Senate bill on homeowners insurance a start towards needed reform
There were two certainties as I joined fellow lawmakers in Austin this January for the start of the legislative session. There was a doom and gloom forecast for state government due the comptroller's prediction of a nearly $10 billion budgetary shortfall. And even before budget news sent shockwaves from the panhandle to the border, Texans from all points between were up in arms over the volatile situation involving the insurance industry.
As early as last fall, the homeowners insurance crisis rated as the number one consumer issue heading into this year's session. The problem came to a head when the state's second largest insurer threatened to pull out of the market last fall. Their departure would have left some 700,000 Texas policyholders unprotected. Farmers Insurance claimed it was losing too much money, the result of enormous payouts caused by a mushrooming number of water and mold damage claims.
Meanwhile, consumers were clamoring for more control over homeowner insurance rates that increased, by some accounts, as much as 200 percent over the past two years. But even in 2001, Texans were already paying nearly $400 more than the national average for homeowner coverage.
Many blame the increases and high rates on a change in state law during the 90s that's resulted in 95 percent of homeowner policies being unregulated. The intent of the change was to provide small companies the ability to insure high-risk customers. Soon however, large companies saw a way to enter the unregulated market and quickly took advantage.
Industry experts will tell you that traditionally, rates are higher in Texas due to extreme weather conditions. They readily point to 2001 when Hurricane Allison ravaged the Gulf Coast just a year after downtown Fort Worth and Tarrant County were partly dismantled by a tornado.
But although mold has been around nearly as long as salt and pepper, the tremendous increase in the number of claims, mostly in Texas, literally obliterated time-tested actuarial tables. The increases have been pinned to public hysteria after hearing of the dangers associated with strains of mold thought to be highly toxic.
Soon, a brand new industry was launched as mold remediation experts pounced on a public whipped into a frenzy by reports of toxic mold that could cause - among other maladies - asthma attacks, nerve damage, even death. And although the health consequences were at least somewhat exaggerated, the dollar and cents costs of settling mold claims were not.
In the first quarter of 2000, the Texas Department of Insurance has record of 1,050 mold-related claims. For the last quarter of 2001, more than 14,700 mold claims are on the books. Insurers said the total for mold claims paid for that period amounted to $3 billion. Claims that previously averaged about $13,000, peaked at $36,000 a year later.
With the crisis now well-defined, within the first weeks of session, tough talk echoed from committee hearings on the issue of insurance reform. By the end of February, the first bill emerged, effective immediately. It ordered insurance companies to open their books in supplying to the insurance commissioner, information on rates and how they are determined. Under the threat of penalty and full disclosure of private records, insurance companies were told to submit information in time for a report by the Commissioner to the Legislature in 30 days.
From those reports, Commissioner Jose Montemayor was able to determine that insurance premiums have in fact increased by 45 percent on average since 2000. Present homeowner rates he said, overcharge anywhere from 12 to 25 percent. The Commissioner also found that while rates have increased, the actual coverage provided has decreased by at least 22 percent.
Earlier this month, the Senate approved a bill that brings regulation to both home and auto policies. Under Senate Bill 14, the Commissioner will have the power to set insurance rates. Any requests for rate increases must be filed with the Commissioner, who will have up to 60 days to approve or reject proposed rates before they would automatically go into effect. Critics argue that rate increases should require prior approval.
Legislation calling for a rate rollback could not win majority approval. With one exception, the vote divided along party lines.
Considerable debate on the Senate floor focused on the use of credit scoring. While 67 percent, of Texans polled - including myself - favored an outright ban on the use of the practice, majority rule defeated an amendment that would do just that. Instead, the approved legislation bans the use of any disputed credit information. Insurers must also make public, the methodology used in determining credit scores.
While credit scoring will continue, the discriminatory practice known as redlining will not. Under current law, insurers are able to charge a different rate within the same city or county. Rating manuals include the use of neighborhood and ZIP Code information. For example, companies can offer a rate preferable to North Dallas based on location alone, that differs from an equal property and other equal factors in Oak Cliff.
With the will of the body, I was able to pass an amendment to Senate Bill 14 that will stop insurance companies from offering better rates to preferred neighborhoods. If this bill is passed into law, the territory used in determining a rate cannot be divided within the same county.
Clearly, there remains a ways to go in bringing true insurance reform to Texas. In theory at least, elected officials are to be responsive to the needs and will of their constituencies. The question to ask is has your Senator, your representative, your elected official fought this and any other battle in a way that will best benefit you, the voter, the consumer?