Study of Texas Homeowners Insurance Reveals Insurer Financial Losses; Strong Correlation Between Actual Water and Wind Claims and Premiums Research Provides Useful Insights as Legislators Debate Insurance Changes

DALLAS, Texas (SMU) - A study of homeowners insurance premiums and losses in Texas substantiates a deterioration in insurer performance over recent years and a correlation between actual water and wind claims with homeowners premiums.
Using data from the Texas Department of Insurance, the study, released today by Dr. Robert Puelz, Dexter professor of risk management and insurance at SMU's Cox School of Business, examined insurer performance and homeowners losses considering each of the 256 counties in Texas and contrasted Texas statewide homeowners insurance performance to Illinois and California.
"A county-by-county examination of four major insurance perils, which contrasts their losses against Texas statewide losses, offers an insightful look at costs affecting homeowners rates," Puelz said. "On a per policy basis, about two-thirds of Texas counties experienced at least a 100 percent increase in the cost of a water loss from 1996 to 2001. The study examines fire, theft, water, and wind losses by county in Texas from 1996 through 2001 and the evidence supports the proposition that variations in homeowners premiums are predominantly explained by variations in water losses with wind losses also playing a significant role," Dr. Puelz said in announcing his study. "Further, it is clear that Texas insurers have struggled financially with the homeowners market segment."
The research also reviewed insurance markets in other states and noted that changes in regulation need to be broad-based. "While long-term thinking about insurance issues in Texas is important, there is a need for a short-term prescription that can be issued only when the underlying cause of the problem is correctly identified," Puelz said. "Policymakers must consider how changes in insurance law can best assist all insurance market participants so changes in prices are less volatile, household economic shocks are minimized, and insurance remains a feasible business proposition for Texas insurers."
"The study suggests that while legislative and regulatory intent should be to protect the interests of consumers, if legislators elect only a one dimensional short-run strategy and advocate price regulation, then there is a chance that large companies will pull out of the market. Thus, legislative solutions will have to consider the interests of all contracting parties otherwise risk market disruptions," Puelz said.
The study compared homeowners market underwriting results from both regulated and non-regulated Texas insurers with overall results from Illinois and California from 1996 through 2001. Puelz said the study draws distinctions between the Texas homeowners insurance market and those in Illinois and California.
"The study addressed the assertion that insurers are more profitable in areas where rates are unregulated. Contrary to general belief, the research found that insurance companies actually were less profitable in the deregulated Illinois market than they were in the regulated Texas and California markets over the same time period," Puelz said.
Puelz said his study did not include public policy solutions, which fall within the cooperative domain of consumers, insurers, and state officials.

LOS ANGELES -- It may be sunny outside, but water continues to cause nearly a half-billion dollars of insured damage inside California homes each year.

A continuing study by the Insurance Information Network of California found that while the number of household water damage claims is

IINC discovered that the annual cost of water claims is finally on the decline after five straight years of increases. The 81,518 claims reported by the companies in 2003 resulted in $428.5 million in insured losses, the first decline in costs since water claims data became available in 1997. Overall 2003 losses for the industry are projected at more than $500 million.

The survey tracked water claims from 1997 through 2003 for companies representing 68 percent of California's homeowner insurance marketplace. Surveyed companies paid California homeowners more than $2.8 billion for water-related damage during the survey period.

Despite the overall decrease in claims cost, the cost of the average water claim continued to escalate, reaching $5,256 in 2003, more than double the $2,484 average water claim in 1997. The average cost per claim rose each year during the survey period. Remediation and construction costs are largely faulted for the high cost of water damage claims.

The survey also found that water-related claims comprised 30 percent of all California homeowners insurance claims filed in 2003, despite the increase in claims prompted by the Southern California wildfires. Other common homeowner insurance claims include fire, theft, liability, wind and lightning.

Based on trends of the insurers surveyed, overall industry water losses between 1997 and 2003 could be as high as $4 billion -- exceeding the cost of most natural disasters.

"Homeowners shouldn't be misled by our sunny fall weather -- with household water damage, the culprit is often leaky pipes and fittings, not seasonal storms," said IINC executive Director Candysse Miller. "By taking just a few minutes each year to inspect and maintain household fixtures and water pressure, homeowners can prevent much of this damage from occurring."