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You are here: Home . rules . 2003 . 1110d-059
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SUBCHAPTER V. TERRITORY RATING REQUIREMENTS

28 TAC §5.9960

The Commissioner of Insurance adopts new Subchapter V, §5.9960, concerning residential property insurance and personal automobile insurance and allowable rate differences for rating territories that subdivide a county, as provided in Insurance Code, Subchapter U, Article 5.171 (as enacted by the Regular Session of the 78 th Legislature in Senate Bill 14, effective June 11, 2003). The subchapter is adopted with changes to the proposed text as published in the September 19, 2003 issue of the Texas Register (28 TexReg 8116).

New Subchapter V, §5.9960, is being adopted to permit insurers to use the rating territory exceptions for residential and personal automobile insurance allowed by Insurance Code, Article 5.171, as enacted by the Regular Session of the 78 th Legislature. Article 5.171 provides that an insurer may not use rating territories that subdivide a county unless the county is subdivided and the rate for any subdivision within that county is not greater than 15% higher than the rate used in any other subdivisions in the county by that insurer. Article 5.171 further provides that the commissioner may by rule allow a greater rate difference for residential property insurance or personal automobile insurance.

The new section allows an insurer to use territorial rate differences that are reflective of higher exposure to loss if the territorial rate differences are based on sound actuarial principles, are supported by data filed with the department, and are in compliance with all statutory and regulatory requirements. As a consequence, the new section will ensure greater availability of residential property and personal automobile insurance, ensure fairness in rates for territorial subdivisions within counties, and minimize market rate disruptions.

Diversity of risk factors within individual counties is taken into account in the new section which will assure greater fairness and flexibility in rates. Because of the diversity of risk factors, the new section does not specify a percentage or amount of rate difference limitation or limit allowable rate differences.

The new section is necessary to allow insurers to use territorial rate differences that are reflective of higher exposure to losses, including losses caused by catastrophic weather events in coastal subdivisions of a county relative to inland subdivisions of the same county, if the territorial rate differences are based on sound actuarial principles, supported with data filed with the department, and are in compliance with all statutory and regulatory requirements. In the case of coastal counties, insureds located in inland areas of a county would not pay higher rates in order to subsidize the catastrophic wind exposure of insureds located in coastal areas of the same county. In addition, this new section would encourage insurers to retain their wind exposure, in lieu of transferring the exposure to the Texas Windstorm Insurance Association, a residual market.

This new section is also necessary to allow personal automobile insurers to recognize territorial rate differences in counties, such as counties that include both highly urban areas with congested traffic and rural areas with very little traffic.

Changes have been made to the proposed section as published; however, none of the changes introduce a new subject matter or affect additional persons other than those subject to the proposal as originally published. In response to comments, the following changes have been made to the proposed section: new wording in subsection (b) clarifies that the section applies to a county mutual insurance company, a Lloyd's plan, or a reciprocal or interinsurance exchange effective January 1, 2004. At the end of subsection (d), additional wording clarifies that the 15% rate difference limitation for subdivisions within counties applies "for identical coverage for insureds having, aside from rating territory, identical risk characteristics." This change is made in response to a comment that the proposed rule relies on the definition of "rate" and allows no variation for the differences between personal automobile insurance and residential property insurance, the type of coverage within a line, or other differences. Subsection (e) clarifies that the exception to Article 5.171 requires that the rate be in compliance with all statutory and regulatory requirements. This change was made in response to comments that the proposed rule would permit territorial factors based on race, creed, color, ethnicity, and national origin in violation of several provisions of the Insurance Code. Changes to subsection (f) clarify that exceptions to filing requirements that would otherwise apply cannot be used to avoid filing rates and supporting data when an insurer proposes to subdivide a county and charge any subdivision a rate that exceeds the rate for any other subdivision of that county by more than 15%. New subsection (h) responds in part to concerns from commenters that insurers such as county mutuals, which were non-rate regulated insurers prior to Senate Bill 14, be allowed 180 days to capture county information from their current insureds. New subsection (h) allows county mutuals, Lloyd's plans, reciprocals and in terinsurance exc hanges until March 1, 2004 to file their data in support of greater rate differentials with the department.

Section 5.9960(a) provides that the purpose of the section is to provide an exception to Insurance Code Article 5.171 for an insurer that writes residential property insurance or personal automobile insurance in the State of Texas. Section 5.9960(b) clarifies that the section applies to an insurer that writes residential property insurance or personal automobile insurance and to a county mutual insurance company, a Lloyd's plan, or a reciprocal or interinsurance exchange effective January 1, 2004. Section 5.9960(c) defines county, insurer, personal automobile insurance, rate, and residential property insurance. Section 5.9960(d) provides that except as provided by subsection (e), an insurer may not use rating territories that subdivide a county unless the county is subdivided and the rate for any subdivisions within that county is not greater than 15% higher than the rate used in any other subdivisions in the county by that insurer for identical coverage for insureds having, aside from rating territory, identical risk characteristics.

Section 5.9960(e) prohibits an insurer that writes residential property insurance or personal automobile insurance from using a rate for a subdivision within a county that is greater than 15% higher than the rate used in any other subdivision within that county unless the rate is based on sound actuarial principles, is supported by data filed with the department, and is in compliance with all statutory and regulatory requirements. Section 5.9960(f) clarifies that notwithstanding statutory or regulatory filing exception requirements that would otherwise apply, an insurer must file with the department a rate for a subdivision within that county in accordance with the statutory filing requirements applicable to residential property insurance or personal automobile insurance. For example, until December 1, 2004, residential property insurers are subject to filing requirements under Insurance Code, Article 5.142 and rules promulgated under Article 5.142, and personal automobile insurers are subject to filing requirements under Insurance Code, Article 5.101 and rules promulgated under Article 5.101. As of December 1, 2004, residential property and personal automobile insurers are subject to filing requirements under Insurance Code, Article 5.13-2 and any rules promulgated under Article 5.13-2. Section 5.9960(g) specifies the department addresses to which filings under the section must be submitted. Section 5.9960(h) provides an extension until March 1, 2004 for filing actuarial data with the department in support of a greater rate difference for county mutual insurance companies, Lloyd's plans, reciprocals, or interinsurance exchanges.

General

Comment: One commenter indicated that the department has successfully translated legislative intent, as expressed in Texas Insurance Code Article 5.171; that the section will encourage insurers to retain more wind exposure; and the proposal is fair and equitable to both insurance companies and insureds.

Agency Response: The department agrees and appreciates the comments.

Comment: Some commenters stated that the proposed rule violates Texas Insurance Code Article 5.171 by rendering it meaningless because the requirement that the territorial rating factor be actuarially sound already exists under other statutes. Commenters also stated that the only possible meaning for Article 5.171 is that even if a higher rating differential is actuarially justified, the commissioner shall set a limit on the effect of the territorial rating factor.

Agency Response: The department does not believe the rule violates Article 5.171 nor does the department believe that the rule renders Article 5.171 meaningless. Article 5.171 establishes the requirement that an insurer may not use rating territories that subdivide a county unless the county is subdivided and the rate for any subdivision within that county is not greater than 15% higher than the rate used in any other subdivisions in the county by that insurer. As an exception to this requirement, Article 5.171 permits the commissioner by rule to allow a greater rate difference for residential property insurance or personal automobile insurance. This exception does not require the rule to provide a specific percentage for a greater rate difference that may be allowable.

Comment: Some commenters believe that the proposed rule violates several provisions of the Texas Insurance Code because it would permit territorial factors based on race, creed, color, ethnicity, and national origin, even if the rates are based on sound actuarial principles. Commenters stated that several provisions of the Code prohibit personal automobile and residential property insurers from using rates based on race, creed, color, ethnicity, or national origin even if the rates are based on sound actuarial principles. The proposed rule, according to commenters, would seemingly permit a territorial rating factor that is based in whole or in part on race, creed, color, ethnicity, or national origin, as long as it is actuarially sound. Commenters stated further that the proposed rule completely wipes out the rule of the statute and opens up redlining for the entire State of Texas.

Agency Response: The department does not believe the rule in any way permits territorial factors based on race, creed, color, ethnicity, and national origin, even if the rates are based on sound actuarial principle. Those insurers that seek to use a higher rating differential than 15% within a county must file their experience with the department to assure the department that all statutory and regulatory provisions have been satisfied. Rates are to be based on sound actuarial principles and satisfy all other statutory provisions. To clarify subsection (e), the department has changed the subsection to reinforce the intent that territorial factors must be in compliance with all statutory and regulatory requirements.

Comment: Some commenters cited that auto insurance is required by the State of Texas for every driver and, therefore, the department and state are morally obligated to assure auto insurance is available at fair rates to all consumers. According to some commenters, many county mutuals in the auto industry charge "200, 300, and 400 times" the rate in low income and minority zip codes within the county than the county mutuals do in other zip codes within a county.

Agency Response: Prior to the enactment of Senate Bill 14, there was no regulatory provision that the rates of county mutual insurance companies be based on sound actuarial principles. The rates used by all insurers, including county mutual insurance companies, now must be just, fair, reasonable, adequate, not confiscatory and not excessive for the risks to which they apply, and not unfairly discriminatory. The department is committed, within its statutory authority, to assure auto insurance is available at fair rates to consumers within the State of Texas.

Comment: A commenter is generally opposed to the proposed rule because the commenter believes rates affect the value of the property, and with this rule, some insureds will see a rise in their rates and others will see a decrease in their rates. The commenter believes that the claim history on the property should determine the rates on the property.

Agency Response: A property's claims history will have some effect on the insurance rates, which could possibly affect the property value. However, the department believes that the requirement that the rates be based on sound actuarial principles means that the rates will be cost-based, which should promote insurance availability even though the rates may increase for some risk and may decrease for others.

Comment: Some commenters stated that the proposed rule fails to provide any regulation of territorial rating factors. Commenters also stated that under the proposed rule, an insurer can charge whatever territorial rate differential it desires, without any review or approval by the department.

Agency Response: The department does not believe the rule fails to provide any regulation of territorial rating factors because these factors must be filed in accordance with the statutory filing requirements for residential property insurance or personal automobile insurance. Rating territory filings must contain sufficient information for the department to determine if the proposed rating differentials satisfy all statutory and regulatory requirements. The department may ask for additional information, and if the filing does not comply with all statutory and regulatory requirements, the rating territory differentials will be disapproved.

Comment: One commenter stated that the proposed rule does not provide flexibility for insurers such as county mutuals in addressing renewals for January business, which must be processed in early November. The commenter believes the legislature allowed flexibility to ease market restrictions by requiring only that the territorial restrictions for county mutuals could not be applied to county mutuals before January 1, 2004 and that the restrictions do not have to be applied on that date. A commenter also requested that the county mutuals serving the non-standard market be required by January 1 st to initiate the means to capture relevant data for new business and be allowed 180 days to capture county information from current insureds.

Agency Response: The department disagrees. Article 5.172, as enacted in Senate Bill 14, effective June 11, 2003, provides that the provisions of Article 5.171 do not apply to county mutual insurance companies, Lloyd's plans, and reciprocals or interinsurance exchanges before January 1, 2004. The department believes that the language of Article 5.172 clearly intended for Article 5.171 to apply to county mutual insurance companies and the other named insurers and leaves no discretion to the commissioner to extend the applicable effective date of Article 5.171 beyond January 1, 2004 for these insurers. The department believes that the insurers subject to Article 5.172 have had ample time since Senate Bill 14 was enacted to prepare to comply with Article 5.171. By the end of the year, 203 days will have elapsed since the effective date of Senate Bill 14, well in excess of the 180 days stated by the commenter. However, the department recognizes that insurers subject to Article 5.172 have been exempt from rate and other filing requirements and may experience difficulty in making the necessary filings to support their January 1, 2004 rate differentials. For this reason and in response to comment: (1) subsection (a) has been changed to clarify that the rule is effective January 1, 2004 for county mutual companies, Lloyd's plans, and reciprocal or interinsurance exchanges; and (2) subsection (h) has been added to allow these same companies until March 1, 2004 to file data to support an exception to the territorial rating differential limitation under Article 5.171, more than 90 days after the effective date of this rule.

Comment: One commenter requests that the rule specifically authorize reference filings so insurers can adopt the rating territories of other insurers where the experience of the other insurer provides a sound basis for such a filing.

Agency Response: The department does not believe that the rule needs to specifically authorize reference filings. The department commonly accepts reference filings based upon the experience of another insurer with credible experience if an insurer demonstrates that it has insufficient data of its own to be reasonably credible. The department has received no reasonable justification not to allow reference filings under such circumstances.

§5.9960(d)

Comment: One commenter states that proposed subsection (d) relies on the definition of "rate" and allows no variation for the differences between personal automobile insurance and residential property insurance, the type of coverage within a line, or other possible, perfectly legal differences. The commenter requests that the definition of rate address the concept of rate by line, by coverage, and by mode of payment so that comparisons between the highest and lowest rates within a county can be made on the same terms.

Agency Response: The department agrees with the commenter and has changed subsection (d) by adding "for identical coverage for insureds having, aside from rating territory, identical risk characteristics" at the end of the subsection.

§5.9960(f)

Comment: One commenter states that subsection (f) should be deleted or reworded to clearly indicate that exceptions to filing requirements that would otherwise apply cannot be used to avoid filing rates and supporting data when an insurer intends to subdivide a county and charge any subdivision a rate that exceeds the rate for any other subdivision of that county by more than 15%.

Agency Response: The department agrees with the commenter and has changed subsection (f) to clarify that other statutory or regulatory filing exceptions do not apply to filings subject to the rule.

For: Republic Group of Insurance Companies, Trinity Universal Insurance Companies, and Progressive County Mutual Insurance Company.

For, with changes: Texas County Mutual Association, and Office of Public Insurance Counsel (OPIC).

Against: Center for Economic Justice (CEJ), American Association of Retired Persons (AARP), League of the United Latin American Citizens (LULAC), Texas Public Interest Research Group (Tex PIRG), Texas Watch, National Organization for Women, Texas Association of Realtors, and Consumers Union.

The new section is adopted under Insurance Code Articles 5.171 and 5.172 and §36.001. Article 5.171 provides that notwithstanding any other provision of the Insurance Code, an insurer may not use rating territories that subdivide a county unless the county is subdivided and the rate for any subdivisions within that county is not greater than 15 percent higher than the rate used in any other subdivisions in the county by that insurer, except that the commissioner may by rule allow a greater rate difference for residential property insurance or personal automobile insurance. Article 5.172 provides that notwithstanding §912.002 (County Mutual Limited Exemption from Insurance Laws; Applicability of Certain Laws), §941.003 (Lloyd's Plan Limited Exemption from Insurance Laws; Applicability of Certain Laws), §942.003 (Reciprocal and Interinsurance Exchange Limited Exemption from Insurance Laws; Applicability of Certain Laws), or any other provision of the Insurance Code, Subchapter U (Rating Territories for Certain Lines) does not apply to a county mutual company, a Lloyd's plan, and a reciprocal or interinsurance exchange, before January 1, 2004. 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.

§5.9960. Exception to Rating Territory Requirements under Insurance Code Article 5.171.

(a) The purpose of this section is to provide an exception to Insurance Code Article 5.171 for an insurer that writes residential property insurance or personal automobile insurance in the State of Texas.

(b) This section applies to an insurer that writes residential property insurance or personal automobile insurance in the State of Texas. This section applies to a county mutual insurance company, a Lloyd's plan, or a reciprocal or interinsurance exchange effective January 1, 2004.

(c) The following words and terms, when used in this section have the following meanings, unless the context clearly indicates otherwise.

(1) County - A county in the State of Texas.

(2) Insurer - An insurance company, reciprocal or interinsurance exchange, mutual insurance company, capital stock company, county mutual insurance company, Lloyd's plan, or other legal entity authorized to write residential property insurance or personal automobile insurance in the State of Texas. The term does not include:

(A) the Texas Windstorm Insurance Association under Insurance Code Article 21.49;

(B) the FAIR Plan Association under Insurance Code Article 21.49A; or

(C) the Texas Automobile Insurance Plan Association under Insurance Code Article 21.81.

(3) Personal automobile insurance - Motor vehicle insurance coverage for the ownership, maintenance or use of a private passenger, utility or miscellaneous type motor vehicle, including a motor home, mobile home, trailer or recreational vehicle, that is:

(A) owned or leased by an individual or individuals; and

B) not primarily used for the delivery of goods, materials, or services, other than for use in farm or ranch operations.

(4) Rate - The cost of insurance per exposure unit, whether expressed as a single number or as a prospective loss cost, with an adjustment to account for the treatment of expenses, profit, and individual insurer variation in loss experience, and before any application of individual risk variations based on loss or expense considerations.

(5) Residential property insurance - Insurance against loss to real property at a fixed location or tangible personal property provided in a homeowners policy, a tenant policy, a condominium owners policy, or a residential fire and allied lines policy.

(d) Except as provided by subsection (e) of this section, an insurer may not use rating territories that subdivide a county unless the county is subdivided and the rate for any subdivisions within that county is not greater than 15% higher than the rate used in any other subdivisions in the county by that insurer for identical coverage for insureds having, aside from rating territory, identical risk characteristics.

(e) For residential property insurance or personal automobile insurance, an insurer may not use a rate for a subdivision within a county that is greater than 15% higher than the rate used in any other subdivision within that county unless the rate is based on sound actuarial principles, is supported by data filed with the department, and is in compliance with all statutory and regulatory requirements.

(f) Notwithstanding statutory or regulatory filing exception requirements that would otherwise apply, an insurer must file with the department a rate for a subdivision within a county that is greater than 15% higher than the rate used in any other subdivision within that county in accordance with the statutory filing requirements applicable to residential property insurance or personal automobile insurance.

(g) Filings under this section must be submitted to the Texas Department of Insurance, Property & Casualty Intake Unit, Mail Code 104-3B, 333 Guadalupe, Austin, Texas 78701 or to the Texas Department of Insurance, Property & Casualty Intake Unit, Mail Code 104-3B, P.O. Box 149104, Austin, Texas 78714-9104.

(h) A county mutual insurance company, a Lloyd's plan, or a reciprocal or interinsurance exchange that seeks to use a rate for a subdivision within a county that is greater than 15% higher than the rate used in any other subdivision within that county must file its data in support of a greater rate difference, as required by subsection (e), no later than March 1, 2004.



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