Insurance industry officials and free-market advocates are cheering the Texas Sunset Advisory Commission for recommending the Texas Department of Insurance clarify and liberalize its property and casualty insurance ratemaking oversight. Activist groups, by contrast, are expressing skepticism.
The commission periodically reviews the performance of all Texas government agencies. It advises TDI to switch to a pure “file and use” system. Under such a system, insurers can submit rates to insurance regulators and use them right away. Regulators can request more data if they have reason to believe the rates constitute unfair discrimination or fraud or would endanger a company’s ability to pay claims.
Texas statutes imply such a system should exist but the state maintains a system that industry players call “file and haggle.”
“Rate regulation for the homeowners line of business has operated more as de facto prior approval than as true file-and-use,” says Fred Bosse, vice president of the Southwest Region of the American Insurance Association (AIA).
The Sunset Commission recommends system reforms that would involve setting clearer guidelines including time limits, clearer definitions of other information required, and greater disclosure of information. Other advisory commission recommendations include the department limiting its use of “prior approval” rate regulation and doing a better job of defining it. Prior approval is a rate regulation process involving government regulators approving prices before they can be used.
The staff also recommends continuing the Office of Public Insurance Counsel (OPIC), a “consumer advocate” independent of the department.
The law charges OPIC with reviewing rates, participating in hearings over contested rates, advocating on behalf of consumers, and providing information to consumers regarding insurance coverage and markets. But it has little real power. Advocates for continuing the agency argue an independent state office outside of TDI is crucial to sustaining a balance in the competing interests of insurance companies and consumers.
“An independent OPIC that is separate from TDI is vital to achieving the goal of a balanced insurance marketplace,” said Pamela Bolton, director of policy and research at
Texas Watch, a self-described consumer group that says it favors universal use of prior approval, disagrees with the Sunset Commission findings on TDI, and supports continuation of OPIC.
“Under a prior approval system, the consumer would not pay the inflated rate unless and until the rate is found by TDI to be fair, ” says Bolton.
Industry representatives, on the other hand, say the standards would move things in the right direction.
“Artificial controls also prevent consumers’ access to new and improved insurance products, which hinders business growth and increases costs for consumers,” says Bosse.
“Texas’ overall system for approving and administrating insurance rates ranks among the very worst in the nation. The use of prior approval rate regulation has no legitimate place in the personal lines property and casualty insurance market.” said Eli Lehrer, a senior fellow of The Heartland Institute and director of its Center on Finance, Insurance, and Real Estate.
Julie Drenner ([email protected]) is director of the Austin, Texas, office of The Heartland Institute’s Center on Finance, Insurance, and Real Estate.