Texas Register
(30 TexReg 7994).
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.
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.
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.
Subsection (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.
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.
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.
§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.
This agency hereby certifies that the adoption has been reviewed
by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of
the Secretary of State on April 3, 2006.
TRD-200601973
Gene C. Jarmon
General Counsel and Chief Clerk
Texas Department of Insurance
Effective date: April 23, 2006
Proposal publication date: December 2, 2005
For further information, please call: (512) 463-6327