condition that brings political and economic stakeholders to a common table, an experiment is created that permits exploration of a) why the problem was created; and b) the thornier issue of how the problem can be interpreted so differently across stakeholders. The recent crisis in the Texas homeowners insurance market provided such a case. Consumers became frustrated over prices and benefits, insurer management was challenged to find profitability in the homeowners line and regulators carried the burden of weighing protecting the people versus ensuring insurance companies’ solvency and ample supply. Questions remain about which factors caused upward price pressure and the role, if any, of a dual regulatory system of regulated and non-regulated rates that was in existence during the time of this crisis. The theoretical approach taken in this paper is grounded in the regulatory policy work of Meier (1991, 1998) whose thesis, when applied to insurance, suggests that regulatory policy changes depend on the competence and expertise of the insurance department vis-à-vis insurance consumer interest groups, insurer interest groups and the “political elites.” 1 Two challenges confronted by stakeholders in the Texas homeowners insurance crisis were product complexity and the differing consumer perceptions of the costs and benefits under the contract, further widening misunderstandings and challenging regulatory policy-making. For example, consider the scenario of an insurance customer who received substantial premium increases even though 1 See Licari (1998) for a general discussion of the framework of regulatory policy. 1
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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 and 12: To further explore the Texas settin
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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