Complaints of exorbitant home insurance rate hikes — some as high as 300 percent — are driving consumers to demand that Texas Insurance Commissioner Jose Montemayor step in and force home insurers to lower their prices. But many Texans don't realize that the commissioner's hands are tied by a collection of unique insurance company structures that exempt most Texas home insurers from rate regulation.

According to the Texas Department of Insurance (TDI), state law exempts insurers now writing 95 percent of the home insurance sold in Texas from any kind of rate regulation. This is not good news for Texas homeowners and they're voicing their anger. In 2000, the TDI received just 24 formal complaints from consumers who said they were being charged excessively high home insurance rates. In 2001, that number skyrocketed to 242.

Water-damage and toxic mold claims are the most easily identifiable culprits driving the sudden large rate increases. Ever since June 2001, when a jury awarded a Texas family $32 million in a highly publicized toxic mold lawsuit against Farmers Insurance Group, the Texas home insurance market has been in upheaval. But many people are unaware that this crisis is fueled by insurance company structures that are unique to Texas.

How it got this way

County mutuals, farm mutuals, Lloyd's companies (named for Lloyd's of London), and reciprocal exchanges are the four unique insurance company structures that began springing up in Texas after the turn of the 20th century. Most of them came into being as a way for companies to insure problematic risks such as fires in rural settings that are exposed to many types of severe weather, including hail, tornadoes, thunderstorms, hurricanes, and high winds.

"When you put pressure on one end of the marketplace, it's only natural that insurers will take the path of least resistance to relieve that pressure," says Don Hanson, southwest regional manager for the National Association of Independent Insurers.

Eventually, Texas insurance companies with these four structures began successfully competing with more traditional nationally prominent insurance companies. As the rate-exempt Texas insurers grabbed increasing market share, the national insurers began imitating their competitors. They either bought rate-exempt companies with these structures already in place or formed new ones. An added incentive? At a time when insurance companies across the nation were calling for a less regulated environment, these Texas companies remained exempt from rate regulation. The mass migration of home insurance business away from the traditional insurers' rate-regulated companies to their rate-exempt subsidiaries was underway.

But it all came to a head early this year as the rate-exempt insurers began hiking their prices due to heavy losses caused by a combination of factors, including skyrocketing mold claims, Tropical Storm Allison, and investment losses suffered in the recent economic downturn. Complaints of wildly inflated home insurance premiums spurred Texas insurance regulators to examine the market conduct of two of the state's top three home insurers, Allstate Insurance Co. and Farmers Insurance Group. State Farm, the state's largest writer of home insurance, is not included in the market conduct examinations. State Farm is not selling any new comprehensive home insurance policies in Texas.

Because Allstate's Texas subsidiary is a Lloyd's company and the Farmers' Texas subsidiary is a reciprocal exchange, they are exempt from rate regulation. The TDI can only review the insurers' rate-setting processes to determine whether any "discrimination" was involved. The TDI can fine or issue cease-and-desist orders to insurers if they are found to be discriminating against homeowners on the basis of race, religion, or geographic location, but it cannot compel the insurers to lower their rates if no discrimination is found.

File-and-use in the future?

The Texas House Insurance Committee is currently drafting emergency recommendations due to the volume of consumer complaints because the state Legislature does not meet in regular session until 2003. Committee Chairman Rep. John Smithee (R-Amarillo) has said the committee will most likely propose a "file-and-use" system for both home and auto insurance that would require all Texas property insurers to notify the TDI of premium increases.

Under a file-and-use system, the TDI could object to rate increases deemed excessive or unjustified and seek to have rates rolled back to previous levels.

Texas insurers have not come to any kind of consensus on the issue of file-and-use, according to Jerry Johns, president of the Southwestern Insurance Information Service, an industry trade group. "While we're supportive of anything that enhances competition [among insurers]," he says, "there are a variety of file-and-use systems and some are good and some are not-so-good."

Johns says it is impossible for the industry to respond to proposals that have not yet been finalized, but he did say insurers would consider a file-and-use system more advantageous than a system of prior approval, where insurers would not be able to raise their rates until they receive the OK from the TDI.

"We want what's best for the consumer as well as the industry," says Johns. "We wouldn't want the commissioner to have to go back and revisit a [rate-setting] system because it was working poorly."