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

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the structure of the Texas homeowners insurance market appeared tenuous when Farmers, the second-largest writer of homeowners contracts, announced their intention to cease writing or renewing homeowners insurance contracts in Texas. During this time frame, Green (2002) noted that consumer complaints about excessive rates in Texas rose 3,000% between the second quarter of 2001 and the second quarter of 2002, putting politicians on notice by their constituencies. Noteworthy to the debate was the observation that Texas law permitted a dual regulatory system, opening a path for insurers to sell contracts through non-rate regulated entities. In 1991, Texas moved to a +/- 30% benchmark flex-rate system for property insurance rates but left a loophole in the law that exempted Lloyd’s entities from this rating law, effectively omitting them from the benchmark system. 4 State law clearly offered an incentive to insurers to switch blocks of policyholders to non-rate regulated underwriters or for customers to switch from a regulated insurer to a non-rate regulated insurer that might be in a different insurer group. Table 1 suggests a migration took place to a market where prices were not regulated. 5 Media and subsequent political reactions linked deregulation and rising prices, implying that insured homeowners were being charged rates that were not justified. 6 Texas policies “have historically covered damage arising from the continuous and repeated seepage of water. In virtually all other states, water damage — the most common cause of loss in homes — is covered only if it is of a sudden and accidental nature.” 4 According to the Texas Department of Insurance, “Farm Mutual, County Mutual, Lloyd’s and Reciprocal Insurers are exempt from insurance laws unless specifically stated in its Chapter or unless the specific law actually names the type of company in the article.” For example, A Lloyd’s company exemption may be found in the Texas Insurance Code, http://www.tdi.state.tx.us/commish/code.html. For discussion about this issue, see the research report prepared by the House Research Organization of the Texas House of Representatives, http://www.capitol.state.tx.us/hrofr/interim/int77-1.pdf, in which it is discussed that Lloyds companies were originally exempt from the 1991 benchmark pricing system because “they comprised only 20% of the market and generally covered specialty risks at rates lower than the standard rates.” 5 Another important phenomenon might have also occurred that led to the movement by insurers to use an unregulated entity to insure customers. That is, Lloyd’s rates may have been lower for consumers than the regulated rates, which gave an opportunity to agents to increase agency market share. This would be encouraging anecdotal evidence of competitive activity in this market. 6 By contrast, Brough (2001) and Harrington (2000) have argued that insurance consumers are best served by competition and deregulation. Moreover, as noted by a referee, the intention of opening a deregulated market 4
[Table 1 about here] might have been for it to serve in place of a Fair Access to Insurance Requirements (FAIR) plan residual market alternative. 5
Page 1 and 2: Lessons from the Texas Homeowners I
Page 3 and 4: I. Introduction Lessons from the Te
Page 5: Illinois with company-level data to
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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