Montemayor Sends Biennial Report, Recommendations to Lawmakers

Texas Insurance Commissioner Jose Montemayor recently submitted the Biennial Report, required under Section 32.022 of the Insurance Code, to Texas legislators suggesting needed changes in laws relating to insurance industry regulation and summarizing the status of the industry in the state.

According to Montemayor, several of the recommendations included in the report address problems brought to light by the mold crisis experienced since the last legislative session. Suggested changes include revising the system for regulating rates charged by insurers writing personal lines; licensing of persons involved in handling mold claims; establishing specific time frames for insurers to respond to water claims; and broadening the applicability of laws governing insurers’ withdrawal from a line of business such as homeowners insurance.

The report recommends changing the method of rate and form regulation in other casualty lines such as commercial automobile, inland marine insurance and fidelity and surety bonds, and requiring that the rates filed by the Texas Medical Liability Trust, the largest Texas writer of medical professional liability insurance, comply with commonly used rate standards.

Other recommendations include standardizing the department’s current rulemaking authority; establishing guidelines for insurers and protections to consumers regarding the use of credit scoring and credit reports in underwriting and rating; expanding eligibility for the JUA; and improving the Commissioner’s ability to establish a residual market facility for homeowners insurance.

Montemayor stated that the recommendations provide flexibility for insurers to respond to market conditions while preserving the Commissioner’s and department’s authority to ensure that rates charged to Texas insurance consumers are just, reasonable, adequate, and neither excessive nor unfairly discriminatory for the risks to which they apply.

Highlights of some of the recommendations include:

Water damage claims
Article 21.55 of the Insurance Code requires insurers to acknowledge and begin the investigation of a claim not later than the 15th day after receipt of written notice of the claim. The statute also requires an insurer to notify the claimant in writing of the acceptance or rejection of a claim not later than the 15th business day after the date the insurer receives all information needed for proof of loss, unless the insurer has a reasonable basis to believe the loss resulted from arson or the insurer notifies the claimant that it is unable to accept or reject the claim. However, Montemayor pointed out that molds can begin growing within 24 to 48 hours of a water event and noted that prompt handling of water damage claims will minimize the cost of the claims for insureds and insurers.

TDI Recommendations: Amend Article 21.55 to require specific time frames for acknowledging and responding to water damage claims. At a minimum, require insurers to acknowledge water damage claims within 24 hours of notice of the claim and that insurers send a representative to the claimant’s home within 72 hours of notice of the claim. Grant the Commissioner rulemaking authority to establish response times for other types of claims as market conditions dictate to effectuate prompt and fair handling of claims.

Withdrawal plans
Article 21.49-2C requires insurers to file withdrawal plans, but does not specifically include Lloyd’s insurers, reciprocal and interinsurance exchanges, and county mutuals. Therefore, if these insurers choose to withdraw from a line of insurance, they are not required to file a plan of orderly withdrawal, and other provisions of the Article are not applicable. Lloyd’s insurers and reciprocal exchanges currently write approximately 95 percent of the residential property insurance market, and county mutual insurers write approximately 28 percent of the automobile market, so withdrawal by one or more of these insurers can potentially cause severe market disruptions. A corollary problem exists because the requirement to file a withdrawal plan is not triggered if an insurer stops writing a single type of policy form or coverage. Montemayor noted that in the residential property market, severe disruptions occurred when insurers stopped writing the Homeowners Form B (HO-B), yet the insurers were not required to file a plan to ensure that the people of Texas were protected.

TDI Recommendations: Amend Article 21.49-2C to make it applicable to Lloyd’s insurers, reciprocal and interinsurance exchanges, and county mutuals. Make the insurers’ withdrawal plan statute applicable to an insurer’s withdrawal from a type of coverage, such as the discontinuance of HO-B coverage. Authorize the Commissioner to disapprove or modify a withdrawal plan (including establishing later dates for the insurer to begin or end its withdrawal) if the Commissioner determines that the insurer’s withdrawal will displace or make the line of insurance unavailable to a substantial number of policyholders or have other adverse effects on the competitiveness of insurance markets in Texas.

Personal lines rates
The Insurance Code currently provides for a dual system of rate regulation for automobile and residential property insurance. Some insurers are subject to the benchmark rate system, which is a file and use/prior approval form of rate regulation, while other insurers are exempt from rate regulation. This dual system of rate regulation has led to the development of the current insurance market in which a substantial number of Texas insureds obtain their automobile and residential property insurance from insurers that are not subject to rate regulation, a trend that is increasing. Montemayor stated that exempting insurers from rate regulation severely limits the Commissioner’s ability to ensure that the rates charged by all insurers writing automobile and residential property insurance are just, adequate, reasonable, not excessive and not unfairly discriminatory. He asserted that rates charged by all insurers writing automobile and residential property insurance in Texas should be required to meet these basic rate standards.

TDI Recommendations: Amend the Insurance Code to establish a rate oversight system that ensures competitive markets for personal automobile and residential property insurance. Such a system should, at a minimum, include a file and use rating system. Apply rate oversight to reciprocal and interinsurance exchanges, Lloyd’s plan insurers and county mutual insurers. Require that rates charged by all insurers meet the commonly used rate standards of being just, adequate, reasonable, not excessive and not unfairly discriminatory. Ensure that the rate oversight process provides for timely review of rate filings to enable insurers to quickly respond to changing market conditions. Grant the Commissioner the authority to review and disapprove rates that do not meet the rate standards, and enable the Commissioner to initiate alternative forms of rate regulation, such as prior approval, when necessary to address problems occurring in the market. Amend Article 5.35 to allow any insurer to file residential property policy forms for approval.

Medical malpractice
High loss ratios incurred by insurers, withdrawal of several insurers from the marketplace and substantial rate increases by the remaining medical liability insurers writing in Texas have caused physicians and health care providers to experience severe problems with the availability and affordability of medical liability insurance coverage. Because medical liability insurance coverage is critical to the well-being of the state, the Commissioner asserted he should have full visibility over the rates charged by all insurers. The Texas Medical Liability Trust (TMLT) is the dominant writer of medical liability insurance in Texas, accounting for 34 percent of the medical liability insurance market (approximately 10,000 physicians) as of Dec. 31, 2001. However, Article 21.49-4, which governs TMLT, stipulates that TMLT is not engaged in the business of insurance. Therefore, the rates and forms used by TMLT are not subject to regulation by the department.

TDI Recommendations: Amend Article 21.49-4 to require that the rates charged by the TMLT meet commonly used rate standards. Grant the Commissioner the authority to examine TMLT’s rates and actuarial justification to ensure that the rate standards are met, as well as the authority to require financial statements and to conduct financial examinations under Article 1.15 to ensure the solvency of the TMLT.

Commercial auto
Commercial automobile insurance is regulated differently than most other lines of commercial insurance, a situation that prevents commercial automobile policies from being integrated with other forms and packages of coverage commonly sold to businesses. Additionally, commercial auto forms are subject to an equivalency requirement, which limits the ability of insurers to quickly introduce new coverage forms to address changes occurring in the marketplace. These limitations tend to reduce market competition and increase costs to the consumer.

TDI Recommendations: Amend Articles 5.06, 5.13-2 and 5.101 to remove commercial automobile from the requirements of promulgated forms and endorsements and the benchmark rating system and place the regulation of commercial automobile insurance under the provisions governing the writing of general liability, commercial property, commercial casualty and medical professional liability insurance. Rates would be subject to a file and use requirement and forms would be subject to prior approval.

Credit scoring
Insurers are not prohibited by Texas law from using credit or insurance scoring when determining whether to write a policy for an insurance consumer, or the rate to be charged. Insurers have increasingly begun to use a person’s credit/insurance score in underwriting, although insurers subject to the benchmark rating system are not permitted to use credit scoring in rating. Montemayor pointed out, however, that approximately 95 percent of the residential property insurance market and 28 percent of the automobile insurance market is written by insurers that are not subject to the benchmark rating system, and these insurers can use credit/insurance scoring with very little limitation.

Because the use of credit/insurance scoring in rating and underwriting may significantly affect the rate a consumer pays for insurance, TDI is concerned that there are no statutory limitations specifically governing the use of credit scoring. Montemayor noted that insurers’ use of credit/insurance scores may unfairly limit or deny access to personal lines coverage for consumers.

TDI Recommendations: Amend the Insurance Code to authorize the Commissioner to define how and when an insurer may use credit/insurance scoring in the underwriting and rating of consumers for personal insurance lines. The department further recommends that the law: 1) require insurers to file their credit/insurance scoring models along with actuarial justification prior to use; 2) prohibit insurers from using credit/insurance scoring in a manner that adversely affects persons with no credit history or persons whose history reflects a decline due solely to a catastrophic event; 3) prohibit insurers from using credit/insurance scoring as the sole factor in determining a consumer’s rate; 4) provide a means for consumers to appeal an adverse determination based on a credit score; and 5) require insurers to re-rate a policy in the event of an erroneous credit score/report.

TDI staff is developing all of its recommendations into bill draft form to assist the Legislature in preparing legislation. The final drafts can be obtained by contacting the Government Relations Division at (512) 463-6651.

The entire report is available on the department’s Web site at www.tdi.state.tx.us.

Topics Carriers Texas Legislation Property Market Lloyd's