SUBCHAPTER J. PROHIBITED TRADE PRACTICES
28 TAC §21.1004
1. INTRODUCTION. The Texas Department of Insurance proposes new §21.1004 concerning the use of residential property insurance claims in rating programs, including surcharge and claims-free programs. The new section is necessary to implement amendments enacted under Senate Bill 14 (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 §551.107 (relating to premium surcharges for residential property insurance policies). SB 14 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 surcharge, discount, or claims-free program. The proposed new section does not prohibit or limit insurers of residential property insurance from considering these claims in the development of base rates. Additionally, as insurers continue to transition from the benchmark rate system under former Insurance Code Article 5.101 to the more flexible file and use system under Article 5.13-2, proposed §21.1004 establishes a procedure to promote rate stability and avoid rate shock by requiring insurers to file a transition plan when a new rating program is introduced or an existing rating program is changed.
Proposed §21.1004(a) specifies the purpose of the new section which is to protect homeowners in Texas from drastic increases in residential property insurance rates and premiums as a result of the introduction of or changes to a claims-free program or claim surcharge program and to promote rate stability for the residential property insurance market in Texas. Proposed subsection (a) also specifies that the new section applies to rates applicable to residential property insurance policies that are delivered, issued for delivery, or renewed on or after January 1, 2006. Proposed §21.1004(b) further implements the SB 14 amendments to Article 5.43 and §551.107 by defining terms commonly used in residential property insurance rating programs. Proposed §21.1004(c) prohibits insurers from assigning a premium consequence for certain claims incurred on or after September 1, 2005, and paragraphs (1) - (3) specify those claims that may not result in a premium consequence because they are not residential property insurance claims for purposes of Insurance Code §551.107 and Article 5.43 as provided in those statutes. 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 the bill, the amendments apply only to rates applicable to insurance policies that are delivered, issued for delivery, or renewed on or after January 1, 2006. Proposed §21.1004(d) and (e) specify that claims-free and premium surcharge rating programs utilized by residential property insurers are subject to the filing requirements of §5.9332. Proposed 21.1004(f) requires residential property insurers to file a transition plan if they introduce a new or change an existing rating program that considers a policyholder's claim experience, and paragraphs (1) - (3) set forth the transition plan requirements.
2. FISCAL NOTE. C.H. Mah, Senior Associate Commissioner, Property and Casualty Program, has determined that for each year of the first five years the proposed section will be in effect, there will be no fiscal impact to state and local governments as a result of the enforcement or administration of the rule. There will be no measurable effect on local employment or the local economy as a result of the proposal.
3. PUBLIC BENEFIT/COST NOTE. Mr. Mah has further determined that for each year of the first five years the proposed section is in effect, the public benefits anticipated as a result of the proposed section will be a uniform and efficient utilization of claims in residential property insurance rating programs. Additionally, the proposed section will establish guidelines for a transition plan that will promote rate stability and avoid rate shock to homeowners. There should be no measurable economic cost to persons required to comply with the proposed section. Any costs to insurers complying with new §21.1004(a) - (c) each year of the first five years the proposal will be in effect are the result of the legislative enactment of SB 14, and any cost to insurers complying with new §21.1004(d) and (e) will not represent additional or new expenses since insurers are required to submit this rate information in accordance with Insurance Code Article 5.13-2. The cost of complying with § 21.1004(f) should not result in additional expenses to insurers because they already develop, consider, and file their own rating information with the department and, under the proposal, should only need to submit an explanation of their plan for moderating increases. The costs of submitting an explanation in order to comply with this section will not vary between the smallest and largest businesses because both small and large insurers alike maintain their own rating information and will be able to review and consider that information in order to file a plan for moderating increases when necessary. Accordingly, the proposed amendments will not have a disproportionate impact on small and micro businesses. The department has considered the purpose of SB 14 and the proposed section, which is to provide for a uniform and efficient utilization of claims in residential property insurance rating programs and to thereby promote rate stability and a void rate shock to all homeowners. Thus, it is neither legal nor feasi ble to waive the requirements of the proposed section for small or micro-businesses because to do so would create a conflict between the department's rules and the statute.
4. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on January 2, 2006 to Gene C. Jarmon, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comment must be simultaneously submitted to J'ne Byckovski, Mail Code 105-5F, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. A request for a public hearing should be submitted separately to the Office of the Chief Clerk.
5. STATUTORY AUTHORITY. The new section is proposed under the Insurance Code Articles 5.13-2, 5.43, 5.35-4, and §§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 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. 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 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.
6. CROSS REFERENCE TO STATUTE The following sections are affected by this Insurance Code Article 5.43 and §551.107
7. TEXT.
§21.1004. Restrictions on Certain Claims in Residential Property Insurance and Transition Plan Requirement.
(a) Purpose and Applicability. The purpose of this section is to protect homeowners in Texas from drastic increases in residential property insurance rates and premiums due to the introduction of, or changes to, a claims-free program or claim surcharge program and to promote rate stability for the residential property insurance market in Texas. This section also identifies certain claims that may not be used as residential property insurance claims under Insurance Code Article 5.43 and §551.107. This section applies to the rates applicable to residential 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 whether through the use of discounts, a tier classification, or other program that does not qualify as a premium surcharge if the policyholder has continuously 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 claim surcharge program, including a tier classification system.
(5) Natural cause claim--A weather claim.
(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 claims incurred 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 and §21.1007 of this title (relating to Restrictions on the Use of Underwriting Guidelines Based On a Water Damage Claim(s), Previous Mold Damage or a Mold Damage Claim(s).
(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 program experience 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, for the purpose of rating and issuing residential property insurance, 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
(3) moderate or otherwise mitigate overall rate and premium increases for individual policyholders over one or several renewal periods.
(g) Termination clause. Subsection (f) of this section expires January 1, 2009.