State Laws Drive Up Homeowners’ Insurance Costs

by Eli Lehrer on March 16, 2011

The homeowners’ insurance bills of $1,500 per household that will arrive in Texas mailboxes over the next few weeks aren’t much fun to pay. After all, homeowners’ insurance does its purchasers good only when something unpleasant happens: a fire, theft, hurricane, slip-and-fall accident, etc. But largely because of the state’s vulnerability to coastal hurricanes, Texans pay some of the highest average homeowners’ insurance rates in the country.

To date, government regulations intended to lower property insurance rates, often passed through the legislature with the enthusiastic support of both political parties, haven’t worked. In fact, rates have soared in their wake.

Although it isn’t a cure-all for high rates (only figuring out a way to prevent all hurricanes, fires, and thefts could do that), a recent legislative proposal to remedy a bizarre quirk in Texas insurance law could lower most Texas homeowners’ insurance premiums, something politicians have promised but failed to deliver.

The legal defect in question relates to “nonrenewal” of insurance policies, and explaining why the defect matters requires some background. Insurers make their money by pooling together properties with roughly the same risks of making similar claims in each year. That way, even when they pay out mammoth claims to homeowners whose houses burn down, they can make money on most other policies they write.

Sometimes, because of behavior, suspected fraud, bad luck, or changing business needs, insurers find that certain policies don’t make sense for them to write any longer. For example, if an insurer finds that a homeowner makes two expensive theft claims every year for three consecutive years (while most of the homeowner’s neighbors had none), it might conclude the insured person in question is particularly careless and choose not to renew that person’s policy. In most states insurers that decide they don’t want to renew a policy after it expires have to send consumers advance notice and check a few other bureaucratically mandated boxes.

Texas law, however, makes homeowners’ insurance nonrenewals almost impossible. Decades of reasonably minor amendments to nonrenewal laws have turned Texas’s insurance law into a complicated morass. Sections dealing with matters as arcane as “appliance-related losses” and numbers of claims are complicated enough to confuse even insurance company lawyers. This forces insurance companies to continue writing policies they know are money-losers.

Nobody intended this situation, but it has become a problem.

That said, there’s no reason to feel sorry for insurers—they simply raise premiums for all their other customers to make up for their money-losers and suspected fraudsters. Higher rates, however, don’t end the insult to consumers; because nonrenewals are so difficult to carry out, many insurers are reluctant to write new policies in the first place to people in higher-risk areas. This makes shopping around a lot more difficult than it should be.

To solve this problem, Texas should let homeowners’ insurance companies do what the state’s auto insurers are allowed to do: pick their customers so long as they obey civil rights laws and give consumers advance notice of nonrenewals. A bill pending before the legislature, which would let insurers non-renew up to 2 percent of their homeowners’ insurance policies after fulfilling various requirements, could be a good step in the right direction, but it probably doesn’t go far enough.

Texas’s current insurance nonrenewal laws raise rates for most consumers and make shopping for insurance a chore. They need to be changed.

Eli Lehrer () is vice president of The Heartland Institute and oversees its Texas office. In 2010, a Texas-based company non-renewed his homeowners’ insurance policy.

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