In the waning hours of the 78th Legislature Texas lawmakers passed Senate Bill 14, the long-awaited insurance reform bill, giving additional power to the Insurance Commissioner to control residential and automobile insurance rates and holding out the promise of lower premiums for Texas homeowners.
Early in the session, Gov. Rick Perry declared insurance reform an “emergency issue.” Lawmakers have been studying and negotiating insurance issues throughout the session, but were unable to agree on a compromise regulation measure until late on Sunday, June 1, the day before the session ended.
Reducing homeowners insurance rates was a top priority for legislators and mandatory rate rollbacks were included in an early version of a House bill. Mandatory rollbacks didn’t make it into SB 14, but according to Texas Department of Insurance estimates, reform of the regulatory structure contained in the bill will cause homeowners rates to drop by as much as 12 to 18 percent on average.
“Insurers beware,” remarked San Antonio Senator Leticia Van de Putte upon passage of the bill, “today marks the end of your reign of charging homeowners excessive rates.”
The Independent Insurance Agents of Texas views SB 14 as a victory for consumers, insurance companies and independent agents. In a joint statement, IIAT president Andre Juneau and IIAT executive director David VanDelinder, said “We believe rates will come down under this new bill for two chief reasons: marketplace competition will increase and the state will begin implementing a new system of insurance regulation.”
The National Association of Independent Insurers, on the other hand, is taking a wait-and-see approach in regards to whether the new law will foster healthy competition in the homeowners insurance marketplace. “Legislation can stifle or stimulate more competition in a marketplace,” said Donald Hanson, NAII southwest regional manager. “It all depends on how the law is implemented.”
As noted on the Senate Web site, SB 14 uses a hybrid approach to increase the regulation of residential property and automobile insurance markets. Under the deal, most homeowners insurers would initially operate under a prior approval system for rates. Beginning Dec. 1, 2004, the regulatory system moves to file-and-use. Personal automobile insurers remain under the current benchmark system until Dec. 1, 2004, at which time they, too, move to a file-and-use system.
Under the bill, the Commissioner has the authority to change a company to a prior approval system anytime if it is determined that it is abusing file-and-use. Forms used by insurance companies would be subject to approval by the commissioner.
“Overall, it turned into a reasonable bill,” said Joe Woods, assistant vice president of the Alliance of American Insurers’ southwest region. “Long-term, the change to file-and-use for homeowners is a good thing. The immediate change to file-and-use for commercial auto is a positive change. The rating territory issue in there is going to be problematic for some companies. We’re going to have multiple rating territories per county that can have no more than a 15 percent variation in rates. In the large urban counties I think that’s going to be a problem for some companies. … [But] they’ll be able to work with it.”
Although the House favored banning the use of credit scores in underwriting altogether, the final version of the bill allows the practice but authorizes the commissioner to set the maximum increase and decrease in rates due to credit scoring. Credit information can be used by insurers as long as it is not the sole basis for setting rates, and insurers would be subject to the public information act concerning their underwriting guidelines. As such, consumers will be able to access information showing how their credit history relates to their insurance costs.
The IIAT believes the bill may open up more coverage options for consumers, especially in the area of water damage. The association said one of the goals of this legislation is to offer consumers coverage options from which they can select to insure their homes. VanDelinder explained that consumers should not expect to see the return of broader coverage until insurers begin to see an improvement in claims costs from such losses.
IIAT also expects the bill will encourage companies currently not writing insurance in Texas to take another look at the second largest insurance market in the country “now that the legislature has passed a bill that creates a system similar to that used in other states,” Juneau said.
“We applaud not only the Texas House and Senate in giving rate and form control back to the Commissioner, but also the governor for demanding that Texans be given access to homeowners insurance that is both fair and equitable.”
The NAII’s Hanson noted, however, that the additional authority given to the commissioner under the bill “gives the regulator more power to exercise control over the marketplace. Depending on how this power is exercised, we could have the problems that plagued New Jersey. We will be working with the Commissioner, legislators and the Governor to ensure that does not occur.”
Hanson added that the “regulatory changes implemented by the Commissioner last year, along with the new law will help to bring some relief to consumers. The major question that remains to be answered is will this legislation be enough to encourage insurers to enter and in some cases re-enter the Texas marketplace.”
Under the new measure, insurance companies will be required to re-file their rates and supporting data with the Commissioner as they did earlier under SB 310. “The companies are in for some short term pain with this re-filing for prior approval,” Woods noted. “But at least the [House] conference committee changed it back to where it’s the Senate bill version, where they can reference the data they already filed for Senate Bill 310.”