TCAIS Insider

Texas Coalition for Affordable Insurance Solutions

January 22, 2007

When the Insurance Marketplace Works, Consumers Have Choices

The culture of insurance in Texas has an interesting history.

It all started back in 1937 when insurance was not a real marketplace and instead operated in a “protectionist” environment. That is, Texas companies didn't want any competition from companies from other states, so the government set prices, wrote the forms, and guaranteed companies could make money, no matter what. Every insurance company looked the same. Consumers essentially had no choices for prices or products.

By the 1990s, Texas saw a need for change. The insurance marketplace had become sophisticated, with many companies operating nationally. Insurance capital investment was not likely to come to Texas without an opportunity to be unique and compete for market share. Recognizing the trend, Texas started to move toward a modern insurance system to attract that capital and grow competition.

For 15 years, we've had ongoing reforms to attract capital and provide consumers with choices in the homeowners and auto insurance marketplaces. Most recently, reforms were enacted to usher in a new day of competition through a “file and use” regulatory system for home and auto insurance.

“File and use” is working effectively in the Texas auto insurance market. Ads are all over the television, radio and billboards. New companies are coming to Texas. Consumers have real opportunities to shop and reduce their own rates. All of these are signs that the marketplace – and competition – is thriving. Companies are spending resources to attract new customers and consumers have more choices than ever.

While “file and use” is working in auto, development of the homeowners insurance marketplace has been more sluggish. Regulatory uncertainty has slowed new product development and stalled additional capital investment in Texas. Demands for rate rollbacks are used as populist credentials by some who hope to politicize insurance. The repeated call for insurers to base their decisions on some notion of politics rather than good business practices is highly destructive to competition.

Short-sighted, insurance public policies, even though they may be temporarily popular, are devastating to the market and cost consumers in the end. For example, the mold crisis, largely a product of the state-mandated homeowners policy of the late ‘90's, cost the Texas economy in excess of $2 billion. It took $2 billion in insurance premiums out of the economy and out of consumers' spending power, and landed the majority of that money in a pseudo-economy based on bad information and fear. The vast majority of these resources moved into the pockets of a handful of lawyers, unregulated mold remediators, and in the worst cases, perpetrators of fraud. Such is the danger of one-size-fits-all regulation.

Instead of politics or short-sighted insurance public policy, consumers exercising choice in the marketplace should set the insurance climate. The regulator can remain ever vigilant of fraud, solvency and deceptive practices while recognizing that insurance is a business like any other.

Consider again the auto marketplace, where file and use has been more effectively implemented. Figures from the Texas Department of Insurance describing the auto market in Texas are remarkably flat, even boring. Loss ratios and profits for auto are stable, rates are adjusting through the marketplace and competition is thriving – all signs of an insurance market that's working. It's what a good insurance market is supposed to look like.

The same can be true in homeowners insurance if we resist the urge to cut insurance out of the business herd and instead acknowledge the power of a marketplace allowed to function in a competitive environment.

Look at what happened in Illinois. In the 1970s, the rate regulation in Illinois was allowed to expire and for a period the state had no insurance rating law. Before legislators developed a new rating law, they realized nothing spectacular or devastating was happening in the insurance marketplace. Quite the contrary. Good things started to happen. Rates stabilized, more companies came to Illinois and rates came down. The state continued to regulate for fraud, solvency and deceptive practices, but let the marketplace set rates and forms. Thirty years later, competition still exists and is thriving in Illinois homeowners insurance. The market works if you let it.

Our current homeowners regulatory culture scares off capital that might otherwise land here in our economy. Stalled competition and a lack of choices cost Texas consumers. Misguided regulation of the insurance marketplace puts citizens and business at risk because it has the potential to slow down the entire Texas economy. We need public policies and regulations for Texas homeowners insurance that foster competition, provide choices for consumers, and keep the economy churning with new investment.

Sincerely,
Beaman Floyd
Executive Director, TCAIS