"Race, Poverty and Homeowner Insurance,"by Gregory D. Squires November/December 2002 issue of Poverty & Race
“No insurance, no loan; no loan, no house; lack of insurance thus makes housing unavailable.” So said the Seventh Circuit Court of Appeals in NAACP v. American Family Mutual Insurance Company, a case that resulted in a 1995 settlement worth $14.5 million, including subsidized home purchase loans, greater access to insurance policies, and other forms of reinvestment for black neighborhoods in inner-city areas of Milwaukee, Wisconsin.
Evidence of insurance redlining persists in low- and moderate-income neighborhoods and minority communities generally, undercutting homeownership and wealth accumulation for residents of those areas. But given severe limitations in publicly available information, nobody can say with certainty how pervasive the problem is or how much progress has been made in recent years. With the industry now asking the federal government for help on at least two fronts, it's time to close the information gap.
Twenty-five years ago, when redlining and racial discrimination were widespread in the mortgage lending market, the federal government responded by passing the Home Mortgage Disclosure Act (HMDA), requiring most lenders to publicly reveal a range of information about their mortgage lending activity, including the number of loans in each census tract in which they were making loans. Two years later, the Community Reinvestment Act (CRA) was passed, banning redlining. HMDA and CRA are credited by the National Community Reinvestment Coalition with generating over $1 trillion in new loans for older urban neighborhoods around the country. Several reports, including "The 25th Anniversary of the Community Reinvestment Act," from the Harvard Joint Center for Housing Studies, released earlier this year, indicate that the CRA has directly led to increased lending activity to racial minorities and low- and moderate-income borrowers, as well as increases in property values in low- and moderate-income communities.
Redlining and discrimination have also long permeated property insurance markets, but nothing close to even minimal disclosure requirements has ever been required for this industry by the federal government.
The Federal Government to the Rescue?
Now the industry is looking for help to deal with the unpredictability of potentially billions of dollars in liability due to terrorist attacks. Not surprisingly, it is looking to the federal government for that help, and the industry is likely to get it. Both the House and Senate have passed versions of a “bailout” or “backstop” bill, and President Bush has indicated he wants to sign such legislation. Differences in the two bills will likely be worked out, and taxpayers could be on the hook for as much as $100 billion in the first year alone.
Some insurers and trade groups, including the American Insurance Association, which generally represents large insurance companies, are also seeking dual chartering legislation that would permit companies to choose to be regulated by either a federal agency or state insurance commissioners. This constitutes a significant break from the industry’s almost universal and long-standing support for state regulation and reflects in part industry consolidation. Proponents contend that dealing with one regulator is more efficient and will help consumers by making it easier and quicker to bring new products to market. Whatever the argument, this represents a second form of assistance the industry is requesting from the federal government.
If the federal government is to provide the bailout or backstop the industry is requesting or grant a dual chartering option, the public is entitled to some protections in return. At a minimum, the industry should inform the public about who it is currently serving and who it is not serving. Specifically, this means requiring HMDA-like disclosure for the property insurance industry.
Redlining, Insurance Style
The costs of insurance redlining were captured by the President’s 1968 National Advisory Panel on Insurance in Riot Affected Areas when it concluded:
Without insurance, banks and other financial institutions
will not – and cannot – make loans. New housing cannot
be constructed, and existing 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.
The issue of mortgage redlining has received far more attention in research and public policy arenas. But insurance redlining has also long been a critical piece of the institutional infrastructure of dual housing markets. When, for reasons unrelated to risk, households cannot get insurance or have to pay more for inferior products, they are unfairly denied the opportunity to buy homes, and the market value of the homes they can purchase is unjustly reduced. Wealth accumulation, consequently, is undercut. For homeowners, approximately 50% of their net worth comes from the equity in their homes. Working families and racial minorities are even more dependent on their homes as a source of wealth.
Evidence of urban insurance availability problems has surfaced, despite the absence of ongoing, systematic public disclosure of where policies are, and are not, written.
The National Association of Insurance Commissioners examined the distribution of property insurance policies in 33 metropolitan areas. Their researchers found that the number of policies and the cost of policies were statistically significantly associated with the racial composition of neighborhoods, relationships that held even after taking risk exposure and loss experience into account.
Fair housing groups around the country have conducted paired-testing audits (where equally qualified black and white or Hispanic and white "testers" shop for insurance from the same agents) and have frequently found illegal discrimination in their investigations. In one nine-city national testing project, the National Fair Housing Alliance found discrimination in at least 32% of the tests in every city, with the frequency of discrimination reaching 83% in one city. Agents often offer policies with less coverage yet higher prices to the minority tester; refer the application to the home office for the minority tester but provide immediate coverage for the white tester; refuse to insure older or lower valued homes; and commit other sins of commission or omission with the result being less service to minority communities.
These investigations have led directly to the settlement of formal discrimination complaints against several major property insurers, including State Farm, Allstate,
Nationwide, Liberty, and American Family. These agreements call for increased marketing efforts in older urban communities, changes in underwriting rules, and
funds to subsidize home purchase and home improvement loans in older, inner-city and predominantly minority neighborhoods. HUD is currently investigating 15 additional discrimination complaints against property insurers.
Racial discrimination is more subtle today. Fifteen years ago, a sales manager for the American Family Mutual Insurance Company advised an agent, in a tape-recorded conversation, “Very honestly, I think you write too many blacks…you got to sell good, solid, premium paying white people.” Today, a question one major insurer asks some of its agents is whether the kids in the neighborhood play basketball or hockey.
What We Don’t Know and Why We Don’t Know It
To the extent that insurance is regulated, the industry is regulated by state governments. But on the issue of redlining, state regulators have been missing in action. State insurance commissioners and state legislators simply have not regulated in this area. Most discouraging is the disclosure data that are available, particular compared to what the federal government requires of mortgage lenders.
Under HMDA, lenders are required to publicly disclose information on the race, gender, income and census tract of all applicants; whether or not the application was approved; the type (e.g., conventional, government-insured) and purpose (e.g., home purchase, improvement) of the loan. Much of the information is available for free on-line and for minimal cost on compact disks or in hard copy. (In order to access this information, go to the web page of the Federal Financial Institutions Examination Council - http://www.ffiec.gov/hmda/default.htm.) Beginning in 2004, lenders will have to report pricing information on high-cost loans.
For property insurance, the picture is quite different. Only eight states collect any insurance disclosure data at all, and they are collected at the zip code rather than census tract level. (Zip codes, of course, are much larger and more heterogeneous than census tracts.) Data on individual insurers are available in just four of these states. The rest provide aggregate data on the larger insurers in the state. Six states provide information on the total number of policies issued and type of policy in each zip code. Loss information (the number of incidents –
e.g., fires, thefts -- where compensable losses occur, and the dollar amount of those incidents resulting in claims filed by policyholders for reimbursement) is made available in three states, and cost data are available in five. No state makes loss and cost data available at the individual company level. And no state provides information on the race or gender of applicants.
State insurance authorities have rarely pursued consumer protections aggressively. One important factor is the proverbial revolving door between the industry and its regulators. State insurance commissioners routinely come from major insurance companies and return to them after their short stints of "public service." In 1995, the Consumer Federation of America found that in ten large states almost 20% of legislators who serve on insurance oversight committees are either owners or agents of insurance businesses or attorneys in law firms with substantial insurance practices. State regulation of insurance is anything but arms-length.
From Redlining to Reinvestment
There have been some positive developments in the insurance redlining debate, despite the reticence of state regulators. Pressure applied by fair housing groups, utilizing the leverage of fair housing laws, led to the settlements and additional complaints noted above. These actions have led to “voluntary” steps on the part of some within the insurance industry. The National Insurance Task Force of the Neighborhood Reinvestment Corporation, which includes most major insurers, has launched loss prevention partnerships with community-based organizations in six metropolitan areas, where insurers advise homeowners on steps they can take to reduce the likelihood they will experience a loss (e.g., installation of smoke alarms and security systems), thus increasing their insurability, and where community groups help insurers find profitable business in previously underserved neighborhoods. The Independent Insurance Agents of America invited the National African American Insurance Association and the Latin American Association of Insurance Agents to participate in its 2000 annual convention, and is assisting minority agents in developing their businesses by aiding them in securing contracts with major insurers. Congressional Representatives Tom Barrett (D-WI) and Luis Gutierrez (D-IL) introduced the Community Reinvestment Modernization Act (H.R. 865), calling for HMDA-like disclosure plus a range of community reinvestment requirements for the property insurance industry.
Absent the systematic disclosure of where property insurance policies are being sold, it is difficult to determine how successful various voluntary and law enforcement initiatives have been and can be. Appropriate disclosure can provide the missing information and encourage additional reinvestment efforts in traditionally underserved communities. Such steps can increase access to insurance, reinforce fair housing initiatives, and enhance wealth accumulation particularly for residents of low- and moderate-income neighborhoods and racial minorities throughout the nation’s metropolitan areas.
In reference to the impact of disclosure on mortgage lending, Nicholas Retsinas and Eric Belsky, Director and Executive Director of the Harvard Joint Center for Housing Studies, observed, “Some banks say that the Community Reinvestment Act didn’t spur them to loan outside their rigid boxes as much as the newspaper publicity on their past records. Banks that redlined had to face angry politicians and shareholders, as well as regulators.”
John Taylor, President of the National Community Reinvestment Coalition, affirmed this message when he concluded, “The mere act of data disclosure motivated partnerships among lending institutions, community organizations, and governmental agencies for designing new loan products and embarking on aggressive marketing campaigns for reaching those left out of wealth building and homeownership opportunities.”
Disclosure constitutes a win-win strategy. It's time to let the sunshine in on the property insurance industry.
Gregory D. Squires is a professor of sociology at George Washington University. firstname.lastname@example.org
Gregory D. Squires (email@example.com) is chair of the Department of Sociology at George Washington University and co-author with Sally O'Connor of Color and Money: Politics and Prospects for Community Reinvestment in Urban America (SUNY Press, 2001).
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