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September 30, 2006 The Texas Coalition for Affordable Insurance Solutions is committed to providing information to help Texans understand insurance and to assist in making wise decisions about their insurance needs. This month we’re taking a look at ways the new regulatory system is improving the homeowners marketplace. We’ll also review some terminology sometimes used to describe the health of the insurance marketplace. The Way We Were We all remember the “bad old days” in Texas insurance. Just a few years ago, our state faced a serious availability crisis as a result of the mold crisis and State-mandated forms. People purchasing homes had trouble finding a provider for their homeowners insurance. Rates were skyrocketing and many companies stopped writing policies or left Texas altogether. Solvency (or an insurance company’s financial ability to pay out claims) was a real danger as companies were paying out more money to policyholders than they were bringing in. Misleading Statistics Some media reports focus on the “pure loss ratios” over the last three years to describe the health of the insurance marketplace. However, “pure loss ratios” don’t give an accurate picture of financial health of the insurance industry because they only reflect the ratio between premiums collected by an insurer and claims paid out to policyholders. “Combined loss ratios” are the true measure of insurance company costs because it includes the expenses of doing business. These expenses include taxes, payroll, claims processing, employee benefits, etc. – on top of paying customers’ claims. For example, a retail store may appear “profitable” if you just subtract sales income from the cost of goods sold. But if you add in employee salaries, rent, and advertising (all of which are hard costs of doing business), the profit might disappear. So scrutinize the statistics you hear before drawing a conclusion about what are true profits and losses in the insurance business. Availability and affordability for consumers have improved and losses in the Texas insurance marketplace have stabilized in the past three years, due in part to a regulatory system called “file and use,” which is designed to promote stability and competition and allow insurers to respond quickly to their customers’ needs. The promise of the “file and use” system attracted 27 new companies to Texas since the passage of insurance reforms, according to the Texas Department of Insurance. After the insurance crisis early in the decade, we saw a “snapshot of stability” in 2003 and 2005. As opposed to examples of excessive profits, 2003 and 2005 were examples of financial adequacy to maintain the marketplace. Insurance companies, like many other long-term businesses, don’t operate or determine rates based on “snapshots” in time; they must evaluate 5 to 10 year periods when addressing risk and the insurance environment. Without such careful consideration, insolvencies can occur as we just witnessed on a large scale in Texas when Texas Select was unable to pay its claims, burdening the Texas Guaranty Fund with its insolvency. Basing insurance rates on risk and long term projections are critical to maintain the health of the Texas insurance marketplace.Sincerely, Home - About
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