After the Mold Rush: Montemayor Looks at Future of Texas Markets

Considering Texas has one of the most difficult insurance markets in the country right now, Insurance Commissioner Jose Montemayor comes across not at all as one might expect—an embattled public official scrambling to shore up an unprecedented homeowners crisis as consumers decry skyrocketing rates and politicians unveil plans to re-regulate the market.

Rather, when he sat down with the Insurance Journal to recount his four-year tenure as insurance commissioner and address challenges yet to be tackled, Montemayor seemed walking proof of Nietsche’s adage, “What doesn’t kill you [or threaten to ruin your state’s insurance market] makes you stronger.” In fact, despite the mold problem and other factors that continue to plague Texas’ insurance markets, Montemayor seemed decidedly upbeat about his position.

“I can tell you I very much still enjoy my job—I think I’m privileged beyond belief to have this job. … It’s still a job I look forward to coming to work to each and every morning. And at night, honest to God, I’ve got difficulty tearing myself from it.”

The early days
Montemayor pointed out that the beginning of his tenure saw several structural changes at the Texas Department of Insurance.

“In every single area, from the management structure that we now have—we continue to look for ways to reorganize and make ourselves more efficient,” he explained. “One of the things we did early on was, we consolidated our number of financial functions, and also we divided the regulated lines between life/health and property/casualty, because each of those is a full-time job in itself. We were not focusing the required resources or attention to them.”

The commissioner also oversaw the reform of the form approval/rate setting process. “We had the regulated lines, and then we had a technical analysis area that dealt with rate setting,” Montemayor said. “So we had form approval on one side and responsibility for rate setting on the other, and…that would be an illogical bifurcation. You cannot approve rates without understanding what’s on the contract, and visa versa. So those are all one now.”

When Montemayor began his first term as commissioner in 1998, mold had yet to dominate the Texas homeowners market. Other issues were commanding TDI’s attention.

“In the early days, the kinds of challenges we had had to do much more with things like amusement rides, and really trying to get a grip on modernizing agents’ licensing—we had a proliferation of licenses that no longer made sense, and so forth.”

One major issue Montemayor and every other insurance commissioner in the U.S. faced was the passage of the Gramm-Leach-Bliley (GBA) Act in 1999. “In the early days I was very, very reticent—skittish, if you would, or worried—about this whole Gramm-Leach-Bliley Act financial services modernization, along with every other commissioner in the country,” he said. “But the more I understood it, and the more I talked to Phil Gramm, the better I felt about this thing, and in my mind it was actually absolutely the right way to go, only because I really believe that at the end of the day it will be an enormous benefit to each and every Texan.

“In concept, making more products available to more Texans at better prices—because it would allow for more creativity, certainly more efficiencies in the system,” Montemayor explained. “In theory, an underwriter that is going to underwrite your loan for a new business expansion has the same information that you would use to do insurance underwriting, whether you’re looking for product liability, for workers’ comp…In theory, you can use those same kinds of things. Now, have we materialized all those gains? I don’t think so. I think we’re still largely segmented, but the potential is there.”

Gathering storm clouds
Like many other regulators and industry officials, Montemayor sensed trouble on the horizon for property and casualty markets even before mold claims and Sept. 11: “I think particularly in the property/casualty side, we’ve seen a hardening of the market that was a long time coming. It particularly came to a flashpoint on Sept. 11…but it had already been coming. We were coming out of a decade-long (market) of relatively soft prices, and essentially pretty good returns on the bull market that were starting to wane in terms of investment income, and we had not kept up.

“Premiums had not kept up with inflation and claims,” he continued. “The price of replacements and the price of repair were significantly up compared to the premiums, particularly in things like homeowners, so that when the hardening of the market happened, it was very, very destabilizing. Very destabilizing.”

Of course, the weakening condition the Texas insurance market found itself in was made substantially worse as mold claims began making their way to carriers. Montemayor said that prior to 2000, such claims were extremely rare.

“I actually had a search done on all the complaints of mold in the department, probably in 2000, when I first started learning about it,” he explained. “For the 10 years preceding, we only had, like, 12 complaints, 10 of which were from 2000 itself. It was a relatively unknown deal. I had done a lot of research on the area—we had four hearings. I heard from some 900 people—bankers, realtors, builders, certainly homeowners, certainly insurers—and they all had a slightly different view of the thing, but overall, a central theme emerged: There was a hell of a lot of misinformation out there, because of the lack of standards in terms of, is this dangerous or not?”

Montemayor added, “It was an area that lent itself readily to widespread abuse, wack science, fear mongering—and that coupled with the lottery mentality from some insureds led to some really, really bad outcomes.

“I keep looking back and scratching my head and saying, ‘God, what a God-awful development’,” he continued. “Certainly, we got very aggressive about it. Staff understood that something needed to be done—they’re proposing a cap along with some other limitations to take up. Stacking … had been a real issue that was resoundingly rejected by both the industry and consumers, which sort of led me to believe that we were on the right track. In the end we came up with something very similar, it just doesn’t have a cap on it. But we did…extract … out of the basic coverage for forms B, the more high-dollar, cost-driven drivers out of that whole equation, in an effort to get back to sanity. It was a back-to-basics approach.”

The commissioner expressed bafflement that mold—something so commonplace in nature—could prove such a bane to the Texas homeowners market.

“The truth of the matter is, we have always dealt in a straightforward manner with the water hazard in terms of repair and replacements, and we did go through the whole business of trying to find out what particular kinds of molds there were…Once you’ve got (mold), I don’t know what difference it makes—you’re still going to remove it anyway,” Montemayor said. “As a scientific protocol, it lacked all the basics. There wasn’t any sample—there wasn’t any control of handling, at the lab… Where’s the threshold? Even if you had everything completely out of there, the truth of the matter is, once you open the front door to let the cat out, it’s back in. It’s in the environment. It’s everywhere.

“There’s reference to mold in the Bible—it’s in Leviticus 14,” Montemayor noted. “And I was intrigued to see just how old this problem has been—it’s been with us a very, very long time. Clearly it’s not a product of today’s buildings or today’s workmanship, or climate changes or global warming. It’s always been there—that’s how Mother Nature disposes of a lot of matter. Dead trees and dead vegetation are allowed to decompose by the action of fungi breaking it down.”

As far as the issue of mold toxicity, Montemayor downplayed assertions that mold poses serious health risks: “I also heard from our own health authorities and from the EPA, the CDC, and what I learned there is that, in fact, there had been no linkages established between exposure to mold and ailments. It is true that people (had allergic reactions)—some people—to certain kinds of mold. But there were no more and no less than people reacting aversely to, say, shellfish, or to peanuts…It’s not an across-the-board deal. And so, a very strange situation—it almost wrecked our homeowners market.”

Nonetheless, mold infestations and claims have resulted in serious costs. “The losses have been steep,” Montemayor said. “It’s wound up costing every single policyholder in Texas something like between $200 and $300 just to pay for that.”

The commissioner continued, “My concern now is—it is a largely deregulated market—that people do not get handled fairly as price increases happen, that have been singled out unfairly…The fact that (homeowners carriers) don’t have rate regulation doesn’t mean they don’t have any regulation. We’re very aggressively doing market conduct evaluations—how these things got executed, how they got handled.”

On the record
Montemayor minced no words expressing his displeasure with many carriers’ use of credit scoring to determine rates without justifying its use. “I have to tell you that I’m less than happy with the way credit scoring has been handled by the industry,” he said. “They’ve done a poor job of explaining it to their policyholders, and furthermore of explaining how it is that they can improve on their situation. I think they’ve done a super poor job—I don’t think the agents are armed with the data that they need to deal with someone that’s fairly upset at the other end of the desk trying to understand what’s going on. The agents are not able to explain it.”

He painted an altogether different picture of the Texas auto market: “I feel good about where we are with automobile, and the fact that we depopulated TAIPA (Texas Automobile Insurance Plan Association), and the fact that we continue to have widely available market access to it. We continue to have pretty decent rates—I’m pleased with that.”

“I think workers’ comp is another one of those areas that’s going to continue to challenge us,” the commissioner explained. “The rate indications are adequate—I think what you’re going to see disappearing is a lot of the discounts that were being offered.”

The commissioner mentioned several TDI achievements in enforcing actions. “In the area of enforcement, I don’t know where to start. We’ve had a very active enforcement area that is very focused on policing the area and trying to keep a level playing field. We’ve recovered great amounts all over the place.

“Some of the highlights are, MidCentury Insurance Company agreed to an $11 million premium overcharge refund, and reduced rates by three percent early in 2000,” Montemayor said. “We’ve gotten after prompt payment and owner restitution for physicians well in excess of $36 million, and fined an additional $14 million on top of that.”

A teetering med-mal market
The Texas medical malpractice market looks to be in serious trouble, according to Montemayor, with prohibitively priced coverage forcing doctors out of the state, or out of practice. “We’re tackling (the medical malpractice issue) along two fronts,” Montemayor said. “I’m working very, very closely with the governor, and I’m working very, very closely with legislators. There, I think we’ve got a two-pronged attack.

“We need to make the JUA much more available,” he said. “I gave a presentation to the Legislature about a month or two ago regarding med-mal…We have experienced an exodus of a number of these companies. My calculations tell me there are about 6,000 doctors who are going to be looking for a place to go somewhere between July and January, when the next renewal cycle comes in, mostly because (carriers) are out of business, or broke, or in rehabilitation. I think we need to make someplace available, so the JUA is stepping up to the plate. We’re working very closely with them to develop a coverage on a claims made basis—that’s new—and also for prior acts. They did sell that before.”

The commissioner went further, “Long term, in order to address the affordability piece, I think you’re going to have to have some reforms. I think the governor has gotten out there and proposed an 11-point reform, and I think he deserves a hell of a lot of credit for A) having the level of care, and B) for having the political courage to take this on. Suggesting a cap on non-economic damage takes a lot of courage. That, and special courts, so that judges have more knowledge so they can set relativities and severities.”

Montemayor mentioned other ways to shore up the troubled market: “A limitation on contingency fees, certainly a strengthening of the medical examiner process to police it a little bit more actively and pull the bad doctors out, or have them modify their procedures so they’re not as dangerous. I feel very good on where we are with that.”

No lack of challenges
“Here are the big challenges I see going forward,” Montemayor said in summary. “On the personal lines, homeowners—no doubt about it. We’re going to continue to try to nurse that market back into shape, primarily by introducing more and more national forms and making these products available to everybody. We’ll continue to monitor the cost side closely.

“I think med-mal is going to continue to be a challenge, and I think workers’ comp is gonna continue to be a challenge,” said the commissioner. “Overlaying all of this is the whole issue of terrorism exclusions. We need to work on these to be sure there’s going to be some fallback, at least at the federal government level. But you don’t want to discourage, either, the solutions through the private insurance market.”

To comment on this story, e-mail seisenhart@insurancejournal.com.

Topics Trends Texas Claims Workers' Compensation Homeowners Market Property Casualty Pollution