The current insurance regulatory system in Texas, although defined as “file and use” under statute, is, for all intents and purposes, administered as a “prior approval” system.
Based on our analysis of all 51 major United States insurance markets, we believe that Texas’s overall system for approving and administering insurance rates ranks among the very worst in the nation. It offers consumers little genuine competition (particularly in coastal areas), charges some inland consumers rates that are too high, and, in many cases, encourages development in environmentally sensitive areas, destroying wetlands and wildlife habitat.
More than anything else, the current system aims to suppress rates. This, in the long run, hurts consumers. Professor Jim Garven of Baylor University aptly sums up the problem when he writes, “persistent regulatory suppression of insurance rates will likely cause product quality to deteriorate and limit insurance availability as insurers seek opportunities to exit the market.”
Better With ‘File and Use’
Texas would be better served through a switch to a true “file and use” system. A true file and use system would allow insurers to announce their rates and make use of them immediately.
We suggest the Texas Department of Insurance (TDI) be allowed to request more information from insurers only in order to satisfy certain core regulatory missions such as determining insurer solvency. Only if TDI has good reason to believe that a rate filing is likely to endanger a company’s ability to pay claims, somehow constitutes an act of fraud against consumers, or can legitimately be said to be unconscionable, should it be able to request additional information.
Furthermore, since a true file and use system has not been implemented, even after the 2008 recommendation, it is impossible to gauge the success of such a system. The use of prior approval rate regulation has no legitimate place in the personal lines property and casualty insurance market. As such, rather than implementing a review process, TDI should simply suspend all use of prior approval rate regulation in order to reap all of the benefits of a true file and use system.
Solvency and Consumer Protection
Government has a valid role in the regulation of insurance, and we agree that TDI should continue to exist. Enhancing TDI’s consumer protection functions, however, may require a broader redefinition of the department’s duties. In particular, we question the need for the department to provide rates that are “fair, nondiscriminatory, and not excessive,” at least as currently understood and implemented.
We believe that rate “fairness” should stem largely from risk incurred—individuals who take larger risks should pay more for insurance—and, as such, market competition provides the best way to ensure fairness.
Discrimination on the basis of immutable characteristics is undesirable in any economic context, and we agree insurers should be prohibited from discriminating on the basis of characteristics such as race, creed, and national origin that could never plausibly correlate with actuarial risk.
On the other hand, some characteristics, such as gender, are illegitimate to use in determining things such as employment but may have real value to actuaries. For example, men engage in riskier behavior—driving at excessive speeds and driving while intoxicated, for example—more often than women do and, as such, it is legitimate that insurers charge many men more than many similarly situated women for auto insurance. Texas allows this and should continue to do so. Non-discrimination in insurance markets is, of course, desirable, but it cannot and should not be defined the same way it is in other contexts.
‘A Market Concern’
The maintenance of non-excessive rates is largely a concern of the market. Individuals choose to pay vastly different sums of money for similar products. Cars range in price from perhaps $500 for a high-mileage used model to more than $1 million for a hand-built sports car. Individuals can and should make informed choices as to the prices they pay for insurance and, so long as rates appear conscionable and are extended in a forthright manner, they should be regulated by the same market forces that govern the prices of everything from bananas to socket wrenches.
TDI has little business regulating the prices paid for insurance except insofar as these prices endanger an insurer’s ability to pay claims. To advance the stated goals of “protecting and ensuring the fair treatment of consumers; and ensuring fair competition in the insurance industry, thus fostering a competitive market,” we suggest a limitation on TDI’s ability to disapprove rates. That will promote more competition and allow TDI to devote more time and resources to investigate genuinely dishonest practices and monitor companies’ ability to pay claims.
In the unlikely event that a less-regulated insurance system makes it more difficult for Texans of modest means to afford insurance products, the state could investigate ways to assist such individuals directly. People wealthy enough to build mansions on sand dunes or drive race cars on the road should pay the costs of engaging in such risks, even if the costs are quite high. Those who genuinely cannot afford insurance may well have a claim on some form of public-sector assistance, but it should be provided directly to those in need rather than by broad price suppression in the insurance market.
Julie Drenner ([email protected]) is director of the Austin, Texas office of The Heartland Institute’s Center on Finance, Insurance, and Real Estate. This article is adapted from her testimony before the Texas Senate Committee on Government Organization, March 21.