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

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