Every election cycle has a four-letter word. Last time around it was property tax. This time it’s insurance. (Notice a theme? Homeowners are always pissed about something. And they vote.) Home insurance rates–steadily rising for the last 18 months–began skyrocketing over the summer, with many customers seeing their bills double overnight. Farmers Insurance took every one of their customers, regardless of how long they had been with the company or whether they had ever even filed a claim, and re-evaluated every policy, in part based on the customer’s credit history, of all things. Citing mounting losses from mold claims, all of the big four–Farmers, Allstate, State Farm, and USAA–pulled similar moves, and Texas now has some of the highest rates in the nation. Placing the blame squarely on inaction by Governor Perry, Democratic challenger Tony Sanchez has made insurance reform the cornerstone of his campaign. Perry has scrambled in recent months to appear proactive, cracking down on the “illegal” pricing policies of Farmers. In late September, Farmers retaliated by announcing they would leave the state–and their 700,000 home policyholders–in the dust. With just a few weeks to go before November 5, the timing couldn’t have been better for the Sanchez campaign.
But who is really to blame for the crisis? And how did we get to this sorry pass? It’s certainly true that losses in Texas have been high in recent years, and mold claims have played a big part. But focusing on mold misses the bigger picture. This isn’t the first time the industry has been in crisis, and for longtime observers of the industry, the current fiasco comes as no surprise. That’s because the insurance industry is cyclical. Insurance companies are like banks; they use income from policy premiums to make investments in the stock market, real estate, bonds–wherever money can be made. During bull markets like the 1990s, they compete with each other for investment capital by lowering their rates as far as they can. In the industry this is known as a soft market, when the game is to get as much premium money as you can, as fast as possible, regardless of the risk of what you are insuring. In the mad rush to write policies during the soft market of the 1980s, a company actually insured the MGM Grand Hotel in Las Vegas after it burned down, knowing they would have to pay the claim.
Inevitably, the stock market cools, interest rates come down, and the economy slows. With their investments in the tank and their bottom lines looking bleak, insurers suddenly become less generous with their clients. Time to raise rates, and fast. “They took some bad risks in the nineties, just as they did in the eighties before the last crisis hit,” explained Joanne Doroshow of the Center for Justice and Democracy in Washington, D.C. Many studies were done in the ’80s on the relationship between stock market losses and premiums, Doroshow said, and they all came to the same conclusion: It’s the stock market, not just losses, that determines what customers will pay for insurance.
“If they could just learn to raise rates 10 percent a year, instead of waiting for years and then jacking them,” said Texas State Representative Craig Eiland, the ranking Democrat on the House insurance committee. “My bill rose 85 percent last year. You know people don’t get 85 percent raises,” he said. But the companies can’t help themselves, and, over the last 10 years at least, the state of Texas has not been willing to be the traffic cop.
The problem began in the early 1990s. Governor Ann Richards had won election on a reform platform, following the insurance crisis of the 1980s. Her reforms created the benchmark system, whereby the commissioner of insurance set a rate for auto and home insurance, and companies had to charge customers within 30 percent of that rate, over or under. But the reform effort left in place a key loophole: For special homes that defied normal risk assessment, say ultra-expensive houses, companies could sell unregulated policies, known as Lloyd’s policies. That was all the thread the companies needed to unravel the whole system, said D.J. Powers of the Austin-based Center for Economic Justice. The definition of a special home was vague enough to allow some experimenting by insurers. “They began gradually shifting more and more homes into the Lloyd’s policies, waiting for the backlash to come,” Powers said. The backlash never came, and today an estimated 95 percent of homeowner’s policies are unregulated. Not only does the state have no control over prices, the companies don’t even have to report what they are charging to the Texas Department of Insurance. (A similar trend in auto insurance has left roughly 35 percent of policies unregulated.)
It wasn’t that the mold losses weren’t real, said Rob Schneider of Consumer’s Union. But losses should never cause such a shock in a properly regulated system. “The difference between rate regulation and what we have now is that companies are trying to recoup their losses in a single year.”
And the Department of Insurance is powerless to stop them, prompting some to ask just what it is they do, anyway. “If the industry is 95 percent deregulated, then what the hell are you paying a bureaucracy to protect you for?” said Democratic State Representative Lon Burnam, who sits on the insurance committee. Even without the benchmark system, however, the insurance commissioner, who is appointed by the governor, can use the position as a bully pulpit. It’s his job, Burnam said, to drum up support for re-regulation–to keep the companies in line, in other words, as former commissioner Elton Bomer did when W. was governor. That hasn’t happened under Perry appointee Jose Montemayor. “As far as I’m concerned, there has been zero leadership from the executive branch,” Burnam said. “We have gone overboard in this state with this mantra of deregulation, and now we’re paying the price.” It’s not that Montemayor is incompetent, said Craig Eiland. “My personal belief is he doesn’t get enough support from his boss. I don’t think commissioner Montemayor would come out and publicly say that Perry prevented him from doing what he thought was necessary, but I think Montemayor knows enough about insurance regulation to know he needed to do some things that he hasn’t done.”
But the Legislature has been AWOL, too, as Lon Burnam knows only too well. The progressive Fort Worth Democrat has brought re-regulation bills of one variety or another before the House insurance committee in each of the last three sessions. You could call him the Chicken Little of the committee, except that he was right. “The sky really was falling and nobody was listening,” Burnam said. Democrats can place the blame on the Republican committee chair, Rep. John Smithee. But Smithee is part of Democratic Speaker Pete Laney’s leadership team, and the committee has always had a Democratic majority. To their credit, the House did manage to pass a bill to end the industry’s use of credit history (known as credit scoring) in 1999, only to have it die in the Senate. A bill to rein in auto insurers made it all the way to the governor’s desk in 1997, but Bush vetoed it at USAA’s behest. Asked why they did not act sooner on home insurance, Eiland said members were just not hearing from their constituents, and the will was not there to re-regulate. “Prices weren’t skyrocketing, the economy was going well, things were stable,” Eiland recalled. The company was quietly deregulating itself, but customers were not feeling the pain. Not yet.
How about since January of 2001, when rates started creeping upward? Consumer’s Union and others have been calling for action from Perry since at least the summer of 2001. Early this summer, after rates had really gone through the roof, Eiland and most of the members of the insurance committee wrote to Perry urging him to call a special session on the issue. The Sanchez campaign has been calling for one, too, but Eiland said the emergency was real, not a political ploy. “This is something that affects every John Homeowner in the state–to me that’s when you call a special session,” he said. Instead, the issue will probably be declared an emergency at the start of the regular session in January, with the hope that a bill can be passed in the first 30 days. But with a huge deficit, school finance, and scores of other issues, it will be difficult to get legislators to focus on insurance alone. Plus, a special session would have stolen Sanchez’s fire on the issue. But Perry was apparently not that worried at the beginning of the summer.
Maybe he should have been. The governor finally did spring into action in recent months, but the results have been unimpressive. Montemayor first caved in to insurers’ complaints by allowing them to adjust their forms to exclude mold coverage, which many of them promptly did. When things still did not cool down, Perry and Montemayor chose to make an example out of Farmers. In August, Montemayor filed a lawsuit against the company over their pricing policies. But that was a sham, according to Powers. “It was purely a political stunt,” he said. “We’ve been calling for action for a year and he comes up with this just a few months before the election?” In September, the commissioner also proposed a rule to keep companies from denying claims based on past water damage. A good idea, but a little late. Consumer’s Union had been pushing for the move for some time, and Montemayor’s own man, Public Insurance Counsel Rod Bordelon, had called for the rule over a year ago. Stung by Sanchez’s ads, Perry got tough. The Department ordered Farmers to freeze its rates and demanded $150 million in restitution for policyholders. To Perry’s chagrin, Farmer’s called his bluff, announcing that they were getting out of home insurance in Texas altogether, leaving hundreds of thousands of homeowners in the lurch. With very little capacity among the remaining companies to absorb those homeowners, Farmers has the state over a barrel.
That was just a taste of the industry’s hardball tactics. In Washington, the insurance lobby rules the halls of Congress. “After 9/11 for example, they basically just walked in and demanded a bailout of the industry,” Joanne Doroshow said. “And there was no question they would get it.” Congress has basically thrown up its hands and left insurance regulation to the states, which is where much of the industry’s political capital is spent. According to data from the Center for Responsive Politics, the industry–led by the big four–gave more than $1.7 million in the 1998 election cycle in Texas. Over the years, the lion’s share of insurance donations has gone to Republicans, including over $900,000 to Rick Perry since 1997. But the real spending is on lobbyists. In 2001, according to numbers compiled by Texans for Public Justice, the industry had at least 100 lobby contracts worth a minimum of $3.45 million. Sensing the inevitability of some type of reform, the industry is gearing up more than ever for the 2002 Legislature. A consortium calling itself the Texas Coalition for Affordable Insurance Solutions has hired Public Strategies, the heavyweights of the Austin lobby, to represent their side this session. Farmers, meanwhile, has hired HillCo Partners, another major player.
What are we likely to see? If re-regulation seems inevitable, the industry will push for some kind of file-and-use system, in which companies report to the state what they have decided to charge for various lines, and the TDI gives its approval or disapproval within a short period. A much stronger reform would be to move every policy back into the benchmark system. Eiland said he would also like to see an end to the notorious practice of credit scoring. Another vital reform, which several states already have in place, would be to limit a company’s ability to pull out of certain lines of insurance in a state, as Farmers is now threatening to do with home insurance. “You tell ’em if they pull out of one line, you pull out of all of them, and you stay out,” Eiland said. “Otherwise, why would anybody write in tough lines during tough times?”
The industry sees the crisis a bit differently. In addition to fighting off these measures, they’ll be advancing their own slate of reforms, which will include limiting damages on mold and other claims. Yes, it’s another tort reform session, and the TV commercials blasting the trial lawyers are already running. Perry and David Dewhurst, the Republican candidate for Lt. Governor, have both already adopted the mantra, calling for damage limits and more regulation to break up the cabal of mold remediators and plaintiff’s attorneys who are exploiting the crisis. Dewhurst has also been calling for medical malpractice reform, another plum on the insurance company wish list this year. Every crisis, after all, has its silver lining. The ironic thing is, as Joanne Doroshow points out, history tells us that this crisis–our third since the 1970s–won’t last long. “Rates are gonna start going down again,” as the economy improves. “But while the iron is hot they’ll get their jury award limits and their malpractice reform.”
The prospects for just what type of reform we’ll get may become clearer after the elections in November, when we’ll know who our governor and lieutenant governor will be. The crucial House Speaker election will not happen until January. If we have some strong leadership in place, there will at least be a chance for meaningful reform, instead of more window dressing. And if not? Eiland summed it up in plain language: “The industry will be able to essentially write their own bill.”
Despite their threat to withdraw from Texas, we may not have seen the last of Farmers: The company announced it would not start sending out notices of non-renewal until November 11, a week after the election. They may be waiting to see who will be writing the bill, too.