Texas Coalition for Affordable Insurance Solutions

File and Use

20 Years of File and Use in Texas

From the brink of collapse to a competitive, healthy insurance marketplace.

Two decades ago, Texas’ homeowners insurance market was facing a near financial collapse, with consumers suffering both severe rate shock and availability issues following claims abuses from a “Mold Crisis” and the state’s flawed, unevenly applied promulgated rate system and a severely restricted promulgated policy system.

In response, the Texas Legislature in 2003 passed significant reforms (SB 14, 78th legislative session) that included the transition to a file-and-use regulatory system and policy form flexibility with prior approval.

Today, 20 years of file-and use has created a healthy combination of state regulation and competition that is working for both Texas consumers and insurers, even with today’s serious challenges of inflation and high losses (most from severe weather) affecting our state as well as the national and global markets.

Strong regulatory oversight protects consumers, ensures insurers can pay claims and operates on the basis of economics rather than politics. File-and-use enables insurers to adjust rates Incrementally based on market forces while meeting fiduciary and legal requirements to have the financing available to pay claims. Regulators have ample authority to ensure the market is properly priced and consumers are fairly treated.

Excessive rates avoided. The combination of competitive pressure between insurers and active state oversight has prevented excessive rates in the market. In fact, an analysis of combined loss ratios, a core indicator of insurance rate adequacy and performance, clearly shows that both homeowners and auto insurance have been priced very close to a long-term break-even level since the 2003 reform.

Texas has maintained a competitive market. Consumers have more choice as insurers are attracted and retained to the Texas marketplace. Currently, consumers can choose between 160 active homeowners writers, and more than 170 auto writers. Prior to the 2003 reforms, and in a smaller market overall, Texas had only around 100 homeowners companies, with many major writers refusing new business. Companies are willing to write in Texas despite the difficult loss environment because they generally have faith that they can make incremental adjustments to their rates and coverage options when solvency is threatened, in contrast to many other states.

Consumers have more options. Policy form flexibility with prior approval of policies by state regulators has provided both consumer protection from the state and a better menu of options for consumers seeking their personal balance between premium and coverage options.

How does file and use work?

Like many other states, Texas uses a file-and-use for rate management. This means that once an insurer files its rates with TDI, it can use them on their effective date. However, every rate is reviewed by TDI, which can disapprove it. If the filed rates do not meet these standards, TDI notifies the insurer. If the insurer does not change, withdraw, or provide better supporting information for the filing, TDI will take action to disapprove it. As a practical matter, the vast majority of rates are filed with TDI well before their use in the market, to ensure good communication with regulators and to minimize the chance of disruptions to customers that might occur in the case of a disallowed rate.

State law requires that rates:

Be adequate.
Not be excessive. An excessive rate produces an unreasonably high long-term profit compared to the coverage provided.
Be based on sound actuarial principles.
Be reasonably related to all costs (expected losses and expenses).
Not be based on the insured's race, creed, color, ethnicity, or national origin.

Texas Rate Filings

Of the 2,923 TEXAS homeowners rate filings reviewed by TDI in 2023 (Source TDI):

160 were withdrawn by the insurer prior to use.
100 were rejected for technical reasons prior to use.
0 filings were disapproved.
2,663 filings were allowed to stand or were approved.
TDI requested additional information on 74% of the filings.

California - A Cautionary Tale

California’s troubled insurance marketplace is a cautionary tale against a prior approval regulatory structure. Under California law, the elected insurance commissioner must approve rate hikes greater than 7% annually. Given the exponential growth in property and casualty payments, rate increase proposals well exceeded this threshold. However, the commissioner’s slow, bureaucratic approval process means that rates are out of date by the time an increase is approved.

California’s insurance marketplace is a third larger than Texas’, yet it has one-third fewer companies writing homeowners policies (103) as insurers – including seven of the 12 largest – have reduced their exposure by cancelling existing policies, refusing to write new policies, and, in some cases, abandoning the state’s insurance market entirely. At the same time, rates have risen by a whopping 35%. Such market swings, with artificially depressed rates giving way to massive corrections, disruptions in availability, and a general collapse in confidence from both consumers and companies, are very dangerous to both the insurance system and the overall economy of California.

Conclusion

Along with the rest of the country, Texas has weathered tough economic times and high inflation rates over the past few years. In addition, Texas has been subject to massive losses from natural hazards. The changes in the market have been challenging for both consumers and companies. As companies have dealt with the new normal of costs in our state to ensure their ability to pay claims, many consumers have had to deal with tough financial and coverage choices.

However, Texas has been better positioned to make needed changes, hard though they have been, because of our strong, balanced regulatory system. We have not been thrown into broad market instability as have been other states, but instead have maintained consumer availability and meaningful choice while working through the hard fundamentals of our insurance economics. As a result, consumers and companies have not had the added critical strains of dislocation and political risk created by the policies of some other states.

Texas policymakers should continue their active oversight of the insurance system in Texas, continue to assess the performance of our market-based system, and hold bad actors accountable even as they preserve the sensible market structure that has helped us avoid the deeper crises suffered in other states.