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

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To explore the movement further, Table 2 details the results among the 10 leading insurer group writers of homeowners policies over this same period. Moving vertically down is the descending rank of insurer groups by the overall quantity of premiums written over the 1996 to 2001 period. The data utilized in assembling Table 2 was first examined by taking the total quantity of premiums written by an insurer group in a given year and seeing how the quantity was allocated between an insurer group’s non-regulated and regulated entities. In Table 2, the focus is solely on the percentage of an insurer group’s business attributed to non-rate regulated sales. Focusing on the “big three” — State Farm, Farmers and Allstate — it is clear that an increasing proportion of their premiums were being allocated to the non-rate regulated sector. With the exception of USAA, the data in Table 2 reveal that if an insurer group was not selling fully via a non-rate regulated entity in 1996 that it was doing so by 2001. 7 [Table 2 about here] III. Preliminary Analysis: Comparing California, Illinois and Texas To put the Texas dual regulatory results in broader context, we begin by comparing the Texas experience to California and Illinois during a similar time period because this permits a view into three of the five largest states that have contrasting regulatory dynamics and general data that were available. 8 The data are taken from annual report information filed by insurers 7 The data in Tables 1 and 2 were received under a 2006 data request from the Texas Department of Insurance. Proportions in non-rate regulated entities vary only slightly from the data used to assemble Figure 1 and Table 3, which were originally compiled in 2002 under a different data request. 8 See D’Arcy (2002) for a discussion of the Illinois deregulation experience. The California data came from http://www.insurance.ca.gov/RRD/RSU/MktShr2001/MktShr2001.htm and the Illinois data came from http://www.ins.state.il.us/, where in the latter the loss ratios for 1997 and 1998 are approximated from Figure 11 in this annual report. Texas data came originally from the site http://www.tdi.state.tx.us/general/forms/tdirpts.html. All data sets were originally assembled in 2002. Loss ratios do not consider other factors that positively affect an insurer’s profitability such as investment income and capital gains, yet it is a ratio widely considered by insurance management and regulatory overseers. 6
with the NAIC, and were sourced for this study from state-assembled datasets. Statutory page 14 of the annual report is a premium and expense exhibit that focuses on premiums, losses and expenses attributable by line of insurance and by state. The analysis considers all insurance entities that sold homeowners insurance in Texas from 1996 through 2001. It includes insurers that wrote policies in both price-unregulated companies and price-regulated companies. Thus, not only is it of interest to examine whether insurers have experienced rising costs, but also were the non-regulated companies, where prices are unconstrained by regulatory mandate, more profitable for insurers? Figure 1 and Table 3 depict loss ratio experience for homeowners contracts in the California, Illinois and Texas markets. While the risk attributes of an insured home in one state are difficult to contrast with an insured home in another state, the proportion of losses to premiums is comparable, particularly with regard to managerial sensitivity about the relative profitability of these markets. From 1996 through 2001, the California experience in the homeowners market was relatively stable, with a loss ratio fluctuating from a low of 0.48 in 1997 to a high of 0.64 in 2001. The Illinois experience was somewhat “u-shaped” with a relatively high loss ratio in 1996 (0.93), stability in 1997 through 1999, followed by a upward movement to a high of 1.08 in 2001. By contrast, the Texas experience over these years reveals a trend similar to Illinois but different from California, highlighted by the years where insurers had a loss ratio of 0.84 in 2000 and 1.18 in 2001; a losing business segment for the industry as a whole even before taking company expenses into account. 9 9 Statistical tests for differences between California and Texas loss ratios were significant at only the 0.08 level; however, the differences between Illinois and California, and Illinois and the Texas entities were statistically significant at the 0.01 level. The near-term trend in these results appears to be consistent with the widespread concern over profitability by insurance executives, which is highlighted in the October 2002 presentation, “What’s Keeping CEOs Awake at Night?” by Robert P. Hartwig, http://www.iii.org/media/industry/outlooks/unitedstates/. 7
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: [Table 1 about here] might have bee
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

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