Legislative Reform (2003)
At the beginning of the 78th Legislative Session in 2003, Senate Bill 310 was signed into law requiring rate information to be filed by the top insurers writing homeowners insurance, and also requiring TDI to prepare a summary report of the findings to the legislature. Among the key findings:
- The Department determined that homeowners rates increased statewide an average of 45% between 2000 and early 2003. The increase would have been at least 65% without the Department's actions to modify the coverage under the HO-B policy form and to approve individual company policy forms.
- A portion of this increase would have occurred under a rate-regulated market due to deterioration in experience, even in the absence of mold claims.
- During the 2002 policy forms conversion process, companies generally reduced rates by an average of 13.5% because of the limitation in coverage.
- The Department estimated that individual company rates could be further reduced anywhere from 0% to 25% from their rate levels in early 2003. The companies reviewed were evenly distributed within this range.
Based on information obtained from the SB 310 report, legislation was passed in SB 14 designed to bring stability to the market and address the recent problems of availability and affordability experienced by Texas consumers.
- Rate Standards. Rate standards applied to all companies authorized to write home and auto insurance, making these companies subject to rate regulation. Rates may not be unreasonable, unfairly discriminatory, excessive, or inadequate for the risks to which they apply.
- Rate Reductions. All companies were required to file their rates, and 32 of the top groups (representing 95% of the market) were ordered to reduce their rates by an average of 12%.
- Rate Filings. Subsequent changes to initial rate filings before December 1, 2004 were subject to prior approval by the Department; after that date, rates subject to file and use.
- Form Flexibility. Companies allowed to file alternative policy forms instead of using state- promulgated forms; all forms subject to prior approval by the Department.
- Credit Scoring. Provided limits on use and application. Made models subject to public disclosure.
- Prior Approval as Sanction. After file and use took effect in December 1, 2004, Commissioner may order a company to be subject to prior approval of rates if rating practices or financial condition warrant; may also require prior approval if a statewide insurance emergency exists or if an insurer petitions an order disapproving rates.
Aftermath of SB 14
Two large insurers filed legal challenges to the SB 14 rate reduction orders; one settled with the Department a year later, reducing its rate going forward and issuing a discount to policyholders. The other case remains in the courts, and as of this writing there is an outstanding multi-million dollar refund order pending. A third large insurer filed a legal challenge one year after the SB 14-ordered reductions, and this challenge was eventually settled as well with a rate reduction and refund to policyholders.
TDI has twice used the sanction of prior approval in response to questionable rating practices, and in each case the Department's action was overruled by the courts. Currently the Texas Sunset Advisory Committee has recommended that the Legislature clarify the conditions under which TDI can move a company to prior approval, and this recommendation will be considered in the upcoming legislative session in 2011.
The initial rate reduction orders resulted in an average statewide reduction of 4% (less than projected 12% due to the legal challenges by two large insurers representing 40% of the market). By 2006, under the new system, average statewide homeowners rates were 13.5% lower than 2003 rates ( see Exhibit 1).
The regulatory tools provided by SB 14 have enabled the Department to affect market stability as well as significant savings to Texas policyholders ( see Regulatory actions resulting in policyholder savings).
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