SUBCHAPTER D. FIRE AND ALLIED LINES INSURANCE

The Texas Department of Insurance proposes new §5.3702, concerning the designation of geographic areas as underserved for residential property insurance for purposes of the Insurance Code, Article 5.13-2C. The proposed section is necessary to designate the areas determined by the Commissioner of Insurance to be underserved areas for purposes of Article 5.13-2C which provides exemptions from rate filing and approval requirements for certain insurers. The proposed section identifies the factors and the methodology used in determining the areas to be underserved. Article 5.35-3, which is referenced in Article 5.13-2C §2(a)(2), provides that in determining which areas will be designated as underserved, the Commissioner shall consider whether residential property insurance is not reasonably available to a substantial number of owners of insurable residential property in the underserved area and any other relevant factors as determined by the Commissioner. Upon the determination of such areas, an insurer authorized to write property or casualty insurance in this state and writing residential property insurance in this state, will be evaluated in accordance with the criteria established in Article 5.13-2C as to whether or not it qualifies for an exemption from the rate filing and approval requirements of Articles 5.142 and 5.13-2.

Proposed subsection (a) specifies the purpose of the section. Proposed subsection (b) defines terms used in the section. Subsection (c) proposes ZIP Code areas to be designated as underserved areas for purposes of Article 5.13-2C. Subsection (d) outlines the factors and methodology proposed for use in determining which areas should be designated as underserved.

The factors and methodology outlined in proposed subsection (d) would enable the Commissioner to determine whether residential property insurance is not currently reasonably available or is potentially not reasonably available to a substantial number of owners of insurable property in specific geographic areas of the state. This determination is necessary to enable the Commissioner to designate such areas as underserved for purposes of Articles 5.13-2C. Because there is no single comprehensive measure to determine whether residential property insurance is or is not reasonably available to a substantial number of owners of insurable property either on a statewide basis or in any particular area of the state, the department has identified characteristics of particular geographic areas which are likely to be associated with greater difficulty by consumers in obtaining residential property insurance. In determining whether to propose the designation of an area as underserved, great weight was placed on the potential for residential property insurance not being reasonably available to a substantial number of owners of insurable property in that area. The department proposes the consideration of geographic factors based on two types of weather-related loss exposure underwriting restrictions used by insurers writing residential property insurance in Texas that would limit the availability of residential property insurance coverages to a greater extent in some geographic areas than in others. The first type of weather-related loss exposure concerns the potential for catastrophic hurricanes and other types of windstorms in the counties that border the Gulf of Mexico and the inability of residents to obtain windstorm and hail insurance through the voluntary market in these areas. The Texas Windstorm Insurance Association (TWIA) was formed by the legislative enactment of Article 21.49 because windstorm and hail insurance was not reasonably available to a substantial number of owners of insurable property in the coasta l c ounties. The department believes that the areas where windstorm and hail insurance is not reasonably available include both First Tier Coastal Counties (Tier 1) and Second Tier Coastal Counties (Tier 2) as defined in Article 21.49 §3 (l) and (m). The owners of insurable property in the Tier 1 and Tier 2 counties have a significantly greater difficulty in obtaining windstorm and hail insurance in the voluntary market than those property owners who reside outside of these areas. For these reasons, it is proposed that the location of a ZIP Code in the geographic areas that comprise the Tier 1 and Tier 2 coastal counties be considered a factor in determining whether an area is underserved for purposes of Article 5.13-2C. A second geographic area that has historically been affected by weather-related loss exposure underwriting factors is Dallas and Tarrant counties. Due to the frequency and severity of hail storms and the ensuing large losses in these counties, insurers have restricted their writing of residential property insurance and have limited the availability of certain property insurance coverages in these counties. Based on this lack of availability of residential property insurance to a substantial number of owners of insurable property in Dallas and Tarrant counties, it is proposed that the location of a ZIP Code in these counties be considered a factor in determining whether an area is underserved for purposes of Article 5.13-2C. It is proposed that ZIP Codes which are located in Tier 1, Tier 2, Dallas, or Tarrant counties be assigned five points.

The department also identified certain demographic factors that have historically been correlated with the limited availability of residential property insurance. The proposed factors to be considered are: low median household income (geographic areas with median household incomes of $36,000 or less), low median home value (geographic areas with the median value of owner-occupied dwellings of $75,000 or less), median year the house was constructed (geographic areas that contain dwellings with a median year built of 1974 or earlier), and high percentage of uninsured households for residential property insurance (geographic areas where the percent of insured households is less than 50%). It is proposed that if the demographic factor for a specific ZIP Code indicates actual or potential difficulty for consumers in obtaining residential property insurance, the ZIP Code be assigned one point. If a ZIP Code does not receive at least one point it will receive zero points for the specific factor.

Additionally, the department has identified a factor that correlates the market share of a set of insurer groups with the availability of residential property insurance. The department examined data reported by insurers pursuant to the Texas Statistical Plan for Residential Risks and determined the insurer groups that cumulatively write at least 90% of the residential property insurance policies that are in force in Texas. The department then analyzed data for each of the individual geographic ZIP Codes (excluding single point ZIP Codes) and calculated the percent of policies in force that are being written by the same insurer groups that write 90% of the policies in force on a state wide basis. It is proposed that if an individual ZIP Code´s cumulative market share calculation shows that the insurer groups that write 90% of the policies in force state wide are writing less than 90% of the policies in force in a particular ZIP Code, then this Zip Code will receive one point. Further, if an individual ZIP Code´s cumulative market share calculation shows that the insurer groups that write 90% of the policies in force state wide are writing 90% or more of the policies in force in a particular ZIP Code, then this Zip Code will receive zero points.

Geographic factors based upon the established lack of availability of certain types of residential property insurance in Tier 1 and Tier 2 counties and in Dallas and Tarrant counties and demographic factors and a market share factor that are correlated with the limited availability of residential property insurance were proposed for analysis by ZIP Code area or county, and points were assigned to each of the factors. Based on the factors and points assigned to each factor, the number of points assigned will be totaled by ZIP Code. It is proposed that areas with five or more points will be identified as underserved or potentially underserved and generally designated as underserved areas. Generally, to be underserved a ZIP Code can meet any one of the geographic based criteria or it must meet all four of the demographic based criteria and the market share criteria.

Marilyn Hamilton, Associate Commissioner for the Property and Casualty Program, has determined that for each year of the first five years the proposed section is in effect, there will be no fiscal implications for state government or local government as a result of enforcing or administering the proposed section. Ms. Hamilton has also determined that for each year of the first five years the proposed section will be in effect, there will be no adverse effect on local employment or the local economy.

Ms Hamilton has further determined that for each year of the first five years the proposed section is in effect the public benefit anticipated as a result of administering the proposed section will be that the regulation of the department will conform with the requirements of recently enacted Article 5.13-2C. An additional public benefit will be that the exemption from rate filing and approval requirements will provide an incentive for insurers to write residential property insurance in underserved areas of the state which should increase the availability of residential property insurance in these areas. There would be no difference in the costs of compliance between a large and small business as a result of the proposed section. In addition, the proposed section does not affect the cost of labor per hour and thus there is no disproportionate economic impact on small or micro businesses. The cost of compliance with the proposed section for large, small, and micro-businesses results entirely from the legislative enactment of Article 5.13-2C, enacted by the 78th Legislature, and is not a result of the administration or enforcement of the section. The proposed section may not be waived for insurers that qualify as small or micro-businesses because the requirements of this section are prescribed by statute, and the statute does not provide for an exemption.

To be considered, written comments on the proposed section must be submitted no later than 5:00 p.m. on April 19, 2004 to Gene C. Jarmon, General Counsel and Chief Clerk, MC 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas, 78714-9104. An additional copy of the comment should be simultaneously submitted to Marilyn Hamilton, Associate Commissioner, Property and Casualty Program, MC 104-PC, Texas Department of Insurance, P.O. Box 149104, Austin, Texas, 78714-9104. Request for public hearing should be submitted separately to the Chief Clerk´s Office.

The new section is proposed pursuant to the Insurance Code, Articles 5.13-2C, 5.35-3 and §36.001. The Insurance Code Article 5.13-2C provides that an insurer may be exempt from the rate filing and approval requirements of Articles 5.142 and 5.13-2 if the total amount of premium collected for residential property insurance by an insurer is less than 2% of the total premium for the state and if more than 50% of the policies issued in the state are valued at less than $100,000 and are located in an underserved area for residential property insurance under Article 5.35-3. Article 5.35-3, §1(a) provides that by rule the Commissioner may determine and designate areas as underserved areas for residential property insurance. Section 36.001 of the Insurance Code 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.

The following statutes are affected by this proposal: Insurance Code Articles 5.13-2C and 5.35-3

§5.3702. Designation of Underserved Areas for Residential Property Insurance for Purposes of the Insurance Code Article 5.13-2C

(a) Purpose. The purpose of this section is to:

(1) designate the areas determined by the Commissioner of Insurance to be underserved areas for purposes of residential property insurance pursuant to the Insurance Code Article 5.13-2C; and

(2) identify the factors and methodology used in determining such underserved areas.

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

(1) Underserved area--An area determined and designated in this section as an underserved area by the Commissioner of Insurance for purposes of an exemption from rate filings and approval requirements for certain insurers pursuant to the Insurance Code Article 5.13-2C.

(2) Commissioner--Commissioner of Insurance.

(3) Department--Texas Department of Insurance.

(4) Market share--the number of residential property insurance policies that an individual insurer has in force expressed as a percentage of the total number of residential property insurance policies in force in a defined geographic area (i.e. state wide or in a specific ZIP Code).

(c) Underserved areas. The ZIP Codes in Figure 28 TAC §5.3702(c) are designated as underserved areas pursuant to the Insurance Code Article 5.13-2C, effective April 13, 2004:

Figure 28 TAC §5.3702(c)

(d) Factors and methodology. In determining the areas designated as underserved, the Commissioner shall consider whether residential property insurance is not reasonably available to a substantial number of owners of insurable residential property in a specific geographic area and any other relevant factors as determined by the Commissioner. The determination of the areas to be designated as underserved is based on the factors and methodology outlined in this subsection.

(1) There is no single comprehensive measure of whether residential property insurance is or is not reasonably available or is or is not potentially reasonably available to a substantial number of owners of insurable property either on a statewide basis or in any particular area of the state. The Commissioner has identified characteristics of particular geographic areas which are likely to be associated with greater difficulty by consumers in obtaining residential property insurance.

(2) Geographic factors based on weather-related loss exposure and the resulting underwriting restrictions used by insurers writing residential property insurance in Texas that would limit the availability of residential property insurance coverages to a greater extent in some geographic areas than in others are as follows:

(A) Tier 1 and Tier 2 coastal counties. One type of weather-related loss exposure concerns the potential for catastrophic hurricanes and other types of windstorms in the First Tier Coastal Counties (Tier 1) and Second Tier Coastal Counties (Tier 2), as defined in Article 21.49 §3 (l) and (m), and the inability of residents to obtain windstorm and hail insurance through the voluntary market in these areas. The Commissioner has determined that the location of a ZIP Code in the geographic areas that comprise the Tier 1 and Tier 2 coastal counties is a factor to be used in determining whether an area is an underserved area for purposes of Article 5.13-2C. ZIP Codes located along the coast, Tiers 1 and 2, are assigned five points.

(B) Dallas and Tarrant Counties. A second geographic area that has historically been affected by weather-related loss exposure underwriting factors is Dallas and Tarrant counties. Due to the frequency and severity of hail storms and the ensuing claims in these counties, insurers have restricted their writing of residential property insurance and have limited the availability of certain property insurance coverages in these counties. Based on this lack of availability of residential property insurance to a substantial number of owners of insurable property in Dallas and Tarrant counties, the Commissioner has determined that the location of a ZIP Code in these counties be considered a factor in determining whether an area is underserved for purposes of Article 5.13-2C. ZIP Codes located in Dallas or Tarrant counties, are assigned five points.

(3) The specific demographic factors and the points assigned are as follows:

(A) ZIP Codes with median household incomes of $36,000 or less are assigned one point.

(B) ZIP Codes with median value of owner-occupied dwellings of $75,000 or less are assigned one point.

(C) ZIP Codes with a median year built of 1974 or earlier are assigned one point.

(D) ZIP Codes with percentages of insured households of less than 50% are assigned one point.

(4) Market share of a set of insurer groups is a factor that correlates with the availability of residential property insurance. The department examined data reported by insurers pursuant to the Texas Statistical Plan for Residential Risks and determined the insurer groups that account for at least 90% of the cumulative market share of residential property insurance policies written on a state wide basis. The department then analyzed data for each of the geographic ZIP Codes in Texas (excluding single point ZIP Codes) and calculated the cumulative market share written by the same insurer groups for each of the individual ZIP Codes. The cumulative market share for each individual ZIP Code was then compared to the state wide cumulative market share of 90%. If the cumulative market share for an individual ZIP Code is less than 90%, then this ZIP Code will receive one point.

(5) Based on the factors and points specified in paragraphs (2), (3), and (4) of this subsection, the number of points assigned were totaled by ZIP Code. Areas with five or more points were identified as underserved or potentially underserved and generally designated as underserved areas in subsection (c) of this section. To be underserved a ZIP Code can meet any one of the geographic based criteria or it must meet all four of the demographic based criteria and the market share criteria.