Playing the Waiting Game in the Texas Homeowners Market

Could it be that there is a light at the end of the tunnel for the Texas homeowners market? Rates have firmed through waves of increases over the past two years to the point where they may have reached a pinnacle, at least for now. In addition, the Texas Department of Insurance (TDI) started approving new, national homeowners forms last year that provide homeowners, agents and carriers alternatives to the previously ubiquitous HO-B.

Still, while agents are doing their best to deal with the environment they have to work with—and some are doing very well—the market as a whole is playing a waiting game as Texas lawmakers work on legislation to reform the way insurance is regulated in the state.

“It’s clear from a market standpoint that everything’s on hold, waiting to see what the Legislature does,” said David VanDelinder, executive director of the Independent Insurance Agents of Texas. “Companies that continue to stay in the market are restricting the amount of new business they’re taking in … They’ve tightened up their underwriting and are generally taking a wait-and-see attitude.”

Donald Hanson, Southwestern Regional manager for the National Association of Independent Insurers (NAII), said that the insurance crisis that has plagued the state for the past couple of years has been “been mitigated, in some ways significantly, by acts of the department of insurance to approve different policy forms.” But Hanson added the companies represented by NAII continue to look for completion of legislative action in order to move ahead.

“Overall, I think our members are a little surprised that neither chamber took no more action than they did during the first 60 days,” Hanson said. “They’ve been studying this issue for a long time and the governor had issued his emergency declaration of homeowners issues, so I think there was every expectation that one or both of those chambers in the Legislature would have moved more quickly during the early part of the session to get a bill out.”

Much focus has been on action in the Senate, which early on took the lead in working on insurance-related bills. It quickly passed Senate Bill 310, which called for homeowners carriers to provide data to Insurance Commissioner Jose Montemayor on rates and underwriting criteria.

The Senate’s Business and Commerce Committee, led by Sen. Troy Fraser (R-Horshoe Bay), then hammered out its version of Senate Bill 14, widely considered to be the comprehensive reform legislation that would ultimately prevail. In a near-marathon committee meeting, some 45 amendments were added to the original bill.

“With the committee substitute they have rolled in a lot of additional issues,” Hanson said. “They have included forms, … insurance scoring, credit scoring. They have included withdrawal provisions.” He added that as a result of the many changes to the bill, committee chairman Fraser admitted it would take some time before a final version of the bill would be written.

Democrats in the Senate put the brakes on the legislation, however, when they sent a letter to Lt. Governor David Dewhurst stating that they could not support the bill that was cleared by the committee. Eleven Democratic senators signed the letter. “The current draft of Senate Bill 14 breaks our promises and will not bring real reform to the marketplace,” the letter stated.

Sticking points for the Democrats include the lack of commitment to a specific rate rollback and the fact that the bill contains no provisions requiring public access to information on how insurers come up with the rates they charge. The Democrats would also like to see more stringent limits on the use of credit scoring by insurers than the bill provides.

Stating that they cannot vote the bill out of the Senate without “significant improvements” to it, the Democrats told Dewhurst: “We know that, like us, you are troubled by the recent poll showing that less than a third of Texans are even ‘somewhat confident’ that the Legislature will pass meaningful reforms. We hope to work with you and our colleagues to fashion a bill that restores faith, not only in the insurance market and the Department (of Insurance), but in the Legislature itself.”

Provisions contained in SB 14 that are expected to make it through the process will give added authority to the insurance commissioner to control rates and usher in some amount of rate reduction in the homeowners area.

“I don’t think there’s any doubt of two things, whether it comes out of the House or the Senate ultimately,” VanDelinder said. “They’re going to give rate control back to the commissioner for all companies, including Lloyds and county mutuals. And there’s going to be some kind of rate reduction in residential property rates. Now how they do that is critical to our markets in the future.”

VanDelinder said it’s essential that any rate rollback should not “involve a refund of premiums collected at this point, and neither the House nor the Senate proposals do. That’s what companies fear most, I think, having to give back money that is being used to pay claims today.”

An across the board reduction wouldn’t work either, according to VanDelinder. He said rate rollbacks would likely vary widely from company to company and would average around 12.5 percent, based on the commissioner’s findings from the SB 310 data call. Some companies were found to be charging rates that as much as 25 percent too high. In his report to the Legislature based on that data call, Montemayor also noted that many carriers were pricing appropriately.

VanDelinder speculated that companies will probably accept a one-time rate reduction that doesn’t involve a refund, and “is tied to a regulatory system that will work into the future and allow them to get the rates and forms they feel they need to make money.”

A certain stability
The Legislature not withstanding, a certain stability has already worked its way into the market as a result of the rate increases and the availability of more forms. While those two factors may seem like a double-whammy to policyholders—since many of the forms and the companies who’ve stayed in the market offer less coverage than in the past in return for higher premiums—the forms and increases have served to make the state more attractive to some insurers.

“I think companies are confident of their homeowner pricing and we’re actually starting to see some companies re-enter the homeowners market,” said Barney Schwartz, president of Heartland Marketing Inc., a Richardson, Texas-based wholesaler. “The Hartford and America First are certainly coming back to be players. To what extent, we’re not real sure yet, but I think it’s going to start to lighten up and I think rates are going to be deemed adequate.”

Schwartz added that market conditions of the past two years have actually been a boon to his company. Besides the increased commissions that higher rates brought along with them, his company has been able to expand geographically and gain increased access to homeowners markets. “Last year we wrote more personal lines business than any year in the past, and so far this year we’re on a pace to break last year’s record,” Schwartz said. “Travelers has been a huge part of that success because they still remain one of the most active homeowners writers in the state.” Heartland’s other markets include The Hartford, Chubb, America first, Metropolitan, SAFECO, Lexington and Chubb Custom.

Retail agencies with continued access to a variety of homeowners markets have also gained from the current environment. “Personally, just from an independent agent’s perspective and the markets we represent, I’m not so sure I see an insurance crisis,” said Kelli Stanford, president of the Ed Weeren Insurance Agency, based in Austin. “We have markets. Our companies—they may have adjusted their forms, or pricing—but we have markets. And we are writing the heck out of homeowners.”

Stanford noted that in the soft market with its low rates, people were shopping around for the lowest possible deal. “We were just kind of writing what we could,” she said. “Now, we’re picking up great business, good clean accounts. We’re rounding those accounts. People are so happy with the pricing and the coverages, they’re allowing us to quote their other lines of business, their auto, their umbrellas, their boats.”

Agency founder Ed Weeren admitted that in hard markets “my motor starts running. And we’ve always done better in hard times because the juices start flowing in the agency.” He added that some of his firm’s success can be attributed to the access to markets provided by its membership in the Combined Agents of America (CAA), an organization of retailers that describes itself as a closed managing agency. “We’re in our sixth year of business and I can tell you that the members of that group have markets that we couldn’t even imagine having if we were on our own,” said Weeren, who help create the organization.

David VanDelinder noted that many agencies are still limited in their ability to expand their book of business because they are often restricted in the amount of business they can write with the companies they represent. He’s hopeful that if the legislative session goes well, carriers that sell through independent agents “will really try to capture market share and agents will need to be prepared to market that. There’s going to be more opportunity than there has been in the past.”

He noted that “one thing good thing” that has emerged from the difficult market is that consumers have begun to question the validity of remaining with their traditional carriers. “And when you consider that four companies write over 75 percent of the homeowners in this state, that’s a good thing for independent agents,” VanDelinder said. “It gets people thinking about shopping. We’re the ones that offer a choice of multiple carriers, so they can be assured they’re getting some review between carriers of their business. So I think it represents a real opportunity for independent agents if they’ve got companies that will continue to write the business.”

To some extent another stabilizing factor on the market has been the opening of the Fair Access to Insurance Requirements, or FAIR plan, by TDI as the state’s market of last resort for homeowners insurance. Beginning in December 2002, insurance agencies were given access to the plan in phases, starting with 450 agencies. By March, the count was up to about 1,300 agencies. The department recently threw the doors open to any property and casualty insurance agency wanting to make the FAIR plan available to its customers who meet the plan’s eligibility criteria.

“The FAIR plan is getting a lot of action,” said Lee Jones, a TDI spokesperson. He said as of mid-March the plan had over 4800 policies, but added that the number is increasing by as many as 100 per day.

The plan is available throughout Texas to consumers who have at least two denials from insurance carriers that aren’t in the same group of companies. Jones noted that while the 12.5 percent commission may make it attractive to agents, the plan was designed for the really hard cases. Plus, “the FAIR plan has a right to underwrite,” he explained. “They don’t have to take a house that’s really a problem house. They have underwriting standards.”

He said the average premium through the plan runs at about $1,000, but it offers much less coverage than can be obtained in the private market. “It’s really the bare bones HO-A with replacement costs,” Jones said. “That’s the only enhancement you can get—replacement costs instead of actual cash value. But it’s not a real rich policy. I hope (agents) explain to their customers—you have no water coverage with that. You don’t even have sudden and accidental. You just have no water coverage except windblown rain that comes into an opening, and that’s not a common situation.”

The right thing to do now
William McCord, senior vice president at Burns & Wilcox and director of its personal lines division, Service General, pointed out that many independent agents in Texas are still having a tough time. As a wholesaler, Burns & Wilcox, “is inundated with submissions, our problem is not submissions, it’s being able to quote them,” McCord said. “And then of course with the rates that some of these carriers are charging it’s a question of whether or not you can sell it. Of course as a wholesaler, we’re not dealing directly with the consumer, we’re dealing with the retail independent agent. They’re scrambling hard. They’ve lost a lot of markets that were available at one time in Texas.”

Acknowledging that, “it’s very, very difficult to be selling an increasing price,” McCord said now more than ever “a professional agent has to sell their value as an insurance professional and a risk manager for the client. You can’t just sell price because the price is going the wrong direction nowadays. The old days of selling—I’ll get it for you cheaper—simply can’t work in this environment because you can’t get it cheaper. And it’s an old adage—if you sell on price, you lose on price.”

McCord noted that this is a good time for the agent to take the opportunity to manage the client’s entire account, “to try to sell as much of it as they can. That’s a financial service axiom, the more account, the more of a financial picture that you have with a customer—banks are trying to do this—the more likely you are to retain the customer and build a relationship with them. And that’s the thing I think an agent can supply … the price is high historically, but there’s still value there when you look at the amount of coverage they’re purchasing.”

As for its part as an advocate for independent agents, the IIAT is both providing guidance to personal lines agents working with the new varieties of forms, and helping from a marketing standpoint through its promotion of the Trusted Choice program.
VanDelinder pointed out that personal lines agents who have been used to working with virtually one form, the HO-B, have found the array of forms to be somewhat confusing. The IIAT has developed on its Web site a comparison tool to help agents figure out what one company is offering with one type of form versus what another company is offering with another form. “We will add to that as companies change their forms,” VanDelinder said.

IIAT is also pushing the Independent Insurance Agents and Brokers of America’s Trusted Choice program as a marketing tool for its members. “I really feel that if our companies are happy with the situation that comes out of the Legislature, or at least satisfied with it, we’ve got an opportunity to capture some market share. And Trusted Choice is really designed to help agents do that—to bring some branding and some focus to the fact that we are a ‘choice’ agency, we’re not stuck with one company.”