Farmers’ Pullout Puts Agents, Homeowners in a Jam
Negotiations continued in early October between state officials and senior executives of Farmers Insurance Group of Companies in the effort to find a solution that would entice the insurer to continue to provide homeowners coverage to its Texas customers. As of press time no settlement had been hammered out but the legislators who called the meeting, Sen. Robert Duncan (R-Lubbock), Sen. Troy Fraser (R-Horseshoe Bay) and Rep. John Smithee (R-Amarillo), remained hopeful that a compromise with the insurer could be negotiated. Duncan, a certified mediator, told the Austin American-Statesman that although a resolution hadn’t been reached, issues were being identified and worked on.
Farmers announced in September that it would stop offering new homeowners policies in the state as of Oct. 31 and would cease renewing existing policies beginning in November. The company has stated that it will continue to service each policy until its expiration date and will honor claims filed on those policies.
The insurer’s decision to give up on the homeowners market came after Texas Attorney General John Cornyn filed a lawsuit against Farmers over what were deemed to be illegal pricing practices and the Texas Department of Insurance (TDI) ordered Farmers to cease-and-desist using unfair and illegal pricing practices to overcharge policyholders and to refund the amounts of overcharges to policyholders. Farmers then filed a counter lawsuit against the attorney general’s office and TDI claiming political harassment.
In renewal letters to customers and notices to its own agents, Farmers insisted that “the type of property insurance policy and the rates we are using today would allow us to continue to serve Texas homeowners. However, the demands made by the Texas Department of Insurance will not allow us to do so.” The company said that losses in its homeowners line during the past two and a half years total $1.3 billion, a number that includes some $435 million losses incurred this year through the month of June. Farmers added that even without mold-related claims, it had an underwriting loss of over $500 million. The company asserted that it cannot continue to sustain those kinds of losses
Farmers lays the blame for its pullout squarely on TDI’s shoulders. In letters to agents and notices to customers Farmers stated, “The actions by the Texas Department of Insurance currently makes it unfeasible for us to offer renewal of our Texas homeowners policies.” And the company disputes TDI’s allegations of pricing irregularities. “The real issue here is the allegation of unfair pricing practices, which is completely false,” said John Hageman, Texas State Executive Director for Farmers “We continue to find wide disagreement over the numbers characterizing our homeowners experience, despite the fact that we have repeatedly presented all our data to the TDI and offered to have independent third-party actuarial review, which they will not accept.”
Still, the insurer’s decision to pull out of the market has left homeowners and Farmers agents scrambling to find coverages. According to one agent who spoke on the condition of anonymity, “life has been kind of upset” for Farmer’s agents. He said that most agents are wary of speaking out because if they “step across the line by saying too much,” the company can fire them. He noted that if Farmers doesn’t place a line in a state, agents are allowed to take that business to another carrier and that some agents have “other sources for placing business.” However, while TDI has insisted there is plenty of capacity to take over Farmers’ business, he said agents are questioning how much capacity there really is. He also said some agents may take the move as sign it is time to retire from the company.
Farmers, in its letter to agents, offered several options to help agents grow their income despite the loss of Farmers homeowners line. One of those initiatives is to provide a temporary increase in new business auto commissions from 10 percent to 14 percent, a move that would be effective from Oct. 1, 2002 through March 31, 2003. It also reminded agents of its policy of allowing them to place business not currently offered by Farmers with outside carriers. However, one danger agents see is that homeowners forced to take their residential policies elsewhere may elect to take other policies—such as life an auto—as well, to take advantage of multiple policy discounts.
In an announcement issued shortly before Farmers’ declared it will no longer offer homeowner’s renewals, TDI maintained that Farmers refuses to take responsibility for its actions. The department noted that company:
• Continues to mislead consumers and regulators by claiming they have been forced to raise premiums due to record mold losses when, in fact, those losses occurred last year under a different policy that has not even been offered to consumers in 2002.
• Continues to mislead consumers when explaining why they are charging excessive premiums by insinuating they have their rates approved by TDI. Farmers rates are not approved by TDI.
• Could have taken the necessary steps to expedite hearing to settle the issues against them in district court or at the State Office of Administrative Hearings (SOAH), but have refused to do so.
TDI, meanwhile, has tried to come up with strategies for increasing the availability of homeowners coverage. Insurance Commissioner Jose Montemayor recently initiated two actions—a statewide expansion of the Texas Windstorm Insurance Association (TWIA) and triggering of state market assistance programs, called the FAIR (Fair Access to Insurance Requirements) Plan—to assist Texas homeowners in finding insurance. Both are designed to build upon existing capacity available within the Texas homeowner’s market and, according to Montemayor, “Both actions are intended to be insurers of last resort.”
TWIA currently provides wind and hail coverage in 14 coastal counties and part of Harris County. The initiative expands the program statewide to owners of insurable property and widens coverage to include fire and explosion.
The FAIR plan would implement a system under which all property insurers would combine to provide coverage for insurable homes in “underserved” areas. To be eligible, a home may have to be rejected by two licensed companies.
“Although companies active in the homeowners market have plenty of capacity to facilitate additional customers, there is the potential that some consumers will have greater difficulty than others due to past claims or other problems,” Montemayor said. “By creating a residual market, we can complement the insurance industry’s current capacity and create a temporary safety net for those hard-to-insure consumers until the 2003 Legislature can consider a permanent solution.”
TDI established a Web site, www.helpinsure.com, to help consumers find homeowners insurance. In addition to educating consumers about homeowners insurance, the site aims to connect consumers to agents and companies. It contains a listing of companies currently offering homeowners insurance in Texas. As of September 24, there were 39 companies listed, 20 of which offered some form of the comprehensive HO-B coverage. In late September TDI approved Nationwide’s national homeowners policies for use in Texas. Earlier this year forms by State Farm, Countrywide and USAA were approved, along with Insurance Services Offices (ISO) forms available to companies that have not developed their own homeowners policies.
The Association of Fire and Casualty Companies of Texas (AFACT), a property/casualty insurance trade association, recently confirmed that most of its member companies, many of which have been operating in Texas for 50 years or longer, are still offering homeowners policies to Texas consumers. Association members include Lloyds and reciprocal companies that are not rate-regulated, but are regulated in other respects by the TDI. AFACT asserted that historically, most Lloyds and reciprocals have offered coverage at rates below the average benchmark.
USAA, the San Antonio-based insurer and financial services company, said it intends to accept applications from former Farmers homeowners customers who are eligible for USAA coverage if Farmers goes through with plans to pull out of Texas. USAA, the fourth largest homeowner insurer in Texas, serves military families. Current USAA members, active military personnel and active reserve or National Guard personnel, and children of current USAA members are eligible. The company provides around 200,000 homeowners policies.