Texas Department of Insurance PROPOSED ACTION The Commissioner of Insurance will hold a public hearing under Docket Number 2309 on December 3, 1997, at 10:00 a.m. in Room 100 of the Texas Department of Insurance Building, 333 Guadalupe Street in Austin, Texas, to consider a petition by the staff of the Texas Department of Insurance proposing the adoption of new rules in the Homeowners and Dwelling Sections of the Texas Personal Lines Manual to establish mandatory premium credits for residential property insurance policies for the installation of an impact resistant residential roof covering that meets Underwriters Laboratories (U.L.) Standard 2218 and the adoption of a form entitled "Impact Resistant Roofing Installation Information and Certification for Reduction in Residential Insurance Premiums" (Certificate of Installation) to be completed by the installer of a roof covering product on a residential risk or the general contractor supervising the construction or repair of a residential risk which meets the Underwriters Laboratories test criteria under U.L. Standard 2218. The rules and form proposed for adoption in the staff petition are necessary to implement the recommendations of the Residential Property Insurance Loss Mitigation Advisory Committee. The petition requests consideration of the adoption of two new rules in the Texas Personal Lines Manual. (1) In the Homeowners Section, staff proposes adding new rating rule VI-M, entitled "Mandatory Roof Covering Credits." (2) In the Dwelling Section, staff proposes adding new rating rule VI-K, entitled "Mandatory Roof Covering Credits." These rules specify the following standards and procedures that a residential property owner must meet in order to qualify for the credit: (1) The replacement or new roof covering installed on the residence must be classified within one of the four impact resistance classifications specified in U.L. Standard 2218. (2) The installer of a roof covering that meets U.L. Standard 2218 must provide the policyholder with a completed Certificate of Installation promulgated by the Texas Department of Insurance. (3) The policyholder must present the Certificate of Installation, that has been completed and signed by the installer, and the roofing material packaging containing the Underwriters Laboratories label and manufacturer's name (packaging is only required for installations done prior to January 1, 1999) to the insurer for application of the mandatory credit. (4) The proposed credits apply to all roof coverings that meet U. L. Standard 2218 other than metal roof coverings. Many metal roof coverings, which may meet U.L. Standard 2218 for impact resistance by withstanding a rupture of the roof membrane under test conditions, continue to suffer cosmetic damage in hail storms and would require replacement of the metal roof covering. These rules provide mandatory premium credits of up to 35% for homeowners and up to 46% for dwelling policies for the installation of a roof covering that meets the classifications specified in U.L. Standard 2218. The amount of premium credit applied to a policy depends on the type of policy (homeowners or dwelling), the classification of the roof installed on the risk, and the rating territory in which the risk is located. The petition provides further details on staff's methods for determining the proposed mandatory credits. The petition further requests the adoption of a Certificate of Installation form to be used by roofing contractors to certify that an impact resistant roof covering has been installed on a residence. Upon receiving the Certificate of Installation the homeowner may present the certificate along with any other required documentation to his insurer for application of the mandatory premium credit. Commissioner's Order Number 94-1029 created the Residential Property Insurance Loss Mitigation Advisory Committee (Advisory Committee). The purpose of the Advisory Committee is to advise and make recommendations to the Commissioner of Insurance on reducing residential property insurance losses. The amount of losses paid is a vital factor in determining insurance rates. A significant reduction in the amount of losses paid will ultimately reduce residential property rates in Texas. In many instances, a significant percentage of the losses that occur could be prevented through efforts to improve factors that have a direct bearing on losses. Prior to the establishment of the Advisory Committee, public hearings were held regarding the increasing losses from wind and hail, crime and freezing pipes. The purpose of the hearings was to allow public testimony concerning methods that could be used to help reduce the increasing losses in these areas. As a follow-up to the public hearings, the Advisory Committee was appointed to review the various methods suggested for reducing losses, as well as any other methods, and to make appropriate recommendations to the Commissioner for the implementation of such recommendations. One of the Advisory Committee's recommendations concerns substantially reducing the losses from hail storms by improving the hail resistance of roof covering materials. Many areas in the State of Texas are exposed to severe hail storms causing hundreds of millions of dollars in damages and losses with roof coverings on residential risks sustaining the majority of the damage and loss. The severe hail storms which have occurred in recent years are causing an undesirable effect on the residential property insurance market in Texas. In the areas of Texas where hail damage occurs most frequently, residential property owners are having problems with obtaining residential property insurance from licensed insurers. This lack of availability compels consumers to seek insurance in the surplus lines market at much higher rates or to forego purchasing residential property insurance. Insurers are restricting their writings in the areas where hail occurs most frequently because in the event of a major hail storm their exposure of risk in these areas is too great. Excessive losses due to hail storms have caused increased rates for specific areas of Texas, and any continued pattern of hail storms causing severe damage will continue to produce increased insurance rates. One solution to the problems created by increasing losses from hail storms is to reduce the losses that are caused by hail storms through the use of roofing materials that are more impact resistant than the roofing materials that are currently being used. The Advisory Committee has focused its review of mitigating losses to residential property in a number of areas, however, the single area that provides the greatest potential for corrective measures to mitigate losses is in the area of damage and loss from windstorms and hail storms. The component of a residential risk with the greatest exposure to hail damage is the roof covering. The more effective a roof covering product is in preventing a rupture of the roof membrane in a hail storm, the less damage the storm will cause. There is a need to establish a system for grading the hail resistance of roof covering products, to provide incentives to consumers to purchase the more hail resistant roof covering products, and for manufacturers to produce such products. The first step in this process is the establishment of a grading system to gauge the hail resistance of roof covering products, and this has been accomplished by the development of an impact resistance test by the Underwriters Laboratories known as U.L. Standard 2218. To ensure that manufacturers of roof covering products will manufacture products that meet such a test, it is important to provide consumers with incentives to purchase roof covering products meeting U.L. Standard 2218. The proposed new rules provide the incentives to consumers to purchase roof covering products that meet U.L. Standard 2218 by offering a premium credit on homeowners and dwelling policies that insure risks having a roof covering installed which meets U.L. Standard 2218. The Commissioner has jurisdiction of this matter pursuant to the Insurance Code, Articles 5.35, 5.101, 5.96, and 5.98. Copies of the full text of the staff petition and the proposed Manual rules and form are available for review in the Office of the Chief Clerk of the Texas Department of Insurance, 333 Guadalupe Street, Austin, Texas, 78714-9104. For further information or to request copies of the petition and proposed amendments, please contact Angie Arizpe at (512) 322-4147, (refer to reference number P-0997-30-I). Comments on the proposed changes must be submitted in writing within 30 days after publication of the proposal in the Texas Register to the Office of the Chief Clerk, P. O. Box 149104, MC 113-2A, Austin, Texas 78714-9104. An additional copy of the comment should be submitted to Lyndon Anderson, Associate Commissioner for the Property and Casualty Division, P. O. Box 149104, MC 103- 1A, Austin, Texas 78714-9104. This notification is made pursuant to the Insurance Code, Article 5.96, which exempts action taken under this article from the requirements of the Administrative Procedure Act (Government Code, Title 10, Chapter 2001). This agency hereby certifies that the proposal have been reviewed by legal counsel and found to be within the agency's authority to adopt. Issued in Austin, Texas, on October 1, 1997. TRD-9713017 Carloine Scott General Counsel and Chief Clerk Texas Department of Insurance Filed: October 1, 1997