Burnt Orange Report

An Interview with Alex Winslow, Executive Director of Texas Watch

By Phillip Martin

If the Legislature made the insurance companies lower their rates to where they should be, the average homeowner would get an extra $600 in their pocket.
--Alex Winslow

Last week, I saw a story on KVUE News reporting that Texas consumers may see an increase in their homeowner's insurance in the wake of Hurricane Rita. The story featured Alex Winslow, Executive Director of Texas Watch, an Austin-based watchdog group for insurance companies. I sat down with Alex on Monday to talk about the potential increase in homeowner's premiums, as well as a handful of other issues facing Texas consumers.

Q. Hurricane Katrina and Hurricane Rita are reported to cost $42 billion in damages. Now, when I get into a car accident, my insurance goes up. Why is it unreasonable for insurance rates to go up following the devastation we've seen on the Gulf Coast?

A. Insurance rates are set to calculate expected future losses, not to recoup losses. The insurance companies have already factored in potential damages due to hurricanes in your premiums. It's not like hurricanes are anything new, so they shouldn't have to raise rates to cover a loss they've understood and factored in for decades. Our research shows that insurance premiums for Texas consumers are already way too high, which would mean, at the very least, premiums should stay where they are. We actually believe they should still go down.

How could premiums still go down if insurance companies are having to pay out so much to cover their losses from this year's hurricane season?

We recently completed a study showing that insurance companies are overcharging Texas consumers by about $4 billion a year. That's an extra $600 a year for homeowners, and another $200 for drivers. These overcharges are an excessive tax on Texas consumers that are used solely to increase the profit of insurance companies.

For an explanation of overcharges, and the rest of the interview, click on the jump.

What are overcharges, exactly?

This is complicated, just as a warning. The Texas Department of Insurance establishes an ideal profit level for insurance companies by setting an appropriate loss ratio. The ratio divides the premiums a consumer pays by the average amount the company will pay out in losses. Ideally, for every dollar paid in premiums, TDI estimates that insurance companies will spend fifty-eight cents on paying losses. After factoring administration costs, the Texas Department of Insurance states that insurance companies would be making about a quarter-cent profit on every dollar spent in premiums, which any businessman will tell you is more than ideal.

OK, I'm with you so far, but where do overcharges come in?

Well, as I said, the Department of Insurance calculated that loss ratio at 58%. Yet, in 2004, the Texas Department of Insurance calculated that insurance companies only spent about twenty-seven cents of every dollar paying out losses -- a 27% loss ratio. That's an extra 31% in profit! What we did in our report was determine how much money Texas consumers would have saved if this extra profit were returned to them, and it came out to a total nearing $4 billion in overcharges, which comes out to about $600 a year for homeowners, and another $200 for drivers.

That's incredible! That's bigger than the property tax cuts proposed in House Bill 3!

Right. And that's why we don't see any reason for insurance companies to justify raising premiums on Texans that are already paying too much in insurance every year.

For some background now -- what is Texas Watch? What role does Texas Watch play in state government?

Texas Watch is a non-profit, non-partisan consumer advocacy and civil justice group based here in Austin. We see politics as an outside game and an inside game. The outside game is the media and grassroots efforts where you try to educate and persuade the general public. Our primary goal is as a media player, sending the research and reports we do out through the press and through grassroots efforts to Texas consumers. We recently became more involved with the inside game, which is actually lobbying members of the Legislature and attending hearings and trying to shape what goes on underneath the dome, and not just around it.

Do you think your voice would be big enough, in the inside game, to counter the lobbying efforts of the insurance companies?

Well, our voice would be big enough, but our pocketbooks wouldn't be. Insurance companies, with that huge amount of profits they make overcharging consumers, pour millions of dollars into campaigns every year. They actually donated tons of money to TAB and TRMPAC in 2002, the election season currently under scrutiny because of the Delay indictment. The insurance lobby invested in a Legislature that will do their bidding. That's why you saw the tort reform legislation pass, it's why lawmakers passed a so-called insurance reform bill that actually benefited insurance companies, and it's why insurance companies were slated to receive the largest portion of the business tax cuts in House Bill 3 during the last session.

You mentioned the tort reform legislation from the 78th Regular Session. To what extent did the Prop 12/tort reform laws affect our insurance rates?

Prop 12 and the so-called tort reforms have been extremely detrimental to Texas consumers. We were told that the cost, quality, and access of health care would improve. I'm fairly certain that if you asked the average Texan, they would say that their health care costs haven't decreased, it hasn't gotten any better, and it hasn't gotten any easier to get the kind of care they need. Really, no one but the insurance companies have gained any sort of benefit from Prop 12, because it's harder to hold a bad doctor accountable and they don't have to pay out as much as a result.

What about doctors? As I remember, they were real excited about tort reform.

Doctors got used by the insurance lobby into believing that Prop 12 would lower their medical malpractice insurance. In reality, the Texas Department of Insurance has reported that half of all doctors haven't seen any decrease in their rates. Those who have seen reductions have only seen about 5% of their overcharges decrease, hardly the revolutionary reform Prop 12 proponents promised.