The Perfect Texas Homeowners Storm (But Not Covered By The Policy)

Texas Department of Insurance Presented By Philip Presley Texas Department of Insurance Casualty Actuarial Society November 11, 2003

1. The Weather Fronts The Policy The Rates The Experience The Regulatory System Credit Scoring and Other Discounts Mold

The Policy Historically Promulgated by the Department Broad Coverage: Slow and Continuous Seepage of Water Backup of Water Water-Caused Damage to Slabs

The Rates Historically the Highest in the Nation Comparison of Texas Average Homeowners Rates to Countrywide (HO-3 Rates*) Year Texas Average Rate Countrywide Average Rate Texas as Percent of Countrywide 1995 $785 $418 188% 1996 $827 $440 1997 $855 $455 1998 $879 $481 183% 1999 $861 $487 177% * HO B Form in Texas Source: Various NAIC Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance Reports

The Experience Experience Heavily Affected by Weather Related Events: Hail and Tornados in the North and West Hurricanes Along the Gulf Coast Increasing Losses Due to Slab Damages Historically Unprofitable

Homeowners Paid Losses – Excluding Water Damage From 1994 to 2002

The Regulatory System Much of the Market Not Rate Regulated: Lloyds Plan Insurers Reciprocal Exchanges No Requirements to File Rates by Not Rate Regulated Companies Unregulated Market Growing Rapidly

TEXAS HOMEOWNERS MULTIPLE PERIL Source: TDI, Property and Casualty Insurance Experience By Coverage and Carrier Statutory Page 14

Credit Scoring and Other Discounts Insurers Began to Make Ever Increasing Use of Competitively-Driven Programs in Late 1990’s Ultimately Exacerbated Rate Increases for Some When the Storm Hit

Texas Reported Mold-Related Claims by Quarter Based on Claims Reported to Five Largest Writers Report Quarter Est. Total # of Claims Est. Incurred Loss & ALAE # of Claims Per 1,000 Policyholders Avg. Loss & ALAE Per Claim [(3)/(2)] Avg. Cost Per Policyholder Per Year (1) (2) (3) (4) (5) (6) 2000:1 1,050 14,405,484 1.7001 13,719 23.32 2000:2 1,933 29,778,910 3.1539 15,402 48.57 2000:3 1,627 39,098,068 2.6660 24,024 64.05 2000:4 2,472 69,378,367 4.0763 28,061 114.39 2001:1 4,033 146,047,711 6.6911 36,213 242.31 2001:2 7,145 246,771,128 11.7077 34,538 404.36 2001:3 11,318 274,044,194 18.3517 24,213 444.35 2001:4 14,706 187,514,976 23.5667 12,751 300.50 Total 44,285 1,007,038,839 9.0352 22,740 205.46

Homeowners Paid Losses From 1994 to 2002

2. The Storm The Mold Hearings Sharp Increases in Rates Changes in Coverage Availability Problems Moratoriums on Business Threatened Withdrawals Public Outcry

Policies currently vary by company * Policies currently vary by company. They include enhanced versions of the HO-A, the state's minimum peril policy; various national forms that have been approved for use in Texas; as well as the traditional HO-B, the states most comprehensive form. Shading represents reduced coverage. Reduction in coverage will vary depending on policy. Various estimates of the reduction in coverage range from 15% to nearly 45%.

3. The Aftermath Creation of the FAIR Plan Legislation: SB 310 SB 14

The FAIR Plan Formed in Late 2002 Offers Basic Coverage Similar to ISO HO-1 86,000 Homeowners Policies Written in First 10 Months of 2003 About 13,000 Other Policies (Tenants, etc.) Written in First 10 Months of 2003 Premiums of About $70,000,000

SB 310 TDI to Prepare a Report to Inform the Texas Legislature: Whether Homeowners Rates are Just, Adequate, and Reasonable and Not Excessive or Unfairly Discriminatory To Assist in the Determination of the Most Effective and Efficient Regulatory System

SB 14 (145 Pages Long) Makes Virtually All Lines and Companies Subject to File and Use Immediately (6/11/03), Except: Personal Auto Effective 12/1/04; and Residential Property Prior Approval Until 12/1/04, Then File and Use Requires Immediate Residential Property Filings From All Insurers, and Gives TDI the Authority to Approve or Modify the Filed Rates Places Certain Restrictions on the Use of Credit Scoring

SB 14 (continued) Places Certain Restrictions on Territorial Rate Differentials Allows Companies to File Their Own Forms for All Lines Requires That All Rates Be Just, Fair, Reasonable, Adequate, Not Confiscatory and Not Excessive for the Risks to Which They Apply, and Not Unfairly Discriminatory And Much, Much More

Texas Department of Insurance Philip Presley Chief Actuary, Property & Casualty Program Texas Department of Insurance 333 Guadalupe Austin, Texas 78701 (512) 475-3017 (800) 578-4677