Frequently Asked Questions About Insurance Reform

Rising Rates and Rate Regulation
• Why are Texas homeowners insurance rates rising so dramatically?
• What’s the best way to stabilize Texas’ market, and improve insurance affordability and accessibility over the longrun?
• Doesn’t Texas need more - rather than less - insurance rate regulation?

Use of Credit Information
• Why do insurance companies need to use credit information?
• Is credit information really a valuable indicator of potential risk?
• How are consumers protected against misuse of credit information?

Finding Insurance
• What do consumers do if they can’t find insurance for their homes?

Rising Rates and Rate Regulation

• Why are Texas homeowners insurance rates rising so dramatically?

Several different factors are contributing to Texas’ high homeowners insurance rates.

First, Texas experiences some of the country’s harshest weather and with its extremely diverse geography, floods, tropical storms, wind, tornadoes and hail all regularly affect Texans and their homes — leading to more damage claims and pricier insurance premiums for homeowners.

Another key contributing factor to soaring rates has been the growing statewide anxiety about mold. Today, Texas leads the nation in both the number of mold insurance claims and the number of mold-related lawsuits. Media attention, excessive litigation and a lack of scientific evidence have continued to spark further claims, driving up costs for homeowners coverage.

Finally, outdated state regulation has contributed to the situation, by limiting choices for consumers and discouraging competition among insurance companies in Texas. Due to restrictive rules, insurers can’t adequately or appropriately respond to changing market conditions - like the mold situation - so they’ve suffered extreme losses, and some have had to stop writing new homeowners policies. With fewer companies competing for Texans’ business, consumers are facing elevated rates and diminished options.

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• What’s the best way to stabilize Texas’ market, and improve insurance affordability and accessibility over the longrun?

Texas needs to update how the insurance industry is regulated. The right regulatory reforms will let consumers enjoy the benefits of a healthy, competitive market, while safeguarding them from potential abuses through strong market conduct and financial standards.

In states where insurance companies compete freely for business based on the product they offer, the prices they charge and the service they provide, consumers have greater choice.

Illinois and South Carolina are two examples of states with smart, reasonable regulation. In both cases, costs have gone down, more companies are writing insurance policies and public officials are receiving fewer complaints.

For example, according to the Illinois Department of Insurance, "Through market conduct reviews, vigilant solvency surveillance and general marketplace monitoring, the department has ensured a stable, viable and competitive marketplace...The current open competition environment works best for both Illinois consumers and insurers."

Five years ago, South Carolina legislators decided to let the automobile insurance market set rates, and "So far, it seems to have worked well, resulting in smaller insurance bills for many drivers...and more than 100 new companies writing autoinsurance policies in the state," according the Charlotte Observer (July 2001).

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• Doesn’t Texas need more - rather than less - insurance rate regulation?

No. Stricter rate regulation simply doesn’t improve insurance affordability and accessibility. In fact, it often has the opposite effect, forcing rates up and insurers out of the marketplace.

For example, according to a Wall Street Journal (April 2002) editorial about New Jersey’s automobile insurance market, "....after three decades of trying to regulate its way to lower prices, and with the whole system about to crash, maybe it’s time for a change of strategy. [New Jersey] could always try good old American competition instead of discredited command-and-control."

Massachusetts has regulated auto insurance using one of the nation’s strictest rate regulation systems since 1979. Not only does the state consistently have some of the country’s highest rates (it’s currently ranked 5th most-expensive nationally), but since the system began, half of Massachusetts’ auto insurance providers have left the state.

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Use of Credit Information

• Why do insurance companies need to use credit information?

  Insurance protects consumers by letting them transfer the financial risk of owning a home or driving a car to their insurance companies. So, insurance companies must be able to assess the risk of existing and potential policyholders.
  
  Risk-assessment tools - like credit information - help insurance companies develop premiums that match customers’ risk. This keeps insurance costs down by helping ensure that only policyholders with high risk pay higher prices, while those with lower risk pay lower prices.
  
  Most insurance companies use limited credit information to help assess insurance risk, as certain credit characteristics have proven to be valuable indicators of the potential for filing claims.
  
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• Is credit information really a valuable indicator of potential risk?

  Yes. Multiple studies have established credit information as an effective, objective tool for assessing risk.
  
  One impressive example can be found in a 2000 report published for the Casualty Actuarial Society Forum. James Monaghan, ACAS, MAAA, conducted the study, comparing the claim histories of about 170,000 drivers and homeowners with certain credit characteristics commonly considered in insurance risk assessment. For each characteristic studied, the study found a strong correlation between credit and losses.
  
  Additionally, the study showed that credit information predicts an individual’s risk potential independently of other factors, such as age or driving record, and sometimes even more accurately. For example, individuals with bad credit and clean driving records actually caused 27% more in claim losses per premium dollar than people with good credit and poor driving records.
  
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• How are consumers protected against misuse of credit information?

  The Texas Department of Insurance (TDI) monitors and supervises how insurance companies use credit information. And the Texas Coalition for Affordable Insurance Solutions (TCAIS) endorses strengthening such safeguards through the following principles for regulation:

  • Notification of credit information use. Require insurers to notify consumers in writing that credit information is used by the company to help assess risk.
  • Explanation of denial, cancellation or rate increases.
  • Require insurers to:
    • provide a written explanation to denied consumers of why they were not offered coverage, if due to credit; and
    • provide a written explanation to existing customers, upon request, of why they received a rate adjustment or cancellation notice, if due to credit.
    • No “sole basis restriction.” Prohibit insurers from using credit information as the sole factor in denying, canceling, or not renewing a home or auto insurance policy.
    • No penalization for lack of credit history. Protect the young, elderly and those with cultural practices that shorten their credit histories by limiting the use of lack of credit history (or "thin files") as a determining factor in denying coverage. However, insurers may petition TDI to allow thin files to be used in setting premiums, since a short credit history is sometimes an indication of identity theft and fraud.
    • Restrictions on types of credit information used. Prohibit insurers from using certain credit information - such as medical collection information and disputed information under investigation by a credit bureau - to help assess risk.
    • Reevaluation of credit report errors. Require insurers to reevaluate policyholders at their request if they discover errors on their credit reports.
    • Accurate and timely credit information use. Require insurers to reexamine consumers’ credit information periodically and, when necessary, adjust their premiums accordingly.

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Finding Insurance

• What do consumers do if they can’t find insurance for their homes?

  Despite the insurance difficulties being experienced in Texas today, there are still dozens of companies offering homeowners insurance.

  The best consumer resource for finding insurance is the Texas Department of Insurance (TDI). TDI’s Web site, www.tdi.state.tx.us, has plenty of useful information for Texans shopping around for insurance; in fact, the department recently launched a separate Web site, www.helpinsure.com, designed especially to help Texas consumers find the right insurance company for them. If, despite their best efforts, a consumer can’t find a company to insure their home, then they should:

  1. Collect and write down the details about the following information:

  • why the home is being denied;
  • location and condition of the home;
  • type of plumbing used in the home, such as copper or PVC; and
  • maintenance records from the current or prior homeowner.

  2. Call TDI at 1-800-252-3439. The more particulars the consumer can provide, the more the department can help.
  
  For consumers who are having trouble finding homeowners insurance, TDI’s Market Assistance Program (MAP) can also help; just call 1-888-799-6277. Other resources for finding insurance in Texas include www.insuretexas.org, and the Texas Coalition for Affordable Insurance Solutions (TCAIS) Web site, www.tcais.org.

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The Texas Coalition for Affordable Insurance Solutions (TCAIS) is a proactive alliance of insurance providers and trade organizations, committed to working with state legislators, regulators, consumers and others to find public policy solutions that will improve insurance affordability and accessibility in Texas.