28 TAC §21.1004
1. INTRODUCTION. The Commissioner of Insurance adopts new §21.1004 concerning the use of residential property insurance claims in rating programs, including premium surcharge and claims-free programs. The new section is adopted with changes to the proposed text published in the December 2, 2005 issue of the Texas Register (30 TexReg 7994).
2. REASONED JUSTIFICATION. The new section is necessary to implement the amendments enacted under SB 14, by the 79th Legislature, Regular Session, to Insurance Code Article 5.43 (relating to optional premium discounts for certain residential property insurance policies) and Insurance Code §551.107 (relating to premium surcharges for residential property insurance policies). The new section is also necessary to establish requirements and procedures for residential property insurance rating programs, including premium surcharge programs and claims free programs, and for transition plans when an insurer introduces a new method or changes an existing method of evaluating a policyholder's claim experience which results in an increase of 10% or more in premium to any policyholder. These requirements and procedures are necessary to protect homeowners in Texas from increases in residential property insurance rates and premiums that vary greatly between renewal periods due to a new method or change in existing method of considering, utilizing, reviewing, or otherwise evaluating a policyholder's claim experience.
The Department invited public input on the SB 14 amendments in June 2005, and then posted an informal draft of the new section relating to residential property insurance claims on the Department website on September 19, 2005. Following publication of the proposed new section in the Texas Register on December 2, 2005, the Department held a hearing on February 15, 2006. In response to written comments received from interested parties prior to the hearing and comments made at the hearing, the Department has changed some of the proposed language in the text of the rule as adopted. The changes, however, do not introduce new subject matter or affect persons in addition to those subject to the proposal as published. The Department received various comments objecting to the word "drastic" in subsection (a) of the proposal to explain the purpose of the new section. One commenter opined that the use of the word "drastic" in proposed subsection (a) in referring to rate increases is unnecessarily negative and that there is nothing to support the idea that "drastic" rate increases may occur. Though the Department disagrees that the word "drastic" implies negativity against insurers, the Department has revised subsection (a) in the adoption to better articulate the purpose and intent of the rule and to clarify that the purpose of the new section is, in part, to protect homeowners from increases in residential property insurance rates and premiums that vary greatly between renewal periods and to provide homeowners with just, fair, and reasonable residential property insurance rates. One commenter suggested adding the words "premiums" and "property" in proposed subsection (a) for consistency in terminology in the new section and the Insurance Code. The Department agrees and has changed the proposed text in the last sentence of subsection (a) to read "This section applies to the rates and premiums applicable to residential property insurance policies that are delivered, issued for delivery, or renewed on or after January 1, 2006." The Department has also added the words "and premiums" to proposed subsection (f)(2) for consistency in terminology. The Department has made non-substantive changes to the term and definition of "natural cause claim" in proposed paragraph (b)(5). According to one commenter, a major concern to insurers is that the Department may be passing an opportunity to define "natural causes" and this is a time when the Department could provide either a definition or basis for classification as "natural." The Department agrees and has revised for clarification, consistency, and accuracy the definition of "natural cause claim" in proposed paragraph (b)(5). The Department has changed the term to "natural cause" and revised the definition of that term to read "a weather related cause" instead of "a weather related claim." Another commenter suggested deleting the definition entirely because, according to the commenter, it limits the scope and intent of the Legislature. The Department does not agree because a definition of "natural cause" is necessary to avoid ambiguity in interpretation and implementation of the new section. In response to comments, the phrase "claims incurred" in proposed subsection (c) has been changed to "filed claims occurring on or after September 1, 2005," because the Department agrees that a claim must be filed before it can be used in rating programs.
The SB 14 amendments harmonize Article 5.43 and §551.107 by adding language to Article 5.43 which conforms to the language in §551.107. The amendments identify claims that cannot be used as residential property insurance claims in rating programs whether the claims are considered for a premium surcharge or claims-free program. These claims include: (1) claims resulting from a loss caused by natural causes; (2) a claim that is filed but not paid or payable under a residential property policy; and (3) a claim that an insurer is prohibited from using under Insurance Code Article 5.35-4 §3 (recodified as §544.353, HB 2018, 79th Legislature, Regular Session). Section 544.353 is the legislative enactment of revised Article 5.35-4 without substantive change. One commenter objected to proposed subsection (c), relating to prohibited premium consequences, stating that it is overly broad because a reference to 28 TAC §21.1007 (Restrictions on the Use of Underwriting Guidelines Based on a Water Damage Claim(s), Previous Mold Damage or a Mold Damage Claim(s)) is included in subsection (c)(3). Although §21.1007 was adopted to accomplish the purpose of Article 5.35-4, the Department agrees that the reference may be confusing and has revised subsection (c)(3) as adopted to omit the reference to §21.1007. The provisions of Article 5.35-4, which have been revised and enacted in §544.353 without substantive change, and the rules promulgated under Article 5.35-4 continue to be in effect. The Department received other comments regarding proposed subsection (c) from commenters who interpret SB 14 to mean that the prohibited claims specified in the Insurance Code Article 5.43 and §551.107 and in subsection (c) are not prohibited until January 1, 2006. The Department does not agree with this interpretation for the following reasons. Under SECTION 8 of SB 14, the amendments to Article 5.43 and §551.107 became effective September 1, 2005; therefore, under the new section the effective date for implementation of subsection (c) is also September 1, 2005, but only for rates applicable to insurance policies that are delivered, issued for delivery, or renewed on or after January 1, 2006. This is because SECTION 7 of SB 14 provides that the amendments to Article 5.43 and §551.107 apply only to rates applicable to insurance policies that are delivered, issued for delivery, or renewed on or after January 1, 2006.
Under proposed subsection (f), insurers are required to file a transition plan when a new method is introduced or a change is made to an existing method of considering, utilizing, reviewing, or otherwise evaluating a policyholder's claim experience. The Department received several comments regarding the proposed transition plan requirements. One commenter objected to proposed subsection (f) because the transition plan adds another layer of rate regulation, which is the opposite of the intention for file and use regulation, and many commenters expressed concern that subsection (f) could require a transition plan for any rating change no matter how minor. Another commenter recommended requiring a transition plan only when "substantial" changes were made to rating programs, while other commenters requested clarification of the transition plan requirements. The Department disagrees that the transition plan adds another layer of rate regulation because, as one commenter noted at the rule hearing, some insurers currently prepare transition plans for their rating programs. In addition, the transition plan is rate filing information that is within the ambit of the file and use system that is regulated under Article 5.13-2 of the Insurance Code, and it is a component in the regulatory framework that is needed to accomplish the purpose of the rule which is in accordance with Article 5.13-2 of the Insurance Code. The Department agrees that a transition plan should not be required for every change to methods used to evaluate policyholder's claim experience, and in response to requests for clarification, the Department has revised proposed subsection (f) by adding a threshold premium increase of 10% to trigger the transition plan requirement. Subsection (f) as adopted requires a transition plan only if a new method or change in existing method of evaluating a policyholder's claim experience results in a premium increase of 10% or more for any policyholder. As a result of the concerns expressed by commenters, the Department has determined that it is appropriate for the transition plan requirement to be of shorter duration than that proposed in subsection (g) and has revised proposed subsection (g) to provide that the transition plan requirement ends on January 1, 2008, instead of January 1, 2009, as proposed. The Department has also made non-substantive changes in proposed subsection (a), proposed subsection (b)(3), and proposed subsection (g). The purpose in subsection (a) has been revised to include reference to the establishment of requirements and procedures for insurers to file a transition plan which is addressed in subsection (f) and which was inadvertently omitted from the proposed subsection (a). Proposed subsection (b)(3) has been revised by adding "in whole or in part" to the definition of "claims-free program." This change is needed for clarification purposes. The subheading for proposed subsection (g) has been changed from "Termination clause" to "Expiration clause" for purposes of consistency and clarification.
3. HOW THE SECTION WILL FUNCTION. New §21.1004(a) explains the purpose of the new section which is to protect Texas homeowners from increases in residential property insurance rates and premiums that vary greatly between renewals, to provide Texas homeowners with just, fair, and reasonable residential property insurance rates and premiums, and to place restrictions on the use of certain residential property insurance claims in accordance with Insurance Code Article 5.43 and §551.107. The section establishes procedures for insurers to file a transition plan when a new rating program is introduced or an existing rating program is changed. The section applies to the rates and premiums applicable to residential property insurance policies that are delivered, issued for delivery, or renewed on or after January 1, 2006. Subsection (b) defines terms used in the new section. Subsection (c) specifies the types of claims, in accordance with Insurance Code Article 5.43 §(a-1) and §551.107(b), for which an insurer may not assign any premium consequence through a premium surcharge or claims-free program based on filed claims occurring on or after September 1, 2005. Subsections (d) and (e) require that claims-free programs and premium surcharge rating programs utilized by residential property insurers be based on sound actuarial principles and subject to the actuarial support filing requirements of §5.9332 of this title in the event that such programs are introduced or changed. Subsection (f) requires residential property insurers to file a transition plan when an insurer introduces a new method or changes an existing method of considering, utilizing, reviewing, or otherwise evaluating a policyholder's claim experience which results in an increase of 10% or more in premium for any policyholder. Paragraphs (1) - (3) of subsection (f) set forth the transition plan requirements. Residential property insurance transition plans and rate filings are subject to the provisions of Article 5.13-2. Subsection (g) provides that the transition plan requirement expires on January 1, 2008.
4. SUMMARY OF COMMENTS AND AGENCY RESPONSE TO COMMENTS
General comments.
Comment: A commenter states that Article 5.35-4 of the Insurance Code was repealed September 1, 2005, and the commenter asserts that it no longer provides statutory authority for any proposed rule.
Agency Response: The Department agrees that Article 5.35-4 was repealed in HB 2018, 79th Legislature, Regular Session, effective September 1, 2005. However, simultaneous with the repeal was the enactment of Insurance Code §§544.351 - 544.354 also in HB 2018. Sections 544.351 - 544.354 constitute the revised Article 5.35-4 without substantive change that was enacted as part of the Texas Legislative Council's revised Insurance Code project. HB 941, 79th Legislature, Regular Session, amended Article 5.35-4 by adding subdivision (4), which was not repealed by HB 2018. Pursuant to Government Code §311.031(c), the repeal of a statute by a code does not affect an amendment or revision of the statute by the same legislature that enacted the code.
Subsection (a). Purpose and Applicability
Comment: Several commenters object to the use of the word "drastic" as it is used to describe rate increases in proposed subsection (a). One commenter states that use of this word carries an unnecessary note of negativity regarding insurers because there is nothing to support the idea that "drastic" rate increases might occur. Another commenter states that the proposal uses the word "drastic" in a way that appears to mean "unaffordable," which the commenter states is a vast departure from the meaning of the word "excessive" as used in an actuarial context. The commenter further states that "excessive" is a word used in rating laws in virtually every state and recommends "drastic" be changed to "excessive." Another commenter states that if "excessive" is vague in the context of this rule, then "drastic" is even more obscure. The commenter also expresses concern that the transition plan in proposed subsection (f) requires an insurer to evaluate each policyholder's premium change and to decide whether the change is "drastic."
Agency Response: The Department disagrees that the use of the word "drastic" to describe rate and premium increases implies negativity against insurers but rather contends that the term as used by the Department describes a potential outcome which could occur from an insurer's use of an individual's claim experience in rating programs. The SB 14 amendments may cause changes in an insurer's rating programs, and the Department's continuing goal is to protect consumers against excessive rates and premium changes. However, the Department has revised proposed subsection (a) in the adoption to better articulate the purpose and intent of the rule. The Department also disagrees that a transition plan would require the evaluation of each policyholder's premium change because actuaries can generally readily identify those groups of policyholders that would be most affected.
Comment: One commenter suggests that proposed subsection (a) be clarified to apply to "optional" claims-free and "optional" surcharge programs and that the terms "premiums" and "property" be added for consistency with the remainder of the new section and the Insurance Code.
Agency Response: The Department does not agree that adding the term "optional" in subsection (a) is necessary because the statutes are clear that such plans are optional. The Department does agree, however, that the addition in subsection (a) and subsection (f)(2) of the words "and premiums" to clarify that the new section applies to "rates and premiums," and the word "property" in subsection (a) to clarify "residential property insurance" is necessary for consistency and has revised subsections (a) and (f) accordingly
Subsection (b). Definitions
Comment: One commenter states that the definition in proposed paragraph (b)(1) of "residential property insurance" should be revised to exclude farm and ranch insurance and farm and ranch owners insurance because these lines are described as commercial property insurance in Article 5.13-2.
Agency Response: The Department disagrees. Farm and ranch insurance and farm and ranch owners insurance are lines that are included in the definition of "residential property insurance" in both Article 5.43 and §551.107, and those statutes are being implemented in this rule.
Comment: One commenter suggests that the term "claim experience" in proposed subsection (b)(3), which defines the term "claims-free program," should be defined and should pertain to the number of claims that are paid or payable under a residential property insurance policy. The commenter further states that the definition of "claims-free program" in proposed paragraph (b)(3) has been expanded beyond what is provided under Article 5.43. Another commenter states that the definition of "claims-free program" in proposed subsection (b)(3) is too broad unless the only reference to the term is in proposed subsection (d).
Agency Response: The Department disagrees that the term "claim experience" as used in the definition of "claims-free program" in proposed subsection (b)(3) is overly broad and needs to be defined. Article 5.43(d) specifically refers to the "claims experience" of a policyholder, and §551.107(c) refers to the existence of claims ("one or more claims in the preceding three policy years"). Article 5.43 and §551.107 do not say that a claims-free program or premium surcharge program must be based on a specific "number" of claims. For example, a claims-free program may depend on the absence of any claims or absence of claims over a certain dollar amount, or an insurer under a premium surcharge program may combine a certain number of claims as in three or more claims. The Department disagrees that the definition of "claims-free program" in proposed paragraph (b)(3) has been expanded beyond what is provided under Article 5.43 because the proposed definition of "claims-free program" is consistent with the statutory language of Article 5.43. The only reference to the term "claims-free program" is in subsection (d).
Comment: A commenter states that the definition of "natural cause claim" as "a weather claim" in proposed paragraph (b)(5) limits the scope and intent of the Legislature and notes that the amendments to Article 5.43 and §551.107 maintain the broader term "natural causes" rather than the narrower term "weather related claim." The commenter recommends deleting the definition. Another commenter states that a major concern to insurers is that the Department may be passing an opportunity to define "natural causes," and this is a time when the Department could provide either a definition or basis for classification as "natural."
Agency Response: The Department disagrees that defining a "natural cause" claim as a weather related claim limits the scope of that term because equating a "natural causes" claim with a weather related claim is a commonly accepted interpretation. Therefore, the Department further disagrees that the definition should be deleted in its entirety. However, as a result of the comment, the Department has made a non-substantive change to the term and definition of "natural cause claim" for clarification, consistency and accuracy. The Department has changed the term to "natural cause" defined as "a weather related cause." Also, to avoid any ambiguity in interpretation and implementation of the new section due to a lack of definition for the term "natural cause" the Department is retaining the definition.
Comment: One commenter contends that the definition of "claim that is filed but not paid or payable" in proposed subsection (b)(6) has been expanded in the rule beyond what is provided under Article 5.43. The commenter states that the language used by the Legislature for a "claim that is filed but not paid or payable under the policy" is unambiguous and requires neither elaboration nor expansion. The commenter specifically objects to the use of the term "customer inquiry" in proposed subsection (b)(6) and points out that the Legislature does not refer to "customer inquiry" as a claim in the Insurance Code.
Agency Response: The Department agrees that the statutory language of Article 5.43 and §551.107 is plain and unambiguous but disagrees that the definition of "claim filed but not paid or payable" should be deleted from the rule. The additional language regarding a "customer inquiry" in the definition of a "claim filed but not paid or payable" is necessary to make clear that a customer inquiry that does not result in an indemnity payment under the provisions of the policy is not a claim because some insurers may open a claim or establish a claim reserve when they receive a customer inquiry.
Comment: A commenter states that the definitions of "premium surcharge" in proposed subsection (b)(2) and "claims-free program" in proposed subsection (b)(3) are not clear when read in conjunction with proposed subsection (c) which prohibits a premium consequence for certain claims that may be used in determining a premium surcharge or claims-free program. According to the commenter, it is unclear whether a premium consequence is allowed when a customer is moved between affiliated companies. If this is not allowed, the purpose of defining the terms as they are currently defined in the proposal is not clear.
Agency Response: It is the Department's position that the definitions are clear and consistent with Article 5.43 and §551.107. Section 21.1004 reflects the statutory framework enacted to harmonize the two statutes, and it is the Department's position that the intent of the Legislature is consistency in the use of "claim experience" whether used in a premium surcharge program under §551.107 or a claims-free program under Article 5.43.
Comment: One commenter objects to the definition of "transition plan" in subsection (b)(4) and states that the words "fair," "just," and "reasonable" are used as surrogates for "perceived affordability." The commenter states that "fair" has a technical meaning within actuarial science, but as used within the rule, it does not appear to have the same meaning. The commenter also states that "moderating rate and premium increases" is not defined, and the commenter asserts that this suggests an after-the-fact subjective determination of affordability that would trigger the need for a "transition plan."
Agency Response: The Department disagrees with the characterization of the words "fair," "just," and "reasonable" as being surrogates for "affordability." The basic purpose of the transition plan is to phase in the effect of the introduction of, or change to, a premium surcharge or claims-free program, including a tier classification, so that a policyholder is not subject to rates and premiums that vary greatly between renewal periods. Insurers commonly phase in or temper large rate changes over time for any of a number of reasons and with the goal of avoiding extreme dislocation within their customer base. Furthermore, the Legislature has enacted rate regulatory statutes using the words "fair," "just," and "reasonable." For example, in the Insurance Code Article 1.02 these terms are used as statutory requisites for all rates used under the Insurance Code. These terms as used in the definition of "transition plan" in subsection (b)(4) are used consistently with the statutory requisites. The Department also disagrees that the lack of a definition for the phrase "moderating rate and premium increases" suggests an after-the-fact subjective determination of affordability that would trigger the need for a "transition plan." However, the Department addresses the concern of an after-the-fact subjective determination of affordability, and other concerns regarding the transition plan, by clarifying in subsection (f) that a transition plan is required only if there is an increase of 10% or more in premium for any policyholder.
S ubsection (c). Premium consequence prohibited
Comment: One commenter points out that proposed subsection (c) references "claims incurred" and the commenter states that this is inconsistent with proposed subsection (c)(2) that pertains to claims filed but not paid or payable. According to the commenter, the implication of Article 5.43 and §551.107 is that until a claim has been filed a surcharge cannot be assessed and a claims-free discount cannot be terminated. Similarly, a premium consequence should be based on claims filed, not claims incurred. Otherwise the rule could exclude consumers from intended protection.
Agency Response: The Department agrees and has changed the term "incurred claims" to "filed claims occurring on or after September 1, 2005," in subsection (c) as adopted.
Comment: A commenter states that prohibiting a premium consequence "in whole or in part" in proposed subsection (c) is beyond statutory support and could impair the entire basis for rating. Another commenter states that the claims that are permitted to be used in the calculation of rates are dictated by statute, and merely reiterated in the rule. The commenter also states that statistics show that policyholders with claims are likely to have future claims and the use of these claims in rating is fair and actuarially justified. The commenter asserts that by excluding claims which are statistically predicative, rates may be artificially excessive for those lower risk customers and artificially inadequate for those who present a higher risk of loss.
Agency Response: The Department disagrees that prohibiting a premium consequence "in whole or in part" is beyond statutory support because subsection (c) is consistent with Article 5.43 which applies to insurers that use a tier classification or discount program that has a premium consequence based in whole or in part on claims experience. Furthermore, as the commenter noted, the claims that cannot be used in a surcharge, discount, tiering, or claims-free program are dictated by statute. While such claims may or may not be predictive of future claims (no data was submitted by the commenter), the public policy decision represented by the legislation overrides actuarial considerations. There is no prohibition in the rule for using all claims to calculate overall rate levels.
Comment: A commenter states that proposed subsection (c) is overly broad and inconsistent and that changes in law apply only to the rates applicable to insurance policies that are delivered, issued for delivery, or renewed after January 1, 2006. The commenter further states that rates applicable to policies that are delivered, issued for delivery, or renewed before January 1, 2006, are governed by the law as it existed immediately before the effective date of this Act, and that law is continued in effect for this purpose. The commenter believes that insurers who renew policies between September 1, 2005, and January 1, 2006, would seemingly be prohibited from using claims identified in this proposal even though SB 14 clearly states that policies that renew prior to January 1, 2006, are governed by the law as it existed prior to the effective date of the act.
Agency Response: The Department disagrees with the commenter's interpretation of the rule. Under SECTION 8 of SB 14, the amendments to Article 5.43 and §551.107 became effective September 1, 2005. However, under SECTION 7 of SB 14 the amendments apply only to rates applicable to insurance policies that are delivered, issued for delivery, or renewed on or after January 1, 2006. The rule is consistent with SECTIONS 7 and 8 of SB 14. Subsection (a) clearly states that the new section applies only to policies that are delivered, issued for delivery, or renewed on or after January 1, 2006. Subsection (c) prohibits insurers from assigning a premium consequence on such policies for certain filed claims occurring on or after September 1, 2005.
Comment: One commenter recommends that the reference to §21.1007 in proposed subsection (c)(3) be removed or clarified. According to the commenter, SB 14 only referenced claims identified in Articles 5.35-4, 5.43, and §551.107. Section 21.1007(c) prohibits the use of an underwriting guideline based on a single prior water damage claim but permits the surcharge provision in former Art. 21.49-2B, Sec. 7, recodified at §551.107. The commenter also asserts that §21.1007(c) read together with amended §551.107(c) permits an insurer to surcharge upon renewal (for one or more water damage claims), and if an insurer can surcharge upon renewal (for one or more claims) then such a claim must count as a "claim" to determine whether an insured is claims free for the purposes of an optional claims-free discount. The commenter opines that the same problem exists for previous mold damage claims when §21.1007(e)(3) is read in conjunction with amended §551.107(c). According to the commenter, it appears that an insurer may surcharge on renewal for one or more remediated, inspected, and certified mold damage claims and should also be able to count the same claim to determine whether an insured is "claims free" for purposes of an optional claims free discount.
Agency Response: The Department agrees that the reference to §21.1007 relating to certain water damage and mold damage claims should be removed because it is confusing as indicated by the comment. The Department has revised subsection (c)(3) as adopted accordingly. Section 551.107(b) clearly defines a claim under §551.107 to not include a claim: (1) resulting from a loss caused by natural causes; or (2) that is filed but is not paid or payable under the policy; or (3) that an insurer is prohibited from using under Section 3, Article 5.35-4. These are not claims for the purpose of §551.107 which authorizes premium surcharges. Therefore, the Department does not agree with the interpretation in the comment.
Subsection (f). Transition plan required.
Comment: One commenter asserts that the transition plan required in proposed subsection (f) is overly broad and could require a transition plan for any rating change no matter how minor. Another commenter recommends changing the transition plan requirement to limit the need to prepare and file such plans when only minor changes in premium occur. Another commenter states that the wording of the transition plan suggests application to individual policyholders even when their claim behavior necessitates a rate increase. The commenter questions whether a transition plan would be required if an insurer needs a 50% statewide rate increase due to claims experience of all its policyholders.
Agency Response: The Department agrees that a transition plan should not be required for every change, no matter how minor, in a premium surcharge program; claims-free program, including a tiering classification; or other discount program, and has revised subsection (f) as adopted to add a threshold premium increase of 10% to trigger the transition plan requirement. A transition plan is required only if a new method or change in an existing method of evaluating a policyholder's claim experience results in an increase of 10% or more in premium for any policyholder. Subsection (f) requires that the transition plan shall moderate or mitigate overall rate and premium increases which result in the increase of 10% or more in premium for any policyholder.
Comment: One commenter states that the transition plan required in proposed subsection (f) adds another layer of rate regulation which is the opposite of the intention for file and use regulation. Another commenter objects to adoption of this rule because it does not enhance competition as the commenter believes the Legislature intended and may provide a pitfall for insurers who may not have recognized an "excessive" or "substantial" rate increase for an individual policyholder.
Agency Response: The Department disagrees. As one commenter noted at the hearing on this rule, some insurers currently prepare transition plans for their rating programs. The transition plan is rate filing information that is within the ambit of the file and use system that is regulated under Article 5.13-2 of the Insurance Code, and it is a component in the regulatory framework that is needed to accomplish the purpose of the rule which is in accordance with Article 5.13-2 of the Insurance Code. Additionally, the amendments to Article 5.43 and §551.107 enacted by the 79th Legislature in SB 14 also reflect the intent of the Legislature. These amendments are not discretionary. The Department disagrees that the rule provides a pitfall for insurers who may not have recognized an "excessive" or "substantial" increase because the rule as adopted requires a transition plan when the rating changes result in a premium increase of 10% or more for any policyholder.
Comment: Another commenter states that §21.1004(f)(2) requires the transition plan to consider any changes other than claims history that may impact overall rates, and this requirement seems beyond the purpose of the rule which deals with changes to rates and premiums due to the introduction of, or changes to, a claims-free or premium surcharge program. This commenter also states that a transition plan is required to "be reasonable and promote market and rate stability" but the word "market" is amorphous and could refer to the entire market for all insurers or an individual insurer's book of business.
Agency Response: The purpose of the rule, as explained in subsection (a) as adopted, is to protect homeowners from increases in residential property insurance rates and premiums that vary greatly between renewal periods and to provide homeowners with just, fair, and reasonable homeowners insurance rates. The transition plan requirement in subsection (f) is a component in the regulatory framework to accomplish this purpose. The requirement in subsection (f) that the transition plan "be reasonable and promote market and rate stability" when read in the context of subsection (f) in its totality refers to the individual insurer's book of business.
Comment: One commenter recommends that "rate stability" as used in subsection (f) be defined.
Agency Response: The Department does not agree that a definition of "rate stability" is necessary. The Department interprets "rate stability" to be a relative term which depends on context for meaning and therefore, cannot be limited to a single definition. This is supported by the fact that the Legislature has in the past used the term "rate stability" without defining it (for example, in Insurance Code Article 5.101). Furthermore, it is the Department's position that limiting "rate stability" to a single definition would not provide insurers with flexibility that is consistent with the file and use system.
Comment: One commenter suggested that proposed subsection (f)(3) should include the term "affected policyholders" in lieu of the term "individual policyholders."
Agency Response: The Department does not agree that this change is necessary because the term "individual policyholders" must also refer to "affected policyholders" due to the language in adopted subsection (f) as a whole.
Subsection (g). Expiration clause.
Comment: One commenter states that they are assuming that under proposed subsection (g) that proposed subsection (f) expires in 2009, not that a transition plan must spread out changes to 2009.
Agency Response: The commenter assumes correctly. However, as a result of the concerns expressed by commenters regarding the transition plan requirements in subsection (f), the Department has changed subsection (g) as adopted to provide that the transition plan requirement in subsection (f) will end on January 1, 2008 instead of on January 1, 2009 as proposed.
5. NAMES OF THOSE COMMENTING FOR AND AGAINST THE SECTIONS.
For: Texas Watch.
For with changes: Office of Public Insurance Counsel, Nationwide Insurance and Financial Services, State Farm Insurance Company, Farmers Insurance Group, and American Insurance Association.
Against: Insurance Council of Texas.
6. STATUTORY AUTHORITY. The new section is adopted under Insurance Code Articles 5.13-2 and 5.43 and §§544.353 (formerly Article 5.35-4 §3), 551.107 and 36.001. Article 5.13-2, §5(a) and (a-1) provide that insurers shall file with the Commissioner all rates, applicable rating manuals, supplementary rating information, and additional information as required by the Commissioner for risks written in this state. SB 14, enacted by the 79th Legislature, Regular Session, amended various provisions of Chapter 5 of the Insurance Code, including Articles 5.144, 5.171, 5.43, and §551.107. The SB 14 amendments, in part, harmonize Article 5.43 and §551.107 by amending Article 5.43 to include the identical language in §551.107 to identify claims that cannot be used as residential property insurance claims in rating programs whether the claims are considered for a premium surcharge, discount, or claims-free program. Article 5.43 provides that the Commissioner shall adopt rules as necessary to implement the article and shall establish by rule guidelines for insurers to develop discounts based on sound actuarial principles. One of the SB 14 amendments added a provision to §551.107 that the Commissioner shall adopt rules as necessary to implement the section. Section 544.353 (formerly Article 5.35-4 §3) requires underwriting guidelines relating to a water damage claim or claims used by an insurer to be governed by rules adopted by the Commissioner and provides that an insurer may not use such an underwriting guideline that is not in accordance with rules adopted by the Commissioner in accordance with the purpose of the Insurance Code Title 5 Chapter 544 Subchapter H (formerly Article 5.35-4). Section 36.001 provides that the Commissioner of Insurance may adopt any rules necessary and appropriate to implement the powers and duties of the Texas Department of Insurance under the Insurance Code and other laws of this state.
7. TEXT.
§21.1004. Restrictions on Certain Claims in Residential Property Insurance and Transition Plan Requirement.
(a) Purpose and Applicability. The purpose of this section is to protect homeowners in Texas from increases in residential property insurance rates and premiums that vary greatly between renewal periods and to provide homeowners in Texas with just, fair, and reasonable residential property insurance rates and premiums. This section places restrictions on the use of residential property insurance claims in rates and premiums due to the introduction of, or changes to, a claims-free program or premium surcharge program in accordance with the Insurance Code and also establishes the requirements and procedures for insurers to file a transition plan. This section applies to the rates and premiums applicable to residential property insurance policies that are delivered, issued for delivery, or renewed on or after January 1, 2006.
(b) Definitions for the purposes of this section.
(1) Residential property insurance--Property or property and casualty insurance covering a dwelling, including homeowner's insurance, residential fire and allied lines insurance, farm and ranch insurance, or farm and ranch owners insurance.
(2) Premium surcharge--An additional amount due to a policyholder's claims experience that is added to the base rate. The term does not include a reduction or elimination of a discount previously received by an insured, reassignment of an insured from one rating tier to another, re-rating an insured, or re-underwriting an insured by using multiple affiliates.
(3) Claims-free program--Any program that considers a policyholder's claim experience, in whole or in part , whether through the use of discounts, a tier classification, or other program that does not qualify as a premium surcharge if the policyholder has been a residential property insurance policyholder with that insurer or an affiliate of that insurer.
(4) Transition plan--A plan that promotes rates and premiums that are fair, just, and reasonable by moderating rate and premium increases caused by the introduction of, or change to, a claims-free or premium surcharge program, including a tier classification system.
(5) Natural cause--A weather related cause.
(6) Claim that is filed but is not paid or payable--A claim that is filed, including a customer inquiry, that does not result in an indemnity payment under the provisions of the policy.
(c) Premium consequence prohibited. An insurer may not assign any premium consequence through a premium surcharge or claims-free program based on filed claims occurring on or after September 1, 2005, in whole or in part, due to:
(1) claims resulting from a loss caused by natural causes;
(2) a claim that is filed but not paid or payable under a residential property policy; or
(3) a claim that an insurer is prohibited from using under Insurance Code Article 5.35-4 §3 (recodified as §544.353, HB 2018 79th Legislature, Regular Session).
(d) Claims-free programs. Claims-free programs must be based on sound actuarial principles. Actuarial support as specified in §5.9332 of this title (relating to Filing Requirements) must be filed with the department in the event such program is introduced or changed.
(e) Premium surcharge programs. Premium surcharge programs must be based on sound actuarial principles. Actuarial support as specified in §5.9332 of this title must be filed with the department in the event such program is introduced or changed.
(f) Transition plan required. If an insurer introduces a new method or changes an existing method of considering, utilizing, reviewing, or otherwise evaluating a policyholder's claim experience, including a tier classification, which results in an increase of 10% or more in premium for any policyholder, a transition plan is required and must be filed with the department. The transition plan shall:
(1) be reasonable and promote market and rate stability;
(2) take into consideration any changes other than claims history that may impact overall rates and premiums; and
(3) moderate or otherwise mitigate overall rate and premium increases for individual policyholders over one or several renewal periods.
(g) Expiration clause. Subsection (f) of this section expires January 1, 2008.