Insurance Reform: a State of Neglect

We must regulate the insurance industry because its product (home and auto policies) is complex - so much so that most citizens don't adequately understand what they're buying. They need protection from the state, but the state of Texas has woefully neglected that responsibility.

HOT presents "State of Neglect" -- a growing collection of important articles from The Dallas Morning News, Forbes, and other sources. Highlights include:

We're #1. Texans still pay the highest average insurance premiums in the country for reduced coverage, some six years after sweeping reforms were supposed to help. Texas homeowners have not seen the rate relief they were promised (see Upward Trend, below) and really don't want to be #1 in this category.

How High? Texans pay an average annual premium of $1,409, compared to the national average of $804. That's based on a 2009 report by the National Association of Insurance Commissioners (NAIC) using the latest data available (from 2006).

Data Accuracy? NAIC obtained insurance data for all other states from the same sources, including the American Association of Insurance Services. Texas data, however, came only from the Texas Department of Insurance (TDI). Why? Are they hiding something? We'd expect TDI's data to make Texas look better than is really is, since TDI is controlled by the industry. Does that mean Texas is in worse shape than presented?

Upward Trend? NAIC says that insurance rates are up compared to $1,372 in their previous report. This conflicts with industry data from the TDI, which says rates are down. Who's telling the truth? In mid-2009, The Dallas Morning News reported on average statewide homeowners insurance rate increases of 6.2%, 10-12.6%, and 8.5% for Allstate, Farmers and State Farm, respectively. These are by far the state's largest insurers, with State Farm alone accounting for 1.2 million homeowner and rental policies.

The Weather? Industry officials blame high rates on Texas weather patterns, which includes hurricanes, hailstorms and tornadoes, as well as a rash of mold claims. But The Dallas Morning News did their own statistical analysis of weather patterns and found that Texas' premiums were 50% higher than that analysis would justify.

Obscene Profits? The Texas insurance industry received more than twice as much money in premiums than it paid in claims. While it's true that natural disasters in 2008 eroded about $1 billion in cash reserves, insurers took in some $23 billion in premiums while paying out about $9.6 billion in claims from 2003 until 2007, the last year for which full data is available.

Favorable Politics? The insurance industry enjoys a business-friendly political climate in Texas. At least 120 industry lobbyists and millions of dollars in political donations have influenced the legislative process in their favor. Money buys influence, and lots of money buys lots of influence.

Big Money Talks. Members of the Texas House Insurance committee received over $16 million in contributions between 2000 and 2008, according to the Texas Ethics Commission. Members of the Senate Business and Commerce committee received over $47 million. That's especially significant, because there are far fewer state senators than representatives. Since contributions are not equally distributed, some lawmakers got millions from the insurance industry. The Dallas Morning News reports who gave the most.

Insider Advantage. Texas laws allow a "revolving door" between industry lobbyists and Capitol insiders that include insurance commissioners, lawmakers and their staffers, and staff members of the Governor's office and other state agencies.

Deception? Insurance lobbyists don't just influence the process; they write the bills that become law and then get legislative friends to introduce the bills. These bills are often so deceptively written that no one can understand them -- not even experienced attorneys. (See example below.) This is obviously deliberate so lawmakers won't understand what they read and can only understand what they're "told" about the bills.

Consumer Voice? Against such odds, consumer advocacy organizations have been ineffective at best, and the industry has been emboldened because of it. HOT hopes to change that by extending its 2009 success against on the $35 billion homebuilding industry and next challenging the bigger insurance industry. That's a tall order, so we need contributions and volunteers.

Regulate Homebuilding Too. Homeowners insurance and homebuilding are related, because construction defects and shoddy work from unlicensed and unaccountable contractors is a major cause of the "epidemic of mold claims" that insurers complained about when they fought for insurance and tort reforms. One of the best ways to eliminate the cause of insurance claims is to enforce strict building codes that result in safer homes, and that's what we'll push for in the next legislative session.

Less Coverage. The 2003 insurance reforms allowed insurers to write policies that cover fewer risks, including wind and water damage and mold contamination. So the full coverage that once was routine no longer exists in many policies. Millions Texans now have bare-bones policies -- often at the same or higher costs than they previously paid.

Cash-Value. Millions of others have cash-value coverage that substitutes depreciated value for replacement cost. The cost of comprehensive coverage is just too high.

File-and-Use. Our regulatory system is upside down. File-and-Use allows insurance companies to charge higher rates immediately after submitting proposed rate increases to regulators. If TDI later disapproves the requests, consumers should be reimbursed, but the state often faces years of court battles to challenge the new rates. Allstate, Farmers and State Farm each took their cases to court when the state said their rate increases were excessive. The insurance industry should have the burden of justifying rate increases, rather than forcing the state to prove that they're too high.

Prior Approval. The Texas Sunset Advisory Commission recommended Prior Approval as an alternative regulatory "tool." We recommend it as a replacement for File-and-Use, returning to the type of regulatory scheme that existed before 2003, when regulation worked.

Transparency? Rate setting is far from transparent and open to public scrutiny. Farmers Insurance sued to block the Open Records release of its rate filings to The Dallas Morning News, claiming they are proprietary. We'd like to know, what are they hiding?

Credit Scoring. Now insurance companies are starting to use the controversial practice known as credit scoring, which uses calculations that include homeowners' credit histories to set premiums. This way they can cherry-pick the most profitable customers and ignore minorities and low-income markets. A poor credit score can cost consumers 35% or more on home and auto insurance even with clean claim histories. California, Hawaii and Maryland are among the states that have already banned the practice. Texas should too.

Caveats. NAIC describes caveats regarding the use of average insurance Premium or Rate for comparison, because the annual premium is based on the size and value of insured property, perils covered, specific limits and deductibles, and other factors the policyholder chooses.

More Detail. State of Neglect includes lots more detail, including a list of useful links if you want even more.

Industry-written Laws

Here's an example from Chapter 5.26 of the Texas Insurance Code. It shows how laws written by industry lobbyists can conceal their true intent. Subsections (a)-(h) were far easier to understand, but Subsection (i) nullifies them all and points elsewhere without context. There's only one reason for writing such convoluted laws: deception.

(i) Notwithstanding Subsections (a)-(h) of this article, on and after the effective date of S.B. No. 14, Acts of the 78th Legislature, Regular Session, 2003, rates for homeowners and residential fire and residential allied lines insurance coverage under this subchapter are determined as provided by Subchapter Q of this chapter, and rates for other lines of insurance subject to this subchapter are determined as provided by Article 5.13-2 of this code, except that on and after December 1, 2004, rates for all lines of insurance subject to this subchapter are determined as provided by Article 5.13-2 of this code.

This example shows why consumers need good representation in the legislative process and the fact that it has not had it so far. HOT, which was established just over a year ago, had the unique mix of legal, legislative and analytical experience required to decipher the hidden deception in HB-2295. HB-2295 was a bill that homebuilders introduced last session to extend the TRCC for six more years. As with the current Insurance Code, HB-2295 had several provisions that appeared to favor consumers, but it took days of in-depth analysis by our entire staff to uncover and then reveal the true intent. This significant effort on our part helped us convince enough lawmakers to vote against the bill and eventually convinced the builders to pull it down. And the TRCC enjoyed a well deserved Sunset.

If you want insurance reform and other consumer protections, please make a personal contribution using the DONATE button on the left. We're up against a formidable foe and need your help.