Division 8. Underserved Areas for Residential Property Insurance
28 TAC § 5.3700
The Commissioner of Insurance adopts on an emergency basis, to take immediate effect, amendments to §5.3700, concerning designation of the underserved areas for purposes of residential property insurance pursuant to the Insurance Code Articles 5.35-3 and 21.49-12. Section 5.3700 also identifies the factors and methodology used in determining such underserved areas. The amendments remove all references to and provisions related to Article 21.49-12, the Market Assistance Program (MAP), and Class 2 underserved areas as well as correct one typographical error. The purposes of the emergency amendments to §5.3700 are to delete all language in conflict with emergency rule §5.3701 concerning MAP which is adopted on an emergency basis simultaneously with these amendments and to keep the provisions of §5.3700 as they relate to the Insurance Code Article 5.35-3, the Property Protection Program for Underserved Areas, in effect as previously adopted effective October 15, 1996.
Pursuant to the Administrative Procedures Act, Texas Government Code §2001.034, the Commissioner finds that an imminent peril to the public health, safety or welfare requires adoption of this rule on fewer than 30 days´ notice.
On September 25, 2002, the Farmers Insurance Group of Companies (Farmers) announced that it would not renew current homeowners insurance policies beginning November 12, 2002 and would no longer provide Texas consumers with homeowners insurance coverage. Farmers currently has approximately 700,000 residential property insurance policies, representing approximately 20% of the market, in force in Texas and its decision to non-renew will affect each of these households and the Texas homeowner market. It is estimated that as a result of Farmer´s decision to non-renew coverage, each month approximately 55,000 Texas consumers will be required to seek homeowners coverage from another insurer. Additionally, the State Farm Insurance Group of Companies (State Farm), which is the largest writer of homeowners insurance in Texas with over 30% of the market, has not been writing new homeowners policies for over a year. According to statistics obtained from the Surplus Lines Stamping Office of Texas, from September 30, 2001, to September 30, 2002, there has been a 91% increase in the homeowners premium written by surplus lines insurers, which indicates a significant increase in the writing of homeowners policies by surplus lines insurers. This increase is a clear indication that consumers are having difficulty obtaining or are finding it impossible to obtain homeowners insurance coverage through the voluntary market, and have had to obtain such coverage in the surplus lines market.
Farmers and State Farm write over 50% of the homeowners market in Texas, and as of November 12, 2002, both of these insurers will no longer be writing new homeowners policies. Therefore, the group of insurers who write less than 50% of the homeowners market in Texas will be left to absorb the estimated 55,000 new policies that will need another insurer each month as a result of Farmers´ decision to non-renew its entire book of Texas homeowners policies as well as those homeowners policies that would have been written by State Farm. Considering these facts in tandem with the statistics from the Texas Surplus Lines Stamping Office which show that consumers are currently experiencing difficulty in obtaining homeowners coverage in the voluntary market, it is clear that when the more than 55,000 consumers who will be in need of homeowners coverage in November 2002 begin to seek new policies, these consumers will face greater difficulty in obtaining or find it impossible to obtain homeowners insurance coverage through the voluntary market.
Section 5.3700 is amended to delete all references and provisions concerning MAP so that this section will not conflict with the emergency rule §5.3701 concerning the designation of underserved areas for MAP purposes. These amendments also delete the definition and all other references to "Class 2 underserved areas" because they are also inconsistent with emergency rule §5.3701. These amendments allow the Property Protection Program to continue to operate without any changes to this program.
The amended sections are adopted on an emergency basis under the Insurance Code Articles 5.35-3 and 21.49-12, and §36.001, as well as Government Code §2001.034. Article 5.35-3 authorizes the Commissioner to adopt rules to determine and designate underserved areas for residential property insurance. Article 21.49-12 §8 authorizes the Commissioner to adopt rules that are appropriate to accomplish the purposes of that article. Section 36.001 provides that the Commissioner of Insurance may adopt rules to execute the duties and functions of the Texas Department of Insurance only as authorized by statute. Government Code §2001.034 provides for the adoption of administrative rules on an emergency basis without notice and comment.
§5.3700. Designation of Underserved Areas for Residential Property Insurance for Purposes of the Insurance Code,
Article [
Articles] 5.35-3 [
and 21.49-12].
(a) Purpose and scope. The purpose of this section is to:
(1) designate the areas determined by the Commissioner of Insurance to be underserved areas for purposes of residential property insurance pursuant to the Insurance Code, Article 5.35-3 (Property Protection Program for Underserved Areas)
and [
;]
(2) [
designate the areas determined by the Commissioner of Insurance to be underserved areas for purposes of residential property insurance pursuant to the Insurance Code, Article 21.49-12 (Market Assistance Program); and]
[
(3)] identify the factors and methodology used in determining such underserved areas.
(b) Definitions. The following words and terms when used in this section shall have the following meanings unless the context clearly indicates otherwise.
(1) Class 1 underserved area--An area determined and designated in this section as an underserved area by the Commissioner of Insurance for purposes of [
both] the Property Protection Program operated pursuant to the Insurance Code, Article 5.35-3[
, and the Residential Property Insurance Market Assistance Program operated pursuant to the Insurance Code, Article 21.49-12.
Policy forms and types of coverage that insurers may write in these areas are specified in §5.10004(b)(1) and (d)(2) of this title (relating to MAP Policy Forms and Types of Coverage)].
(2)[
Class 2 underserved area--An area determined and designated in this section as an underserved area by the Commissioner of Insurance for purposes of the Residential Property Insurance Market Assistance Program operated pursuant to the Insurance Code, Article 21.49-12. Policy forms and types of coverage that insurers may write in these areas are specified in §5.10004(b)(1) and (d)(2) of this title (relating to MAP Policy Forms and Types of Coverage).]
[
(3)] Commissioner--Commissioner of Insurance of the State of Texas.
(3)[
(4)] Department--Texas Department of Insurance.
[
(5) Market Assistance Program--The residential property insurance market assistance program operated pursuant to Article 21.49-12 of the Insurance Code and §§5.10001-5.10015 of this title (relating to Plan of Operation).]
(4)[
(6)] Property Protection Program--The residential property insurance program for underserved areas operated pursuant to Article 5.35-3 of the Insurance Code.
(c) Class 1 underserved areas.
(1) The following areas are designated as Class 1 underserved areas, effective October 15, 1996:
Figure 28 TAC 5.3700(c)(1)
( For copies of graphics contact ChiefClerk@tdi.texas.gov )
(2) The following areas are designated as Class 1 underserved areas, effective January 15, 1997:
Figure 28 TAC 5.3700(c)(2)
( For copies of graphics contact ChiefClerk@tdi.texas.gov )
(3) The following areas are designated as Class 1 underserved areas, effective April 15, 1997:
Figure 28 TAC 5.3700(c)(3)
( For copies of graphics contact ChiefClerk@tdi.texas.gov )
(d) [
Class 2 underserved areas.]
[
(1) The following areas are designated as Class 2 underserved areas, effective October 15, 1996: ]
[Figure 28 TAC 5.3700(d)(1)]
[
(2) The following areas are designated as Class 2 underserved areas, effective January 15, 1997:]
[Figure 28 TAC 5.3700(d)(2)]
[
(3) The following areas are designated as Class 2 underserved areas, effective April 15, 1997:]
[Figure 28 TAC 5.3700(d)(3)]
[
(e)] Factors considered in designating Class 1 [
and Class 2] underserved areas. In determining the areas designated as underserved, the Commissioner shall consider whether residential property insurance is not reasonably available to a substantial number of owners of insurable property in a specific geographic area and any other relevant factors as determined by the Commissioner. The determination of the areas to be designated as underserved is based on the factors and methodology outlined in this subsection.
(1) There is no single comprehensive measure of whether residential property insurance is or is not reasonably available or is or is not potentially reasonably available to a substantial number of owners of insurable property either on a statewide basis or in any particular area of the state. Therefore, the Commissioner has identified characteristics of particular geographic areas which are likely to be associated with greater difficulty by consumers in obtaining residential property insurance. These characteristics were considered in addition to direct measures of residential property insurance availability (including the number of surplus line policies as specified in paragraph (3)(F) of this subsection).
(2) The Commissioner considered underwriting restrictions and requirements of insurers writing residential property insurance in Texas that would limit availability of residential property insurance coverages to a greater extent in some geographic areas than in others. Underwriting guidelines are the rules used by insurers to determine whether or not to sell an insurance policy to a particular consumer and what, if any, restrictions will be placed on the policy issued. Many underwriting guidelines have a differential geographic impact. These guidelines include weather-related loss exposure, type of dwelling, age of dwelling, minimum dwelling value, financial stability of consumers, employment status of consumers, length of continuous employment, occupation, and length of continuous residency.
(3) Based upon the review of insurer underwriting guidelines and the Commissioner's authorization under Article 5.35-3 [
and the Commissioner's mandate under Article 21.49-12] to establish
a program [
programs] to increase the availability of residential property insurance in designated underserved areas as well as the structure and methods of operation of the
program [
two programs], specific factors for analysis by ZIP Code area or county were developed, and points were assigned to each of the factors. If the factor for a specific ZIP Code indicated actual or potential difficulty for consumers in obtaining residential property insurance, the ZIP Code was assigned one point. If the factor for a specific ZIP Code indicated especially significant actual or potential difficulty for consumers in obtaining residential property insurance, the ZIP Code was assigned two points. ZIP Codes not receiving one or two points received zero points for the specific factor. The specific factors and the points assigned are as follows:
(A) Low median household income. Underwriting guidelines related to financial, employment and residential stability and credit histories will likely affect consumers in areas with lower-income to a greater extent than consumers in other areas. Therefore, ZIP Codes with median household incomes of $16,000 or less are assigned one point, except that because of higher median incomes in Harris, Dallas, and Tarrant Counties, ZIP Codes in these counties with median household incomes of $18,000 or less are assigned one point.
(B) Low median value of owner-occupied homes. Underwriting guidelines relating to minimum coverage requirements will likely affect consumers in areas with lower median housing values to a greater extent than consumers in other areas. ZIP Codes with median value of owner-occupied dwellings of $30,000 or less are assigned one point, except that because of higher underwriting standards in Harris, Dallas, Tarrant, and Travis Counties, ZIP Codes in these counties with median values of owner-occupied dwellings of $40,000 or less are assigned one point.
(C) Older median age of homes. Underwriting guidelines relating to age of dwelling will likely affect consumers in areas with older median housing age to a greater extent than consumers in other areas. ZIP Codes with a median year built of 1957 or earlier are assigned one point.
(D) High percentage of dwelling to homeowners policies. The consideration of this factor is based on the premise that a high percentage of dwelling to homeowners policies in an area is a possible indicator that insurers are restricting their writing of homeowners policies. A high percentage of dwelling policies may indicate that insurers are issuing dwelling policies even if the homeowners policy could be issued, when the coverage amount was less than the insurer was willing to issue or the perceived risks were such that the insurer wanted to reduce exposure by writing a less comprehensive coverage. Also, because consumers purchasing homeowners coverages generally have more choices than consumers purchasing dwelling coverages, the increased coverage choices available through the Property Protection Program will likely have a greater impact in areas with higher percentages of dwelling policies to total policies. Because the statewide percentage of dwelling policies to total dwelling plus homeowners policies is about 20%, ZIP Codes with percentages of dwelling policies to total dwelling plus homeowners policies of more than 50% are assigned one point.
(E) High theft losses per policy. The consideration of this factor is based on the premise that because of insurers' perception of high theft losses in certain areas, insurers are reluctant to sell policies which include theft coverage. Consumers in high theft areas, therefore, have less availability of all kinds of coverages. The Property Protection Program allows policies to be sold without theft coverage, thereby creating the potential for greater availability in areas with high theft losses. Because the statewide average theft loss per residential property policy is approximately $70, ZIP Codes with a three-year average (1993-1995) of $125 or more theft losses per policy are assigned one point, while ZIP Codes with an average of $150 of theft losses in each of the three years are assigned two points.
(F) The number of surplus lines policies. By definition, consumers who have obtained residential property insurance coverage through a surplus lines, or non-admitted, carrier have been denied coverage in the admitted market. Based on a sample of 1994 and 1995 surplus lines policies representing about 75% of the total surplus lines residential property insurance writings in Texas, the statewide average of surplus lines policies to total dwelling and homeowners policies is about 1.0%. Because surplus lines data is available by county and not by ZIP Code, ZIP Codes in counties with surplus lines percentages of 2.0% to 4.0% are assigned one point, while ZIP Codes in counties with surplus lines percentage of over 4.0% are assigned two points.
(4) Based on the factors and points specified in paragraph (3) of this subsection, the number of points assigned were totaled by ZIP Code. Areas with three or more points were identified as the most underserved or potentially most underserved and generally designated as Class 1 underserved areas. [
Areas with two points were identified as underserved or potentially underserved and generally designated as Class 2 underserved areas.] Generally, areas with zero
, [
or] one
, or two points [
point] were not designated as
Class 1 underserved areas. The designated areas resulting from these general rules are modified for
two [
four] reasons:
(A) First, [
areas with two points are generally designated as Class 2 underserved areas if the areas were geographically contiguous with other areas of two or more points to promote geographically contiguous underserved areas. Geographically]
geographically isolated ZIP Codes with
more than two [
or more] points are not designated as [
Class 2 or] Class 1 underserved areas to avoid identifying a random result as an underserved area. In addition, groupings of ZIP Codes with
more than two [
or more] points but with very few policies are not designated as [
Class 2 or] Class 1 underserved areas to enable insurers participating in the [
MAP and] PPP to dedicate their initial commitment of resources to underserved areas with the greatest potential impact.
(B) Second, [
certain areas with zero or one point are designated as Class 2 underserved areas because of additional information available to the Department regarding availability problems in certain areas. This additional information included the testimony presented at public hearings held by the Commissioner for the purpose of soliciting comments from consumers, agents, insurers and other interested parties on residential property insurance availability
problems. The February 8, 1996, hearing in Arlington, Texas identified severe restrictions in residential property insurance writings by insurers in Dallas and Tarrant Counties. The Department's review of underwriting guidelines that was done as preparation for the Arlington hearing, which included the insurers' plans for writing residential property insurance in Tarrant County and the City of Dallas, confirmed the geographically-targeted restrictions in Tarrant County and the City
of Dallas. Therefore, zero and one point areas in Tarrant County and the City of Dallas are designated as Class 2 underserved areas because of severe restrictions imposed by insurers on new and existing business in those areas.]
[
(C) Third,] certain areas with two points, which are geographically contiguous with areas of three or more points, are designated as Class 1 underserved areas in Harris and Bexar Counties [
and Bexar Counties] to create a geographically contiguous area of eligibility for the Property Protection Program.
[
(D) Fourth, certain areas in the City of Dallas with three or more points are designated as Class 2 underserved areas to test for the effectiveness of the Market Assistance Program alone in addressing insurance availability problems, especially in comparison to the underserved areas in Harris County which consist solely of Class 1 designations.]
(e)[
(f)] Changes in Class 1 [
and Class 2] designations. Any changes in Class 1 [
or Class 2] designations may be adopted at any time by amending this section pursuant to the Government Code, §§2001.004-2001.038 (Administrative Procedure Act).