Insurance 101 >Insider Newsletter
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2009 Texas Insurance Loss Data:
Companies writing homeowners insurance in Texas had a better year than 2008 but still saw a net loss after expenses
The Texas Department of Insurance (TDI) recently released aggregate loss data for the Texas homeowners insurance market. The average combined loss ratio (the claims payments and policy expenses per dollar in premium) for the homeowners line in 2009 was 102.4%. In other words, insurance companies spent just over $1.02 for every dollar of premium collected, resulting in an overall loss. These high losses are especially interesting in light of the fact that Texas was not hit by a hurricane or tropical storm last year, potentially the most expensive loss event for the marketplace. The data illustrates the difficult diversity of risk in Texas, where a variety of bad weather including hail, tornados, ice storms, thunderstorms, and fire can lead to staggering losses. Add the risk of hurricanes, and it is plain to see that Texas is a very high-risk environment for property and casualty insurance.
Texas insurers must simultaneously compete to offer good prices while pricing risk properly to guard solvency in the long term. Since the 2003 insurance reforms in Texas, 29 new companies have entered the market and insurer combined loss ratios and premiums have begun to stabilize, in large part because - unlike states like Florida (see below) - Texas policymakers generally recognize that the most important attributes of a healthy market are for insurers to be able to pay claims to customers and for the marketplace to be competitive on price and product.
A recent press release by the Heartland Institute underscores this point: “If the industry is losing money in years without a major storm landfall, how can they protect their customers when hurricanes hit?...Texans will not be able to buy private insurance if the companies are driven out of the state due to continual losses. Consumers are best served when solvent companies are unshackled in the market to provide the best coverage at the best prices.”
As noted in the TDI loss chart below, over the last 18 years the average combined ratio in Texas is 108. Looking at loss experience since the regulatory reforms of 2003, the average combined loss ratio is just under 100 which is the the break-even point (a ratio below 100 indicates a profit and above 100 indicates a loss.) The report states "combined ratios provide a better snapshot of the state of the market. The combined ratio takes into account a company’s expenses for agent commissions, overhead, and administrative costs."
Understanding Insurance Profitability
Profit and loss are key components of insurance competition, which in turn are the key to a well-balanced, stable, responsive market environment. Insurers do not set rates to recoup previous losses, but set rates based on data that helps predict future losses. Such losses are only a matter of time in coming, and have been realized time and again - particularly in Texas - as over the past two years the state experienced more claims losses than any other state - including 5 times more losses in 2008.
To be prepared for extraordinary events, insurers spread risk over a large number of people as well as over time. Insurance profitability is properly viewed over a period of several years, not a single year’s performance. To be responsible to its policyholders and the marketplace, insurers must price in a manner that recognizes the risk, realized or not, in each individual year. The combination of individual actuarial pricing by companies, competitive pressure, and solvency regulation yields a more stable market with more options and predictability for consumers and the financial resources to pay claims when risk inevitably becomes reality.
Because Texas weather is so severe and unpredictable, it is all the more important for insurance regulation to be both predictable and rational. The results of unsound action include the creation of availability problems, rate spikes, and the risk of insolvency, which puts the entire Texas economy at risk. Look no further than the recent debacle in the Florida insurance market - where government intervention in the insurance marketplace has created availability and solvency issues. In fact, a recent investigation by the Sarasota Herald-Tribune found that more than 1 in 3 Floridians with private insurance are currently covered by a company showing some sign of trouble. According to the Tribune report, "lawmakers and regulators have ignored warnings and encouraged private companies to stretch their limited cash further. They have pushed companies to insure more and more homes without increasing the money set aside to pay claims, a practice that put state residents farther out on a limb." |
