Twenty-five years ago, the National Advisory Panel on Insurance in Riot Affected Areas made this critical observation:
- “Insurance is essential to revitalize our cities. It is a cornerstone of credit. Without insurance, banks and other financial institutions will not and cannot make loans. New housing cannot be repaired. New businesses cannot expand, or even survive. Without insurance, buildings are left to deteriorate; services, goods and jobs diminish. Efforts to rebuild our nation’s inner cities cannot move forward. Communities without insurance are communities without hope.”
This statement applies to cities in 1995 as accurately as it did in 1968. While urban communities still find themselves in desperate conditions for many reasons, one major reason is the practice of insurance redlining.
The Reality of Race
Racial minorities and neighborhoods containing large numbers of minority residents are discriminated against in the provision of property insurance. This is a systematic reality, not an anecdotal occurrence. In studies by fair housing councils, insurance commissioners, academics, and others throughout the United States, residents of minority communities have been discouraged while residents of predominantly white neighborhoods have been encouraged to do business with insurance agents. Whether or not this discrimination is intentional, traditional industry practices adversely affect racial minorities and undermine the redevelopment of urban communities.
ACORN recently found homeowners insurance offered by major insurers in fourteen cities to be far more readily available to upper-income and white suburban communities than to lower-income, integrated, or predominantly non-white central-city neighborhoods. These gaps could not be attributed merely to insurance companies experiencing greater loss in predominately non-white, poor areas. In St. Louis, one of the cities included in the ACORN study, the Missouri Insurance Commissioner found that residents of lower-income black areas paid $6.15 per thousand dollars of coverage, compared to just $4.70 in lower-income white communities, even though the loss ratio was higher in the white neighborhoods.
In December, the National Association of Insurance Commissioners (an organization of state insurance commissioners who regulate the insurance industry) concluded in an analysis of 33 cities in 20 states that “there is considerable evidence that residents of urban communities, particularly low-income and minority neighborhoods, face greater difficulty in obtaining high-quality homeowners insurance coverage through the voluntary market, when compared to residents of other areas.”
Research on Chicago by staff of the U.S. Commission on Civil Rights and on Milwaukee by faculty at the University of Wisconsin-Milwaukee found that insurance companies were far more likely to write policies in predominantly white areas. The number of policies written per owner-occupied dwelling was associated more highly with race than income, poverty rate, age or condition of housing, population turnover, crime rate, incidents of fire, and other factors presumably associated with risk. While the financial considerations of insureds, conditions of properties, and other risk-related factors can account for part of the racial gap in the availability of property insurance, the gap remains substantial even after these variables are controlled
Part of the reason for this gap is that, for the agent, it is often more profitable to do business in neighborhoods with higher-valued properties, which are generally suburban and white, than in areas with lower-valued properties, which are generally urban and non-white. This begs the question of whether profit maximization for some should be accepted as the justification for the devastation of neighborhoods for many. If urban communities cannot be profitably served by the current insurance market, perhaps this essential service should be restructured as a publicly regulated utility, a municipally run service, or some other mechanism. Unfortunately, the problem is even more complex.
Another contributing factor is the perpetuation of racial stereotypes within the industry. As a sales manager for the American Family Insurance Company admonished an agent in a tape-recorded conversation in 1988:
- “Your persistency went down the shitter…Very honestly, I think you write too many blacks…You gotta sell good, solid premium-paying white people…they own their homes, the white works…Very honestly, black people will buy anything that looks good right now…but when it comes to pay for it next time…you’re not going to get your money out of them…the only way you’re going to correct your persistency is get away from the blacks.”
The NAACP, the ACLU, and several Milwaukee homeowners, including a member of the City’s Common Council, are now suing American Family for racial discrimination. Trial is scheduled to begin early in 1995.
Effect or Intent -or Both
Many traditional industry underwriting practices, like minimum value and maximum age requirements, may have some legitimate business purposes but adversely affect racial minorities and minority neighborhoods. Often, for example, a home would be disqualified if it was valued at $50,000 or less or was constructed before 1950. Given the realities of segregation, racial minorities are far more likely to live in such homes and subsequently be excluded by these rules. Forty-seven percent of blacks, compared to 23 percent of whites, live in homes valued at less than $50,000. Similarly, over 40 percent of black households but less than 30 percent of white households were built prior to 1950. A study by the Office of the Public Insurance Council in Texas found that 91% of the market in that state is served by insurers that have minimum value requirements and 88% of the market is served by companies with maximum age requirements.
Underwriting rules and guidelines often are clearly subjective, and there is rarely systematic loss data or evidence to justify their use.
The manner in which these rules are implemented is also often subjective, as indicated by investigations in which matched pairs of callers contact insurance agents posing as consumers. These individuals report the same income, credit history, and other financial considerations and are shopping for the same insurance coverage for the same type of home, in terms of market value, structure, and condition; they differ only in their race or the racial composition of the neighborhood in which the home is located.
As the recent report by ACORN and other similar studies have found, the caller from the white community is generally quoted a price and offered a policy over the phone, with the agent enthusiastically trying to sell the policy. But the caller from the minority neighborhood is often told an agent is not available but will call back (with the calls frequently not returned), not provided a quote over the phone, told that an inspection will be necessary, referred to the FAIR Plan (a publicly administered insurance plan that provides less coverage at greater cost than conventional policies), and in many other ways discouraged from pursuing the policy. Along with studies that confirm these patterns, sympathetic agents (often racial minorities) identify such practices as common among their white colleagues.
Another critical factor in the marketing of insurance is the location of agents. Most of the property insurance policies sold by agents are to those living in the neighborhoods in which the agents are located. A study of agent location in Milwaukee found that in 1970, 1980, and 1990, more agents were located in white than in minority neighborhoods. Again, that relationship remained after the number of owner-occupied housing units, the age and condition of homes, and the income of residents were considered. To illustrate, the racially integrated neighborhood of Sherman Park on Milwaukee’s west side changed from 1 percent non-white to 24 percent non-white between 1970 and 1980, and the number of insurance agents dropped from 22 to nine.
Responses to Redlining
To ameliorate the practice of insurance redlining and nurture reinvestment by insurers, more comprehensive disclosure requirements are essential. Only four states (Illinois, Minnesota, Missouri, and Wisconsin) require geographic disclosure of policies at all, and those only require aggregate zip-code-level disclosure. Current reporting requirements under the Home Mortgage Disclosure Act can provide guidance. Each property insurer should be required to disclose the following information: race, gender, and income of each applicant; census tract, age, structure (e.g. brick or frame), and value of property; type (e.g. fire insurance, HO-3), value, premium, deductible, exclusions, and other terms of the policy; and whether the application was approved or denied. This information should be publicly available in a user-friendly format and widely used by enforcement agencies.
Such disclosure, however, still would not address discrimination that may occur during the prescreening of an applicant. Far more comprehensive testing programs should monitor such practices and any changes that may occur.
The U.S. Department of Housing and Urban Development and the Civil Rights Division of the Department of Justice, which are currently investigating complaints of insurance discrimination, could prosecute insurance redlining far more aggressively under the Federal Fair Housing Act, other statutes that prohibit unfair trade practices, and Constitutional guarantees for equal rights to make and enforce contracts and to buy and sell real property. Federal agencies could initiate more investigations, file suits where appropriate, and provide additional funding for local nonprofit fair housing groups to expand their work in this area.
HUD has announced its intent to promulgate regulations, under the Federal Fair Housing Act, to provide detailed guidance on the kinds of insurance practices that violate the act and appropriate remedies when violations are found. Those regulations, to be published by the end of 1995, will articulate disparate treatment and impact standards and will address specific underwriting guidelines, marketing practices and sales tactics.
Currently, the state insurance commissioners who regulate the industry are notoriously weak on consumer issues. State commissioners often approve rates, underwriting changes and new products, and perform several regulatory functions primarily to assure the solvency of insurance companies. The revolving door between many insurers’ and regulators’ offices also undercuts aggressive enforcement.
To address this problem, perhaps the federal government should develop a regulatory structure similar to the Community Reinvestment Act that applies to mortgage lenders. Approvals and other actions requested by insurers – like the addition of new agents – could depend on whether a company has adequately served all parts of its “service area.” But debate over the repeal of the 1945 McCarran-Ferguson Act, which virtually exempts insurers from federal regulation, has had a long history. Short of repeal, the federal government could license insurers, with one condition of maintaining the license being service to low- and moderate-income areas. Like the CRA requirement for lending, such an approach would aim to empower community groups and begin leveling the insurance playing field.
Other issues also need to be addressed. Underwriting guidelines should be subject to public disclosure requirements and closer scrutiny by law enforcement agencies. Specific underwriting practices that adversely affect minority communities and cannot be justified by insurers – with evidence, not simply by argument – should be eliminated.
The redlining debate must also address investment practices. The insurance industry controls approximately $2.5 trillion, and much of its profits are derived from investments. Some insurers have already entered into partnerships with community groups in which company investments in low-income housing, small business loans, and other urban development projects were as significant as commitments to providing insurance in previously redlined communities. For example, Aetna negotiated its Neighborhood Investment Program with the National Training and Information Center and ultimately invested more than $30 million, through 13 neighborhood organizations in 11 cities, to create or rehabilitate 3,000 housing units. Aetna also provided $1.5 million in capacity building for participating organizations. Organizing and enforcement efforts could increase the number and scope of similar partnerships.
In addition, insurers’ employment practices should be examined. In 1990, 23 percent of the total private sector workforce was non-white, compared to just 17 percent among property/casualty insurance companies, according to the U.S. Equal Employment Opportunity Commission. While no systematic research has examined the link between racial composition of the work force and service to minority communities, discussions with many agents strongly suggest that bringing more racial minorities into the work force would improve service in distressed areas.
From Redlining to Reinvestment
Redlining undermines urban redevelopment efforts, locks people out of critical markets simply because of skin color, and contributes to the concentration of poverty and rise of underclass behavior in urban America. The evidence of insurance redlining further confirms that institutional discrimination is a central, structural cause of urban poverty. It counters the culture of poverty theories so popular in recent years, which simply blame the victims for their plight.
In 1978, the Federal Insurance Administration concluded that “insurance availability and affordability in urban areas are crises of monstrous proportions… denying credit and sealing the doom of today’s urban neighborhoods.” The continuing decay of America’s cities confirms this warning.
Institutional problems require institutional solutions. A vigorous response to insurance redlining must be a part of any viable urban policy. The fate of our nation’s cities depends on it.
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