SECTION 5.3700. Designation of Underserved Areas for Residential Property Insurance for Purposes of the Insurance Code, Articles 5.35-3 and 21.49-12

(a) Purpose and scope. The purpose of this section is to:

(1) designate the areas determined by the Commissioner of Insurance to be underserved areas for purposes of residential property insurance pursuant to the Insurance Code, Article 5.35-3 (Property Protection Program for Underserved Areas);

(2) designate the areas determined by the Commissioner of Insurance to be underserved areas for purposes of residential property insurance pursuant to the Insurance Code, Article 21.49-12 (Market Assistance Program); and

(3) identify the factors and methodology used in determining such underserved areas.

(b) Definitions. The following words and terms when used in this section shall have the following meanings unless the context clearly indicates otherwise.

(1) Class 1 underserved area--An area determined and designated in this section as an underserved area by the Commissioner of Insurance for purposes of both the Property Protection Program operated pursuant to the Insurance Code, Article 5.35-3, and the Residential Property Insurance Market Assistance Program operated pursuant to the Insurance Code, Article 21.49-12. Policy forms and types of coverage that insurers may write in these areas are specified in §5.10004(b)(1) and (d)(2) of this title (relating to MAP Policy Forms and Types of Coverage).

(2) Class 2 underserved area--An area determined and designated in this section as an underserved area by the Commissioner of Insurance for purposes of the Residential Property Insurance Market Assistance Program operated pursuant to the Insurance Code, Article 21.49-12. Policy forms and types of coverage that insurers may write in these areas are specified in §5.10004(b)(1) and (d)(2) of this title (relating to MAP Policy Forms and Types of Coverage).

(3) Commissioner--Commissioner of Insurance of the State of Texas.

(4) Department--Texas Department of Insurance.

(5) Market Assistance Program--The residential property insurance market assistance program operated pursuant to Article 21.49-12 of the Insurance Code and §§5.10001-5.10015 of this title (relating to Plan of Operation).

(6) Property Protection Program--The residential property insurance program for underserved areas operated pursuant to Article 5.35-3 of the Insurance Code.

(c) Class 1 underserved areas.

(1) The following areas are designated as Class 1 underserved areas, effective October 15, 1996:

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(2) The following areas are designated as Class 1 underserved areas, effective January 15, 1997:

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(3) The following areas are designated as Class 1 underserved areas, effective April 15, 1997:

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(d) Class 2 underserved areas.

(1) The following areas are designated as Class 2 underserved areas, effective October 15, 1996:

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(2) The following areas are designated as Class 2 underserved areas, effective January 15, 1997:

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(3) The following areas are designated as Class 2 underserved areas, effective April 15, 1997:

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(e) Factors considered in designating Class 1 and Class 2 underserved areas. In determining the areas designated as underserved, the Commissioner shall consider whether residential property insurance is not reasonably available to a substantial number of owners of insurable property in a specific geographic area and any other relevant factors as determined by the Commissioner. The determination of the areas to be designated as underserved is based on the factors and methodology outlined in this subsection.

(1) There is no single comprehensive measure of whether residential property insurance is or is not reasonably available or is or is not potentially reasonably available to a substantial number of owners of insurable property either on a statewide basis or in any particular area of the state. Therefore, the Commissioner has identified characteristics of particular geographic areas which are likely to be associated with greater difficulty by consumers in obtaining residential property insurance. These characteristics were considered in addition to direct measures of residential property insurance availability (including the number of surplus lines policies as specified in paragraph (3)(F) of this subsection).

(2) The Commissioner considered underwriting restrictions and requirements of insurers writing residential property insurance in Texas that would limit availability of residential property insurance coverages to a greater extent in some geographic areas than in others. Underwriting guidelines are the rules used by insurers to determine whether or not to sell an insurance policy to a particular consumer and what, if any, restrictions will be placed on the policy issued. Many underwriting guidelines have a differential geographic impact. These guidelines include weather-related loss exposure, type of dwelling, age of dwelling, minimum dwelling value, financial stability of consumers, employment status of consumers, length of continuous employment, occupation, and length of continuous residency.

(3) Based upon the review of insurer underwriting guidelines and the Commissioner's authorization under Article 5.35-3 and the Commissioner's mandate under Article 21.49-12 to establish programs to increase the availability of residential property insurance in designated underserved areas as well as the structure and methods of operation of the two programs, specific factors for analysis by ZIP Code area or county were developed, and points were assigned to each of the factors. 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. If the factor for a specific ZIP Code indicated especially significant actual or potential difficulty for consumers in obtaining residential property insurance, the ZIP Code was assigned two points. ZIP Codes not receiving one or two points received zero points for the specific factor. The specific factors and the points assigned are as follows:

(A) Low median household income. Underwriting guidelines related to financial, employment and residential stability and credit histories will likely affect consumers in areas with lower-income to a greater extent than consumers in other areas. Therefore, 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 or less are assigned one point.

(B) Low median value of owner-occupied homes. Underwriting guidelines relating to minimum coverage requirements will likely affect consumers in areas with lower median housing values to a greater extent than consumers in other areas. ZIP Codes with 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.

(C) Older median age of homes. Underwriting guidelines relating to age of dwelling will likely affect consumers in areas with older median housing age to a greater extent than consumers in other areas. ZIP Codes with a median year built of 1957 or earlier are assigned one point.

(D) High percentage of dwelling to homeowners policies. The consideration of this factor is based on the premise that a high percentage of dwelling to homeowners policies in an area is a possible indicator that insurers are restricting their writing of homeowners policies. A high percentage of dwelling policies may indicate that insurers are issuing dwelling policies even if the homeowners policy could be issued, when the coverage amount was less than the insurer was willing to issue or the perceived risks were such that the insurer wanted to reduce exposure by writing a less comprehensive coverage. Also, because consumers purchasing homeowners coverages generally have more choices than consumers purchasing dwelling coverages, the increased coverage choices available through the Property Protection Program will likely have a greater impact in areas with higher percentages of dwelling policies to total policies. Because the statewide percentage of dwelling policies to total dwelling plus homeowners policies is about 20%, ZIP Codes with percentages of dwelling policies to total dwelling plus homeowners policies of more than 50% are assigned one point.

(E) High theft losses per policy. The consideration of this factor is based on the premise that because of insurers' perception of high theft losses in certain areas, insurers are reluctant to sell policies which include theft coverage. Consumers in high theft areas, therefore, have less availability of all kinds of coverages. The Property Protection Program allows policies to be sold without theft coverage, thereby creating the potential for greater availability in areas with high theft losses. Because the statewide average theft loss per residential property policy is approximately $70, 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.

(F) The number of surplus lines policies. By definition, consumers who have obtained residential property insurance coverage through a surplus lines, or non-admitted, carrier have been denied coverage in the admitted market. Based on a sample of 1994 and 1995 surplus lines policies representing about 75% of the total surplus lines residential property insurance writings in Texas, the statewide average of surplus lines policies to total dwelling and homeowners policies is about 1.0%. Because surplus lines data is available by county and not by ZIP Code, ZIP Codes in counties with surplus lines percentages of 2.0% to 4.0% are assigned one point, while ZIP Codes in counties with surplus lines percentage of over 4.0% are assigned two points.

(4) Based on the factors and points specified in paragraph (3) of this subsection, the number of points assigned were totaled by ZIP Code. Areas with three or more points were identified as the most underserved or potentially 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 designated areas resulting from these general rules are modified for four reasons:

(A) First, areas with two points are generally designated as Class 2 underserved areas if the areas were geographically contiguous with other areas of two or more points to promote geographically contiguous underserved areas. Geographically isolated ZIP Codes with two or more points are not designated as Class 2 or Class 1 underserved areas to avoid identifying a random result as an underserved area. In addition, groupings of ZIP Codes with two or more points but with very few policies are not designated as Class 2 or Class 1 underserved areas to enable insurers participating in the MAP and PPP to dedicate their initial commitment of resources to underserved areas with the greatest potential impact.

(B) Second, certain areas with zero or one point are designated as Class 2 underserved areas because of additional information available to the Department regarding availability problems in certain areas. This additional information included the testimony presented at public hearings held by the Commissioner for the purpose of soliciting comments from consumers, agents, insurers and other interested parties on residential property insurance availability problems. The February 8, 1996, hearing in Arlington, Texas identified severe restrictions in residential property insurance writings by insurers in Dallas and Tarrant Counties. The Department's review of underwriting guidelines that was done as preparation for the Arlington hearing, which included the insurers' plans for writing residential property insurance in Tarrant County and the City of Dallas, confirmed the geographically-targeted restrictions in Tarrant County and the City of Dallas. Therefore, zero and one point areas in Tarrant County and the City of Dallas are designated as Class 2 underserved areas because of severe restrictions imposed by insurers on new and existing business in those areas.

(C) Third, certain areas with two points, which are geographically contiguous with areas of three or more points, are designated as Class 1 underserved areas in Harris and Bexar Counties and Bexar Counties to create a geographically contiguous area of eligibility for the Property Protection Program.

(D) Fourth, certain areas in the City of Dallas with three or more points are designated as Class 2 underserved areas to test for the effectiveness of the Market Assistance Program alone in addressing insurance availability problems, especially in comparison to the underserved areas in Harris County which consist solely of Class 1 designations.

(f) Changes in Class 1 and Class 2 designations. Any changes in Class 1 or Class 2 designations may be adopted at any time by amending this section pursuant to the Government Code, §§2001.004-2001.038 (Administrative Procedure Act).

Source Note: The provisions of this §5.3700 adopted to be effective October 15, 1996, 21 TexReg 9835; amended to be effective June 5, 2002, 27 TexReg 4708