Texas Market Assistance Program: Road "MAP" for Success?

BRIEF BACKGROUND

In late 1993 and early 1994, insurance availability issues came under increasing scrutiny and, by March 31, 1994, consumer advocates were openly accusing the industry of "redlining" in Texas.² Commissioner Robert Hunter held a hearing in Houston on that date, and later in rural areas, to hear testimony on insurance availability issues. The industry stepped up to the plate and testified as to reasons for availability and affordability issues and the activities being undertaken by industry to address these issues, such as the creation of an Urban Issues Task Force by one large insurer, and pilot programs to increase minority agent participation.³ A Task Force made up of industry representatives, community groups, legislators and regulators was formed by Commissioner Hunter and Senator Rodney Ellis to study the issues in underserved areas of Houston and consider solutions. The group organized a bus tour of Houston on September 8, 1994, which was well-attended by all groups.⁴ The interest level in availability and affordability issues remained high throughout the year.

H.B. 1367

The issue was a shoo-in for legislative activity, and several bills were introduced during the following legislative session.⁵ Of these, H.B. 1367, sponsored by Rep. Harold Dutton and Senator Rodney Ellis, emerged with several provisions relating to insurance availability and was enacted. The bill contained a new statute on unfair discrimination, Article 21.21-6, a new statute on use of underwriting guidelines by health insurers, Article 21.21-7, an amendment to Article 21.21-8 regarding affirmative defenses, and a set of statutes designed as a comprehensive approach to residential property availability issues. The primary provision, the Market Assistance Program (MAP) contained in Article 21.49-12, is the subject of this article. Special recognition should be given to Representative Harold Dutton, the House author, who was instrumental in seeking a consensus among the various interest groups involved in the debate on availability of insurance.

Other new statutes in the bill which operate in conjunction with the MAP are the Property Protection Program for Underserved Areas, Article 5.35-3, Group Insurance of Private Passenger Auto and Residential Property in Underserved Areas, Article 21.79, a statue authorizing a Fair Access to Insurance Requirements Plan, or FAIR Plan, Article 21.49A, a Voluntary Inspection Program, Article 5.33B, and authority for a Property and Casualty Insurance Initiative Task Force, Article 21.49B.⁶

MAP PROGRAM

The MAP is a program operated by the Texas Department of Insurance to attempt to match residential property insurance applicants in underserved areas of Texas who have been nonrenewed, cancelled, or declined coverage with an insurer willing to write the coverage by means of a computer bulletin board. The program is voluntary unless the Commissioner, after a public hearing, decides based on specified criteria that the voluntary program is not working and a mandatory MAP should be established. If the mandatory MAP does not address the availability problems, the Commissioner may establish a Fair Access to Insurance Requirements Plan, or FAIR Plan.

CRITERIA FOR MANDATORY MAP

If the program is not working on a voluntary basis, the Commissioner may establish a mandatory program.⁷ The criteria to be used by the Commissioner when considering the establishment of a mandatory MAP to replace the voluntary MAP is:

• If less than 60 percent of the eligible applications are quoted or if less than 40 percent of the eligible applications are written in the preceding 12 month period, the Commissioner may hold a public hearing to determine if the MAP should be mandatory.
• The Executive Committee is required to review the demand for and performance of the program after the first six months and at least annually thereafter, and to make recommendations to the Commissioner if there is evidence the voluntary MAP is not working. The Executive Committee bases its recommendation on the criteria above, based on certain factors, such as the number of eligible applications received for each designated area, number of premium quotes made in each area, and the number of policies issued in each area.⁸ Then the Commissioner must hold a hearing to consider a mandatory MAP. The decision to make the MAP mandatory may be on an area-by-area basis. In no event may the program be made mandatory for an underserved area until the voluntary program has been operational in the area for at least six months.

The Executive Committee may also recommend that the program be terminated, subject to the approval of the Commissioner. The program may not be terminated earlier than 48 months following commencement of the program.⁹

FAIR PLAN CRITERIA

In the event that the voluntary MAP is made involuntary, and the involuntary MAP fails to address availability problems existing at that time, the Commissioner may decide to implement the FAIR Plan authorized by Article 21.49A. The statutory criteria is that, in all or any part of the state, residential property insurance is not reasonably available, and at least 50% of eligible applicants to the MAP, after the MAP has been made mandatory, have not been placed with an insurer in the previous 12-month period.¹⁰ The earliest time, therefore, that a FAIR Plan would be instituted is 18 months after commencement of the voluntary MAP program, since the Executive Committee of the MAP may not make a recommendation for a mandatory MAP until the MAP has been operational for six months.¹¹ It is unlikely, however, that a FAIR Plan would be instituted as quickly as 18 months. Commissioner Elton Bomer has publicly encouraged participation in the voluntary MAP and has indicated that he would be very surprised if it becomes necessary to institute a FAIR Plan.¹²

DESIGNATION OF UNDERSERVED AREAS

As part of the MAP requirements and Plan of Operation, the Commissioner was required to designate which areas of the state are "underserved" for purposes of the MAP and the Property Protection Plan.¹³ The designation is by ZIP code. On August 6, 1996, a hearing was held by the Commissioner, and on September 24, 1996, 28 TAC § 5.3700 was adopted, which specifies the areas designated and the criteria for designation.

The designation was somewhat controversial because of the factors considered and the manner of determining Class 1 and Class 2 groups. Most parties agreed that it is difficult to quantify availability problems, to come up with criteria which form a perfect basis for designation, and to create a completely objective formula.

In developing the criteria, Department staff reviewed insurers' underwriting guidelines, considered testimony from an availability hearing in Arlington, Texas held February 8, 1996, considered recommendations of the MAP Executive Committee, spoke with HB 1367 sponsors Representative Harold Dutton and Senator Rodney Ellis, met with insurance agent representatives, met with representatives of the City of Dallas, the Dallas Homeowners League and Senator Royce West, and discussed availability and measurement concepts with Dr. Robert Klein of the NAIC.¹⁴

Specific factors for analysis by ZIP code were developed and a scoring system by points was applied to each factor. Department staff stated that, in addition to direct measures of availability, underwriting restrictions have different impacts in different geographic regions.¹⁵ Therefore, if the factor for a specific ZIP code indicated actual or potential difficulty for consumers in obtaining residential property insurance, the ZIP code was assigned one point, but if the factor for a specific ZIP code indicated "especially significant" actual or potential difficulty, the ZIP code was assigned two points.¹⁶

Based on these factors and points applied, the number of points assigned were totaled by ZIP Code. Areas with three or more points were identified as the most underserved and generally designated as Class 1 underserved areas. Areas with two points were identified as underserved or potentially underserved and generally designated as Class 2 underserved areas. Generally, areas with zero or one point were not designated as underserved areas. The significance of Class 1 and 2 designations is discussed below.

As finally adopted, the specific factors and the points assigned are as follows:

• Low median household income. ZIP codes with median household incomes of $16,000 or less are assigned one point, except that because of higher median incomes in Harris, Dallas, and Tarrant Counties, ZIP Codes in these counties with median household incomes of $18,000 are assigned one point.
• Low median value of owner-occupied homes. ZIP Codes with a median value of owner-occupied dwellings of $30,000 or less are assigned one point, except that because of higher underwriting standards in Harris, Dallas, Tarrant and Travis counties, ZIP Codes in these counties with median values of owner-occupied dwellings of $40,000 or less are assigned one point.
• Older median age of homes. ZIP Codes with a median year built of 1957 or earlier are assigned one point.
• High percentage of dwelling to homeowners policies. ZIP Codes with percentages of dwelling policies to total dwelling plus homeowners policies of 50 percent or more are assigned one point.
• High theft losses per policy. ZIP Codes with a three-year average (1993-1995) of $125 or more theft losses per policy are assigned one point, while ZIP Codes with an average of $150 of theft losses in each of the three years are assigned two points.
• The number of surplus lines policies. Because surplus lines data is available by county and not by ZIP Code, ZIP Codes in counties with surplus lines percentage of 2 percent are assigned one point, while ZIP Codes in counties with surplus lines percentage of over 4 percent are assigned two points.

In addition to determination of point assignment, certain areas with two points which are geographically contiguous with areas of three or more points are designated as Class 1 areas in Harris and Bexar counties. As an exception to the formula, certain areas of the City of Dallas with three or more points are nevertheless designated as Class 2 areas. The purpose of the exception is to test the effectiveness of the MAP alone, without the Property Protection Plan.

Most factors and aspects of the formula used received critical comment, but several areas stood out. Many commenters objected to the factor of percentage of dwelling to homeowners policies, noting that such a percentage could be due to a high number of renters in the area. The Department responded that, while it still viewed the factor as a possible indicator of insurers restricting the writing of homeowners insurance in the area, the weight given to the factor should be decreased from two points to one point, and the point assigned only when the percentage amounted to 50% or greater.

Industry also objected to the use of "contiguous geographic areas," where certain ZIP codes were designated as being within Class 1 or 2 although the sum of points for the ZIP codes did not meet the necessary point total for such designation. Upon adoption, the Department modified the use of contiguous area designation to exclude groups of two or more points.

Objection was made to the consideration of "potential" difficulty in obtaining residential property insurance, and the weight given to the potentiality was lessened upon adoption. Although some members of industry objected to consideration of the high number of theft losses per policy, no change was made upon adoption. Several commenters objected to the proposed lock-in of designations for a three-year period, and this requirement was removed on adoption so that the designations may be evaluated and changed by the commissioner at any time. Staff indicated that the proposal was designed to provide adequate motivation for insurers to take advantage of the tax incentives allowed by the Property Protection Plan.

The changes resulted in the number of ZIP codes designated as underserved decreasing from 517 as proposed to 427 as finally adopted. The proposed rule was also revised to allow a three-step phase-in, so that the most critically underserved areas are implemented immediately, with two other groups to follow at six month intervals. The specific counties to be phased in are as follows:

Phase One began October 15, 1996, for zip codes in Bexar, Brooks, Cameron, Duval, Dallas, Harris, Hidalgo, Him Hogg, Jim Wells, Kenedy, Starr, Tarrant, Webb, Willacy and Zapata counties.

Phase Two began January 15, 1997, for zip codes in Aransas, Armstrong, Briscoe, Childress, Collingsworth, Cottle, Dickens, Donley, El Paso, Fisher, Foard, Galveston, Gray, Hall, Hardeman, Haskell, Jefferson, Jones, Kent, Knox, Lamb, Lubbock, Motley, Newton, Nueces, Stonewall, Travis, Wheeler, Wichita and Wilbarger counties.

Phase Three begins April 15, 1997, for zip codes in Brown, Callahan, Camp, Coleman, Dimmit, Eastland, Fannin, Frio, Hamilton, Hunt, Lamar, Lampasas, Llano, Limestone, Mason, McCuloch, McLennan, Menard, Mills, Palo Pinto, Red River, Robertson, Runnels, San Saba, Schackelford, Stephens, Taylor, Titus and Zavala counties.

CLASS 1 AND CLASS 2

The categories of Class 1 and Class 2 simply refer to the programs which are to be made available in the ZIP codes designated as Class 1 or Class 2. In Class 1 areas, applicants are eligible for both the MAP and the Property Protection Program (PPP). In Class 2 areas, applicants are eligible for the MAP only.

The PPP is established pursuant to Article 5.35-3, Tex. Ins. Code, and, as with the MAP, does not include windstorm and hail insurance coverage for a risk eligible for the Catastrophe Property Insurance Association, commonly known as the CATPOOL. PPP provides for a basic policy covering fire and allied lines perils with endorsements providing additional coverages. An insured may take the basic policy alone, or add any of the endorsements in a cafeteria style approach. The program is designed to make available basic coverages at a commensurate rate, with the addition and increased cost of only those coverages the insured desires. Basic coverage is provided on forms HO-A, TDP-1, FRO-A and TFR-1. Many standard endorsements may be attached to the basic policy, and several endorsements were promulgated for use specifically in the PPP. Current rates, premiums and rating rules in the Texas Personal Lines Manual apply to the forms and endorsements approved for use in the PPP.¹⁷ A significant aspect of the PPP is the statutory incentive provided to insurers to write PPP policies. Premium on PPP policies is not subject to the premium tax of Article 4.10, and is not included in "net direct premiums" for purposes of CATPOOL requirements of Article 21.49.

The MAP provides for basic fire and extended coverage, named perils, broad form named perils, additional named perils, either separately or in combination, all risk coverage, and any other coverages under forms and endorsements promulgated pursuant to Article 5.35. Applications are evaluated based on each insurer's underwriting guidelines and rates determined in accordance with Insurance Code provisions applicable to that insurer.

VOLUNTARY INSPECTION PROGRAM

Another prong of the comprehensive HB 1367 availability legislation is the Voluntary Inspection Program (VIP) authorized in Article 5.33B, Tex. Ins. Code. The program is not restricted to designated underserved areas but is available statewide, and is designed to help insurance applicants either be certain their property is insurable or to identify the reasons that the property is not currently insurable. A certificate of inspection is sufficient evidence of insurability for eligibility purposes of the MAP. Inspections must be made by a licensed or certified inspector authorized to perform VIP inspections, and the inspector may charge a reasonable fee not to exceed $50.00 for an initial inspection, or $25.00 per follow-up inspection if repairs are made within 90 days.¹⁸ Criteria for insurability standards are set forth by rule.¹⁹

ELIGIBILITY OF APPLICANTS

Consumers seeking coverage through the MAP may contact any licensed agent who sells property insurance to take their application. To be eligible, a property must be in a designated underserved area ZIP code, it must be insurable and the applicant must provide written documentation that the applicant has been unable to obtain residential property insurance. The applicant may demonstrate such eligibility by providing either:

• If the applicant has previously been insured, a cancellation or non-renewal notice from one company and written proof of declination by at least one other company unaffiliated with the previous insurer. The documentation must be dated within the previous 12-months.
• If the applicant has not been previously insured, either documentation of unsuccessful attempts to obtain coverage from two or more licensed unaffiliated insurers, or a completed "letter of non-eligibility" from an insurance agent, stating that he or she is unable to place the risk with a licensed insurer available to that agent.

The agent completes the MAP application and submits it, along with the required proof of non-renewal, cancellation or declination, to the MAP. The MAP reviews the application for eligibility, records it and sends it to a private contractor for entry onto the computer bulletin board. The MAP will return any ineligible application, along with a written explanation, to the agent within 14 days of receiving it.

BRIEF DESCRIPTION OF OPERATION

An application for assistance through the MAP must be provided by an originating agent, who will receive $25 for a policy with a premium of less than $500 and $50 for a policy costing more than $500. On renewals, the originating agent will receive 25% of the issuing agent's commission, or 15% if such agent is a salaried representative. The issuing agent is responsible for payment of the originating agent's commission. An electronic bulletin board is used to process applications and is used by participating insurers to select applications to consider.

The MAP procedures operate in the following manner:

1. TDI receives the application from an originating agent confirming the consumer lives in an underserved area, and confirms that necessary paperwork has been completed.
2. The application is then forwarded to the Policy Management Systems Corp., which operates the bulletin board.
3. If the applicant qualifies for the MAP, application information is placed on the bulletin board.
4. Using software provided at no cost by the MAP, participating insurers log onto the bulletin board and review applications. Based on their underwriting guidelines, insurers can select from the board for processing one or more applications, which can remain on the bulletin board for one year.
5. Insurers report to the bulletin board if they provide a quote or write a policy. Refusing a quote does not remove a consumer from the board.

IMPLEMENTATION

Phase One of the MAP was implemented on October 15, 1996, and Phase Two was implemented on January 15, 1997. Currently there are 20 insurers participating in the plan which make up 80% of the market.²⁰ Over 360 agents from 54 counties indicated through a survey sent out by the TDI that they would like to be originating agents.

The Department and the MAP Outreach Implementation Team held seminars in Dallas and Houston in October 1996 to demonstrate operation of the electronic bulletin board for insurers. Events have been planned or attended by Department staff in communities across Texas during implementation to make consumers and agents aware of the program availability, including presentations and exhibits, agent seminars, radio and television interviews, newspaper articles, and publication distribution. In addition, the Department encloses MAP information in every agent license renewal packet. Early feedback received from industry has been positive in regard to the accessibility and coordination of the program although some difficulty with the software has been experienced by insurers.

The Commissioner's order designating underserved areas stated that designations would help to discourage claims of redlining. Whether this will prove to be true remains to be seen. Significant effort has gone into development of the MAP and PPP programs in all respects. There will be direct and indirect benefits from the establishment of the MAP. The MAP will directly benefit those who have not been able to obtain insurance. Some parties feel that the existence of the MAP will provide an indirect benefit by encouraging more writings in the voluntary market. Data collected on applications made and accepted will provide some quantification of whether significant availability problems truly exist and to what extent. Voluntary participation in the MAP provides an excellent opportunity for insurers to demonstrate good corporate citizenship in Texas, whether or not many applications are received. As the Commissioner has pointed out, much will depend on the efforts of insurance agents in making consumers aware of the available program or programs, depending on the area.²¹