Since 1946, Dallas-based Old American County Mutual Fire Insurance Co. has stayed true to a simple business philosophy: Provide reasonably priced insurance on a reasonable payment schedule for difficult risks. Much has changed for Old American in the intervening years, and the impact of Texas’s sweeping SB 14 insurance reform legislation is still unclear, but for this American company old ways die hard.
As is evident from the insurer’s name, Old American began its life as a provider of fire insurance for rural dwellings with no fire protection or easy access to water. In the 1970s, the company began offering liability coverage for farm equipment, tractors and trailers. Eventually it entered the open market for non-standard private passenger and commercial vehicles.
“Even today, in 2003, we’re still providing a reasonably priced product at a reasonable pay plan for those that have difficulty buying insurance in the standard market,” said Tom McCall, president of Old American. “We haven’t changed our guiding principle since we were established in 1946.”
As a Chapter 17 company under the Texas insurance code, Old American has traditionally had rate flexibility under the law.
“We could design a product outside the benchmark and controls of [Texas Department of Insurance’s] ratings,” McCall explained.
Five percent of risk retained
Further, as a county mutual, Old American retains a small amount of real capital and is owned by the policyholders, meaning the company relies on reinsurers to provide the bulk of the capital. In fact, it has an A.M. Best Co. “NR-3” rating because it cedes more than 75 percent of its business to reinsurers. The company only retains five percent of its business, McCall said.
“I really cede out all the underwriting risk,” he added. “Substantially it’s a business model that’s pretty much needed. At $2 million worth of surplus we can only write $6 million in net premium, so we’ve always needed reinsurance.”
“We’ve reached out to the reinsurance market, which typically has an appetite for more volatility, more creativity. Our specialist MGAs throughout the state specialize in a certain class of business or certain territory or certain market. For example, we have an MGA located in El Paso, which is a specialist for the Rio Grande Valley—a huge market.”
Old American has 28 active MGA affiliates, according to McCall. The MGAs appoint agents, “design the products, develop the marketing, do the sales, all the underwriting, policy issuance, claims handling, all under a contract with us where we delegate the authority to do that work. They handle themselves as though they were an insurance company.”
It takes one to three years to develop this transaction and to partner an MGA with a reinsurer to write 100 percent of the risk for the business the MGA specializes in, McCall said. In cases where an MGA is not already affiliated with a reinsurer, Old American buys reinsurance on their behalf, typically splitting the capital risk between four to six different reinsurers.
“You really have to be a specialist to do well,” McCall said. “We don’t think the standards can bring the expertise in a way that allows flexibility. We think our producers or MGAs have that expertise, and they can move quicker than some of the standard companies.”
Small size, big player
In spite of its tiny size, Old American was ranked ninth in total premium for personal auto in 2002 with $305.5 million (2.9 percent market share), and 10th in total premium for commercial auto with $62.5 million (3.3 percent market share). Much of that business is written at the minimum rate for minimum coverages. On personal auto, for example, limits of $20,000 each person, $40,000 each accident and $15,000 in property damage constitute 90 percent of Old American’s business.
When McCall came to Old American from Crum & Forster in 1993, Texas’ residual market (the Texas Assigned Risk Plan), had about $650 million worth of business placed with standard companies.
“But county mutuals were learning more and more about automobile, and reinsurers were learning more and more about auto,” McCall said. “Now we’re projecting that pool to be about $42 million in 2003, a deep decrease since 1990. The county mutuals served as a voluntary market for a lot of that business.”
Some of the flexibility that gave Old American a leg up on the standard markets appeared to be endangered during the protracted legislative haggling that resulted in SB 14, as Texas’ county mutuals were for the first time put under the regulatory gun. “For the first time since 1946 when county mutuals first started in Texas they’ve become subject to rate regulation,” McCall said. “We all tried to meet all the actuarial standards of rating, but we had the ability to simply change our rates. But when SB 14 first came out we were put into the same criteria as a standard company when it comes to rates.”
Valuable role recognized
Eventually both the House and Senate, realizing the role played by the county mutuals in improving the elasticity of the Texas insurance marketplace, wrote a county mutual exemption into the sweeping reform bill. The exemption allows the insurance commissioner to develop specialized and simplified rating criteria.
The two major requirements of the new law, according to McCall, is that the county mutuals not exceed 3.5 percent of the overall market share and that their rates, when compared to the “old benchmark plus loss cost factor, need to be 30 percent above that rate. That’s okay. That’s about where our prices are.”
The five exempted county mutuals must comply with these new regulations by Dec. 1, 2004, but another set of rules on territorial ratings must be complied with by Jan. 1, 2004.
Old American and the other county mutuals are still seeking clarification on the territorial rules, which state that if a company uses a territory rating structure and subdivides within a county, the difference between the highest rate and lowest rate cannot be greater than 15 percent.
The question for the county mutuals is that they rate by zip code and often zip codes are shared between two counties. How that should be handled was one of several points a representative for the Texas County Mutual Association broached at a public hearing before TDI on Oct. 22.
More of a concern to Old American and other insurers at this point is not how TDI will regulate rates but how the market may turn.
“What we’ve seen is, starting in late 1998 we had a real competitive market down here in Texas,” McCall said. “I believe the products were under-priced. Many of the companies and MGAs had to do that to stay reasonably competitive with the market. Because of that, a number of MGAs went out of business, and a number of reinsurers pulled back and removed their capacity from the market.”
Guarding against the cycle
From 1998 to 2002, Old American’s direct written premium grew more than 50 percent, from $190.8 million to $397.7 million. For the first six months ending June 30, 2003, direct written premium was $219.6 million.
“Rates came up back to where they needed to be. MGAs and reinsurers are now enjoying a reasonably good profitable loss ratio,” McCall said. Meanwhile, Old American’s combined ratio finally reached 100.7 percent in 2002, from 108.6 percent in 1998.
Rates have leveled off, but that’s not a concern for McCall. “I am concerned about the onset of a new cycle,” he said. “The leveling is such that you look back at cycles where you start to level. It might be on the back end of our rate increases. We need to guard against inadequate pricing in the future.”
However, just as the ultimate regulatory guidelines issued by TDI are beyond Old American’s control, so is the tide of the market. All it can control is how it does business, and its philosophy is unlikely to change this far into the journey.
“We need to have specialists in the Texas market, because it is a special marketplace,” McCall said. “And I think we fill that role.”
More of a concern … at this point is not how TDI will regulate rates but how the market may turn.
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