Watch the Skies, Weather Still Causing Trouble for Homeowners Markets

For the past year, while the Texas homeowners insurance market reeled from the effects of mold claims on premium (and still does), homeowners markets in other states have begun bracing themselves for similar nightmare scenarios. But considered from a wider perspective, the mold issue will likely turn out to be not quite the market breaker it has so far seemed to be. For Oklahoma, Arkansas, Louisiana and even Texas, that distinction belongs to something far more devastating and much less predictable: weather.

Although the acute effects of skyrocketing mold claims on the Texas homeowners market, not to mention the wariness of surrounding states of the problem spreading to their markets, could hardly be downplayed, insurance carriers and regulators are working to reduce exposures and recoup losses (albeit by raising homeowners premiums in some cases). In essence, Texas is trying to get a handle on its situation, while other states are working to make sure similar debacles don’t happen in their markets; and once the Texas market recovers from its predicament, the threat of mold could well be permanently diminished. However, one might not want to make such a claim when it comes to weather exposure.

Don Hanson, southwest regional director of the National Association of Independent Insurers (NAII), noted that steps now being taken will eventually de-fang the mold issue: “We’re paying right now for problems that began with the HO-B policy form in 1991, and were never fixed,” he explained. “Over about an 18-month period, beginning in 2000 and lasting through 2001, it just got ugly. And we’re paying for that now. The problems are getting fixed, so now we’re on the backside of the curve.”

Hanson also pointed out that so far, mold exposure has by and large remained a Texas problem. “The level of impact to insurers (in Arkansas, Louisiana, and Oklahoma) hasn’t been anywhere near what it’s been in Texas. The insurance companies have not been required to go into those states and amend their policy forms—it really has been kind of localized in Texas.”

Texas: under control?
The Texas homeowners market may indeed be on the backside of the curve, as Hanson suggested, but recovery is still proving painful. Reports from the Texas Department of Insurance (TDI) and the Independent Insurance Agents of Texas (IIAT) indicate that costs stemming from mold-related losses paid by homeowners coverages had not stopped growing as of Dec. 31, 2001. As of that date, losses reached $138 million.

Paid losses for water-related claims excluding freeze and foundation slab coverages were $1 billion for 2001, twice as much as the 2000 total and triple the 1999 total. Claim payments for December continued eclipsing those already record-setting payments made in previous months; they were 16 percent higher than those in November.

The average water-related claim cost for December reached $8,900, three times the average cost of $2,800 in 1999. And December claims payments were nearly half the amount of homeowners premium for that month, compared to water-related loss totals of only 12 percent of homeowners premiums in 1999.

TDI’s report also details another trend: In addition to water-related claims, other types of homeowners claims began increasing at a rate of nine percent in 2000 and 11 percent in 2001, further diminishing many carriers’ bottom lines. Homeowners losses that averaged 67 percent of written premium between 1990 and 1999 have grown to 82 percent in 2000, and 91 percent last year.

One thing the mold crisis has facilitated in Texas is more of a willingness on the TDI’s part to allow more of a variety of homeowners policies (albeit with more restricted coverages in some instances), rather than just the ubiquitous HO-B. Hanson explained, “There have been a number of companies who have filed individual filings for new policy forms. Insurance Service Offices, ISO, has their homeowners filing currently with the department. And I understand that the department has been engaged in a little back and forth with ISO on tweaking some language in the form—I would expect that to be approved here in the next several weeks.

“The ISO filing contains $10,000, $20,000, and $50,000 limit options for water damage, and also includes an option for total exclusion, and an option for 100 percent buyback,” Hanson continued. “Their water provision is going to be sudden and accidental, but is also going to have a Texas buyback for a constant and repeated so that the way they’re setting it up is, if you want to buy the coverage back, you can continue to have your traditional HO-B with all of its bells and whistles, at an appropriate rate. If you don’t want that, then you don’t have to pay for it.”

Hanson noted that ISO’s new form differs slightly from the HO-A, which some carriers are now offering: “That is a little different from the named peril policy, the HO-A that’s been punched up. That’s a little different from an all risk policy that may be dumbed down a little bit. But still, it is carving out the cost driver from the marketplace.

“Although the market response won’t be immediate,” he said, “over time the premiums are going to decline. That gets the consumer where the consumer wants to be.”

Hanson pointed out that the fact that the TDI is considering and approving new policy forms could ultimately be the silver lining of this particularly nasty storm cloud. “Companies like Allstate, State Farm, USAA and ISO have made their state filings, and the TDI has been approving those filings, which is a significant change in their policy,” he said. “Up to this point, they wouldn’t even consider a form other than the HO-A or the HO-B. So it’s been a significant recognition on the part of the TDI that the policy form was indeed the problem, and now they’re moving to allow companies to work around the problem to get back to where we were before all this started.”

Louisiana loses market leader
The Louisiana homeowners market may not be riddled with mold claims, but it is hardly a sea of tranquility. The combination of severe weather and the Louisiana Insurance Rating Commission (LIRC), an entity separate from the state insurance department whose handling of rate change requests has drawn the ire of the NAII and various insurers, has created a tense environment in the state. And for State Farm, Louisiana’s largest homeowners underwriter, these conditions proved too much to bear.

Last month, the company announced it would cease writing new homeowners policies in the state. State Farm cited growing claims costs, a drastic increase in the number of new customers, and inadequate pricing for the coverage it offers as the primary reasons for its action.

John Zangerli, Louisiana Fire Division manager, laid out his company’s case. “If you look back to 2001, for every dollar we took in premiums, we paid out $1.15 in our homeowners line, resulting in a net homeowners loss of $31 million in 2001 in Louisiana.

“We have been challenged with losses in the state, and we’ve also been challenged with getting adequate rates from the LIRC,” Zangerli continued. “Our most recent rate filing was deferred April 24, for a third time. In the face of the losses we’re seeing, and in the face of the rates that we lack, we didn’t feel like we had any other choice but to restrict writing—to no longer write new business.”

Zangerli then elaborated on specific reasons for State Farm’s restrictive measures. “Really, as we look at our losses in Louisiana, there are three big ones: wind and hail, fire, and water. Water, in fact, has been growing in terms of lost dollars over the last several years. As a company, we had water loss as our main cause of loss during 2001. Mold was the big reason.”

Zangerli continued, “We have seen an increase in our number of mold claims in Louisiana, although not to the extent as in Texas. There are some contract differences there that preclude it from being as big an issue in Louisiana. Nevertheless, there are more today than there were last year at this time, and they seem to be increasing. We have been successful in terms of restricting ourselves and getting a mold exclusion approved through the insurance department—we hope that that will assist in controlling those issues.”

As for the issue of inadequate policy rates, Zangerli said the company would continue its efforts to get them increased. “Our rate filing has been deferred, but we are in the process of continuing to work with the LIRC and the Louisiana Insurance Department to get that issue resolved,” he said. “At this point, there’s nothing in terms of a rate change for existing customers. I should explain that on the impact to existing customers and … to new customers, we will accommodate in Louisiana existing State Farm homeowners policyholders, but we will only do so in parishes north of Interstate 10—we will not in parishes south of I-10, the reason being hurricane exposure.”

J. Robert Wooley, Louisiana Acting Commissioner and chairman of the LIRC, explained why State Farm’s rate increase was deferred. “State Farm got a rate increase last year—it wasn’t what they wanted, but they did get a rate increase last year,” the commissioner said. “And then this year, they’re still trying to negotiate a rate increase, but the big problem they ran into here was they wanted to do conversions of all their HO-2s and HO-3s, HO-5s and HO-1s to their HO-W. And they wanted to do an increase to have people pay more for a policy that has less coverage, without any real notice to the policyholders.

“Right now, they told us that they will not write any new business,” Wooley continued. “So if somebody cancels or non-renews with them, then they will not fill that policyholder slot, whereas the last time they quit writing, at least if they lost a State Farm customer, they would replace him with another State Farm customer. But now they’re not even doing that.”

But State Farm’s withdrawal doesn’t necessarily foretell a mass exodus of carriers from the state’s homeowners market, according to Wooley. “From what we’ve seen … we’ve had three new companies come into the state recently,” he said. “We had Farmers come in about a year ago, Allstate just announced the formation of a new company to write homeowners in the state called Allstate Property and Casualty, and then Kansas City Fire and Casualty, which is a subsidiary of Encompass, just recently got approved for rates and products to write homeowners in the state. So we’re starting to get a little activity of some other companies, which I think will be good, and hopefully will shift some of the large amount of market share that State Farm has to some other companies.”

Wooley cited the same reasons, however, that State Farm did to explain the difficulties of the Louisiana market. “Our biggest problem was that in the year 2000, we had a hail storm in New Orleans that caused as much insured loss damage as did Hurricane Andrew, which was about $500 million.

“And then up in Shreveport that same year, there was a set of tornadoes on Easter weekend that caused widespread damage, about $50 million,” Wooley said. “It’s the threat of hurricanes more than anything … When you look at our coastline, there’s really not much population area. In fact, when Andrew hit, it dropped two categories before it even got to a populated area, and there was very little wind damage—it was mostly flood damage. I think some of these companies’ CAT models that they use are flawed. I’ve had meetings with some of them to talk about that … because they use the numbers of miles of coastline. If you look at the way our coastline is configured, we have as much coastline in miles as California, but yet our exposure to the Gulf of Mexico isn’t as big. We’ve asked some companies and their underwriters to look again at the things that they say are keeping them from writing in Louisiana.”

Wooley understood companies’ frustration with the LIRC, even though he chairs that commission. “That’s the biggest impediment. No companies like to say that out loud—in fact, when I have meetings they come up to me and tell me privately that the real reason they’re not coming to Louisiana is because of the rating commission and the prior approval system on rates.

“I went before the legislature and helped pass a bill to eliminate our rating commission, or at least move it to an appellate body,” Wooley continued, “but the governor vetoed it.”

The commissioner noted that although increasing mold claims are certainly on the radar screen, it has yet to reach epidemic proportions: “We have some mold problems, but I haven’t seen it as prevalent as it apparently is in Texas, as far as numbers of complaints or people having problems,” he said. “Of course, the more exposure the issue gets, the more likely claims will increase. The mold seems to become more toxic as people talk about it.”

Oklahoma has high risks, low premiums
Smaller than those of both Texas and Louisiana, the homeowners market in Oklahoma faces considerable severe weather exposure, but its relatively low population makes it difficult for carriers to collect ample premium to offset weather-related losses. But like Louisiana, no acute mold crisis is yet afflicting the state.

Dan Ramsey, CEO of the Independent Insurance Agents of Oklahoma, explained that while windstorms, hail, and tornadoes remain the most serious risks in the state, the threat of mold claims spiraling out of control has given carriers and agencies cause to keep wary. “We had an article in The Oklahoman the other day that talked about mold being in homes up in some areas of Oklahoma … where they’ve got a major pollution area,” he said. “There had been some mold discovered, but I checked with my agents up there, and none of them have reported it. But I wouldn’t be surprised if mold doesn’t creep in—there have been a couple of mold claims, but it hasn’t gotten heavy play yet. I just keep waiting. Those reclamation commercials are just going like crazy, they’re telling people this is a silent fire, this mold. So I suspect somebody thinks there’s potential out there.”

Ramsey then noted more perennial issues affecting the Oklahoma market. “It’s a tight market, no doubt about that—especially in the rural areas, where the agents don’t have the volume to satisfy the carriers.

“It’s just a hard time for some of them,” he continued. “With a small population base to start with, low premium dollars and major catastrophe peril staring in the face every spring and summer, it makes it always a difficult market for homeowners insurance.”

Arkansas: a paradigm for the country?
Compared to Texas, Louisiana, and Oklahoma, the homeowners market in Arkansas is relatively stable, for now. Concerns about mold claims abound here, to be sure, but the state insurance department issued a bulletin last month listing conditions for approval of mold exclusions in the state, in an effort to safeguard against a situation like that in Texas.

Specifically, the department allows carriers to exclude mold coverage for remedial costs, which includes testing premises for mold, as well as containment and fumigation costs, and for mold not resulting from a covered cause of loss.

Jim Taylor of the NAII’s Southeast Regional Office explained, “The commissioner just adopted a regulation which specifically allows for the exclusion of mold, as long as mold is not resulting from a covered event. If your policy covers certain events and mold results from those, you’re covered.

“They’re not going to cover seepage,” Taylor said. “You can basically eliminate pure seepage like you have in Texas, or the pure existence of naturally occurring mold. You can certainly eliminate that as well. So, it clarifies and makes a little more clear when a company can exempt mold, but that has really not been a problem so far.”

Other than stepped-up vigilance against mold claims, Taylor noted that the Arkansas homeowners market has held a steady course. So steady, in fact, that the Arkansas market could stand as an example for other, more tumultuous states. “In homeowners, I don’t see anything else right now that is on the radar screen. You will probably have a few act of God things that you see all the time. I just don’t see anything new and different.”

Taylor continued, “The insurance commissioner wants to establish a very welcome atmosphere in which to do business. He’s pursuing regulatory modernization ideas, not just your typical rate reform. I think in Arkansas, we’re in pretty good shape with rating laws and stuff like that … The commissioner wants to use what they do in Arkansas as an example for the rest of the country.”

Topics Catastrophe Carriers Texas Profit Loss Agencies Claims Louisiana Homeowners Oklahoma Arkansas