IIAT Queries Commissioner José Montemayor About Reforms

The Texas Department of Insurance has begun implementing the directives in Senate Bill 14 to bring balance, stability, fair pricing and a dynamic homeowners insurance market to Texas. Its first step toward that goal involved a review of all homeowners rates to ensure carriers were using rates based on sound actuarial principles. TDI looked at filings by 32 companies with premium in excess of $10 million and those of 29 smaller companies.

All but two of the 61 companies accepted the ordered rate cuts. The two remaining large carriers, State Farm and Farmers, rejected TDI’s ordered cuts and appealed. After a hearings process the ordered reductions were affirmed. The companies have the opportunity to file an appeal with state district court.

In light of the tremendous impact the regulatory reforms are sure to have on the Texas insurance industry, the Independent Insurance Agents of Texas invited Texas Commissioner José Montemayor to discuss his decisions and the challenges he faces in putting his strategies into practice for both agents and insureds.

IIAT: What is TDI doing to encourage new carriers to begin writing in Texas?

Commissioner Montemayor: The recent changes in insurance laws and regulations have created a level playing field for all insurers since uniform rate standards will apply to everyone. All insurance companies can expect equal and fair treatment by TDI. They can also expect greater form flexibility so that they may offer more choices to consumers. As of June 10, 2003, companies can now tailor any form they want to their particular policyholders and submit it to TDI for approval. This flexibility applies to both homeowners and auto.

Smaller companies can also expect greater filing flexibility and more incentives to compete with larger companies. TDI is working with the industry and consumers to create a healthy, stable, competitive marketplace where insurers will want to do business. I’m confident that this environment will make new carriers look at Texas as a place they’ll want to offer their services.

IIAT: How do you balance the need for market availability while ensuring that companies are charging an appropriate rate?

Montemayor: This is truly the tightrope that TDI must negotiate. The rate cuts ordered by TDI are not arbitrary but based on sound actuarial principles. The rate cuts are not intended to solely provide low rates but to ensure fair rates. We believe these rate cuts ensure fairness for both consumers and companies while allowing companies to make a reasonable profit.

IIAT: What message does the rate appeal process send to companies not currently writing business in Texas?

Montemayor: Our message to all companies is that Texas is a great place to do business where you can expect fairness and flexibility.

IIAT: There was much talk during the legislative session about restoring competition to the Texas markets. How will the law do that?

Montemayor: Competition is fostered by companies having greater flexibility to offer more choices at lower prices to Texas consumers. Thanks to legislation passed by the legislature this spring, companies can submit new, more flexible forms to TDI for approval today if they choose to. TDI also now has authority to offer rate and filing flexibility to entice companies to compete and increase market share. Additionally, in 2004, TDI will move from the more restrictive “prior approval” system to a more market-oriented “file and use” system. This will allow companies to better adjust to changing market conditions.

IIAT: What did TDI want the rate review process to accomplish?

Montemayor: I view our primary mission as implementing legislative policy. TDI’s rate review process will ensure fairness for Texas homeowners. For several years, Texans were greatly challenged by unregulated insurance rates that were based on multiple models and assumptions for current market conditions. Gov. Rick Perry made insurance reform an emergency item during the past legislative session. Senate Bill 14 and other reform measures are the result. TDI has acted upon the provisions of SB 14 and ordered numerous premium reductions. This is a pocketbook issue and Texans will soon experience much-needed relief.

IIAT: How did TDI determine the rate reductions?

Montemayor: TDI actuaries looked at each company individually. They reviewed each company’s data using standard actuarial methodologies including: loss trends, policy type offered in relation to premium charged, profit / loss margins, expenses, and CAT loads to determine whether a filed rate was reasonable, excessive or adequate.

IIAT: Can you explain why some companies were allowed to phase-in their rate reductions instead of cutting the full amount immediately?

Montemayor: Of the 29 companies that were ordered to reduce rates, 12 appealed. Of the 12 companies that appealed the ordered reductions, 10 companies reached agreement with TDI that allowed them to withdraw their appeal and reduce their rates. In most cases, these agreed to rate cuts that will be phased-in, usually with 50 percent of the reductions effective immediately. In most cases, companies will be responsible for the outstanding 50 percent reduction in the form of refunds at the end of a year providing the actuarial date is accurate. Additionally, in most cases, the company may be required to reduce their rates again in one year and, depending on the data, the reduction could be greater than originally ordered.

The reason TDI reached these agreements is to avoid a long court battle and get relief to consumers as quickly as possible. We also reached many of these agreements in an attempt to balance consumer relief with the stability of the market and/or the particular company.

IIAT: What is the status of the reviews at this time? Particularly with the big four.

Montemayor: At this point, all carrier reviews have been completed. The state’s policymakers made it clear that they wanted action taken on an expedited basis and that is what TDI has done. The first rate reviews were done on carriers with an excess of $10 million in premium in Texas. That was followed by reviews of the remaining carriers doing business in our state. The review process was exhaustive and weighed the need for fairness to consumers with the need to ensure companies can afford to do business in Texas. I think the TDI staff did a remarkable job on a very short timeline and I’m confident that the proposed reductions are fair and balanced.

With regards to the four leading carriers in Texas, USAA (7.0 percent rate reduction) accepted our recommendation and is implementing now. Allstate (18.2 percent reduction) has agreed to a two-step phase-in process. The two remaining large carriers, State Farm (12.0 percent rate reduction) and Farmers (17.5 percent rate reduction), rejected TDI recommendations and appealed.

IIAT: What should an agent tell a customer who gets their renewal policy in a few months and notices that the premium has not been reduced by the percentage shown in the TDI press release for that particular company?

Montemayor: In most cases, rate reductions will take effect Sept. 7 for new and renewal customers but in some cases the reductions for some companies may be phased-in over a year. The bottom line is that these rate reductions are the first step in stabilizing the Texas homeowners market and all consumers will be paying fair rates from this point forward.

IIAT: What about refunds? Is it correct that some companies must give refunds to their policyholders next year?

Montemayor: Yes, that is correct. Some companies that are allowed to phase in their rate reduction over the next year may be required to refund consumers a percentage of the rate reduction at the end of that year.

Topics Carriers Texas Legislation Homeowners