#120 Nov/Dec 2001

Insuring Reinvestment

Low-income neighborhoods and communities of color have been fighting for decades to get equal access to financial services, fend off predatory lenders, and get the banking industry to reinvest in […]

Low-income neighborhoods and communities of color have been fighting for decades to get equal access to financial services, fend off predatory lenders, and get the banking industry to reinvest in their communities. A host of hard-won tools, including the Community Reinvestment Act (CRA) and the Home Mortgage Data Disclosure Act (HMDA), have helped. Though there is plenty more to be done, banks are clearly recognized as players in the community-development world with responsibilities and roles to fill.

For most community groups, however, the insurance industry represents uncharted territory, despite the fact that its relationship with low-income communities is similar to that of the banking industry. Some key differences in the way the insurance industry is regulated have helped to keep it below many advocates’ radar. But at a time when the industry is moving toward providing traditional financial services, having regulations and relationships in place is increasingly important, and there are many ways to encourage the insurance industry to take a stronger role in developing low-income neighborhoods.

Like banks, insurance companies play a big role in low-income communities. Low-income people and people of color are substantial insurance consumers. Homeownership has increased markedly among these groups during the past decade, and all new homeowners need homeowners’ insurance. Most states require auto insurance, and low-income people also buy substantial amounts of life and credit insurance. According to the American Council of Life Insurers, households earning less than $40,000 purchased 56 percent of all life insurance policies in 1997.

All of these premium dollars add up. The latest figures show that the insurance industry controls over $4 trillion in assets, making it a key player in the capital markets. A significant chunk of those dollars comes from low-income communities, but no one knows how much is reinvested in these communities or in community-development efforts. Insurance regulators, like bank regulators, are primarily concerned with the solvency of the industry, and may even cite this as a reason to discourage so-called “social investments” in low-income and minority areas, assuming that they could not possibly be safe, never mind profitable. Insurance companies do invest a fair amount in real estate, however, implying that community investment may not be an unattainable goal.

Despite being such a large market, people living in poor communities or communities of color also face pervasive problems with discrimination and redlining by the insurance industry. Some are refused homeowners insurance because of their location. Since homeowners insurance is generally required by a mortgage lender, these homebuyers may be forced to go to a FAIR (Fair Access to Insurance Requirements) plan, the last-resort state-sponsored insurer. Only 25 states have FAIR plans at all, and those vary in coverage. Most are both more costly than the voluntary market and vastly inferior – some just cover for fire; others don’t offer full replacement value coverage.

In 1991, the NAACP filed a lawsuit under the federal Fair Housing Act against American Family Insurance, alleging race discrimination in the provision of homeowners insurance in Milwaukee. A former American Family agent testified that he had been criticized by his supervisor for writing too many policies for African Americans. American Family paid $16 million, including $5 million to plaintiffs and $9.5 million for housing programs. It also agreed to stop using the age and value of properties as underwriting criteria, and made affirmative-action commitments. Since then, the National Fair Housing Alliance and its members have filed lawsuits or administrative complaints under the Fair Housing Act against many of the largest insurance companies in America, including State Farm, Allstate, Nationwide, Liberty Mutual, Aetna, Travelers, and Prudential, charging racial redlining and other forms of discrimination. Most cases resulted in significant adjustments of underwriting guidelines, monetary damages for the plaintiffs, company contributions to reinvestment efforts and, sometimes, agreements for future testing.

Neighborhood redlining, racial discrimination, failure to invest in the locations where they make their profits – sounds just like the problems that community groups have been making headway on with banks for years. But the two industries are not directly analogous. Perhaps the most important difference is that insurance companies are regulated almost exclusively by the states, despite the fact that most major insurers have multi-state operations.

State regulation generally leaves much to be desired. According to the National Association of Insurance Commissioners, North Carolina is the only state that mandates regular market conduct exams – the equivalent of consumer compliance exams for banks – to check for unfair practices and violations of consumer protection laws. Other states may have their financial examiners do limited consumer compliance checks as part of financial solvency exams, but they rely on consumer complaints, press reports, and similar sources to identify companies that need more in-depth market conduct reviews.

A significant difference between the regulation of banking and insurance is the near-complete lack of systematic public information about company activities at the neighborhood level. Efforts to win disclosure laws have met resistance from insurance-friendly state legislatures. Insurance companies have been extremely aggressive in their efforts to prevent any public disclosure of data about where they do business, filing lawsuits in a number of cases to prevent states from making this information public. As a result, according to recent research by Greg Squires of George Washington University, only eight states collect any data at all, and in each case they are collected at the zip code rather than census tract level. Only four of those states make public information about individual insurance companies, rather than industry aggregates. Even where data are available, they are nowhere near as detailed as the data on mortgages made public under the Home Mortgage Disclosure Act.

In the absence of strong regulatory oversight, the burden of enforcement has fallen on consumers’ shoulders; however, consumers lack the tools that have proven critical in persuading banks to serve low-income communities. These include good, comparable public data, a reinvestment mandate, and a mechanism for holding institutions accountable for their performance.

Much of the difficulty is that in the insurance arena, there is no Community Reinvestment Act (CRA)–equivalent, no publicly stated mandate that the benefits of public support come with a public responsibility to serve all of a company’s communities, including low-income areas. And yet, like banks, which benefit from FDIC insurance, insurance companies receive a substantial public benefit – they are exempt from anti-trust laws. This is a huge economic boon, and grounds for holding the industry to the same standards that apply to banks.

Despite the obstacles, community groups have achieved some noteworthy victories on insurance-related issues, using a range of tactics. In the mid-70s, National Peoples Action (NPA), led by the late Gale Cincotta, began fighting at the federal and company levels against insurance redlining. A campaign against Aetna in the early ‘80s resulted in hundreds of millions of dollars pouring into 12 cities around the nation.

In 1989, a coalition of community groups in Massachusetts launched an effort to increase investments in low-income and minority communities by the banking and insurance industries. The coalition sent a formal, detailed Community Investment Plan to the 20 leading banks and seven leading insurance companies in the state. When the insurance industry refused to participate, advocates proposed CRA-like legislation that included data disclosure and an affirmative obligation to invest in these communities. The data disclosure portion would have included breakdowns of property and life policies by census tract and race, loss ratio data, and investments sorted by type of investment and census tract.

To generate public support for the legislation, the Massachusetts Affordable Housing Alliance (MAHA), the Massachusetts Association of CDCs, and other groups published reports about the activities of various insurance companies and staged actions at the Boston Marathon, which is sponsored by the John Hancock Life Insurance Company. By 1995, sympathetic legislators were in place in key committees in the state legislature. In 1996, the legislature passed the data disclosure portion of the original bill, and two years later it required insurers to invest in low-income communities in exchange for tax relief they had already been lobbying for.

The availability of data on where companies are writing homeowners insurance has allowed MAHA to publish annual reports on the performance of the top insurers in the state, encouraging them to shape up. By the third year of monitoring, 16 of the top 25 insurers had written more business in the under-served areas than in the year before. The analyses have also spotlighted some of the excuses insurers use to avoid certain areas. For example, many insurers claim that flat roofs, those that typically top small multi-family residential properties like Boston’s so-called “triple-deckers,” are prone to water damage. Triple-deckers are common in lower-income areas of Boston, and because two of the units can be rented out to generate additional income, they allow many lower-income families to become homeowners. The inability to get insurance for these properties forces families that want to purchase triple-deckers to get insurance through the state FAIR Plan. MAHA is working on this problem, researching ways to mitigate the risk and pressing the state insurance commissioner to study the issue more deeply.

State-based regulatory campaigns can also focus on the need for state agencies to enforce existing laws. The Center for Insurance Research (CIR), based in Cambridge, Massachusetts, recently began a campaign to increase the budget for the state’s Division on Insurance and to improve the agency’s “industry-policing” activities. CIR cites several insurance company failures, including that of a popular health insurance plan used by many low-income households, which could have been avoided had the agency enough resources to conduct more thorough financial examinations of the companies. The group also cites the small number of market conduct examinations of insurance companies initiated by the agency. Such examinations look for problems with insurers’ advertising, claims payment, settlement practices, and complaint handling. CIR has also called for the publication of financial and market conduct examinations and consumer complaint information on the Internet. Access to such information would help citizens and community groups identify systematic problems.

Groups can use the insurance regulation process to encourage particular companies to be more responsive to local needs. New Jersey is home to the country’s largest insurance company, Prudential. Prudential has recently been going through the process of “demutualization,” shifting from being mutually held (i.e., owned by its policyholders) to publicly traded. Under demutualization, policyholders can lose the economic value of their ownership without compensation. New Jersey Citizen Action (NJCA), the state’s largest watchdog organization, has been following this process closely, concerned both about the fairness of the demutualization process itself and about its implications for the company’s future business strategy. NJCA has sought to ensure that Prudential’s new business plan includes commitments to increase policy-writing and investments in low-income and minority communities.

Prudential is one of the strongest power centers in the state and has tremendous influence with both the state legislature, which had to authorize the demutualization, and the insurance commissioner, who approved the final plan. The New Jersey Department of Insurance had complete and final say on Prudential’s restructuring, despite the fact that less than 7 percent of Prudential’s 11 million policyholders reside in that state. Nonetheless, NJCA was able to initiate a dialogue with both regulators and the company. This is partially because NJCA is one of a coalition of groups convened by the Center for Community Change (CCC) that together have been delving into insurance issues in recent years. This meant that NJCA could draw on allies from across the country to support its efforts. Collectively, the groups met with Prudential and testified before the Department of Insurance.

Both Prudential and the state acknowledged NJCA’s issues and entered a dialogue with advocates – something unprecedented in prior demutualizations. However, the state was unwilling to put restrictions on the demutualization, and the company made only small (though positive!) concessions, such as providing discounted homeowners’ policies for graduates of NJCA’s homebuyer classes. NJCA and the CCC coalition see this as a solid first attempt to engage a company on this level.

Advocacy groups have also begun working within the National Association of Insurance Commissioners (NAIC) to educate those who can make change at the state level. NAIC is a private, industry-funded organization comprising all of the state insurance commissioners. It collects data, coordinates multi-state efforts, issues recommendations, and sets national standards, although it has no actual regulatory authority. Last year, community groups started participating regularly in NAIC meetings, bringing a low-income perspective to a debate that is heavily dominated by the insurance industry. At a December 2000 meeting in Boston, for example, a delegation of Massachusetts organizations and that state’s insurance commissioner made a presentation on the process and progress of Massachusetts’s data disclosure and investment programs. More than a hundred conference participants attended, including industry representatives and the executive leaders of the NAIC.

Efforts have been made to create products and vehicles that make investing in low-income communities easier for insurance companies – and many are starting to bite. Insurance companies have invested in loans generated by the NeighborWorks® network, and the Neighborhood Reinvestment Corporation has established a partnership with insurance companies to develop models for mitigating risks in low-income neighborhoods and reducing claims. Insurance companies have also invested in some of the large community development intermediary organizations, such as LISC and the Enterprise Foundation. Groups in California, led by the California Reinvestment Committee and others, are working with their state’s insurance commissioner to encourage companies to increase investments in community development projects.

While their colleagues focus on investment issues, the National Fair Housing Alliance (NFHA) and its member fair housing groups have opened up another front. NFHA has been using matched pairs of testers to determine whether insurance companies are discriminating against classes of individuals protected under the federal Fair Housing Act. These testing efforts, implemented in many cities, uncovered a series of problematic practices, reminiscent of what has long been documented among mortgage lenders. These include underwriting standards that discriminate against communities of color by refusing to insure homes under a particular market value or over a certain age, or by providing more limited coverage for these homes than for other, comparable properties in higher-income, non-minority areas. NFHA’s testing also found practices that discourage people of color from purchasing insurance from a particular company – from tactics as simple as not returning phone calls to requiring minority testers to jump through hoops not required of their white counterparts. These include providing social security numbers or having to undergo a property inspection before a quote is given.

Perhaps NFHA’s best-known victory is the settlement it reached with Nationwide Insurance in 1999. In addition to changes in underwriting standards and ongoing monitoring of the company’s fair-housing compliance, this settlement required Nationwide to invest $13 million in 10 communities to assist homebuyers in minority neighborhoods with down payments, closing costs, below–market rate mortgages, and counseling.

Although insurance regulation is largely a state matter, there is even some hope for success in Congress. In 1994, the House of Representatives passed legislation requiring data disclosure, but the measure died in the Senate. Similar proposals were revived during the debate about the financial services industry modernization legislation enacted two years ago. Since then, the National Community Reinvestment Coalition and others have proposed legislation that would extend the Community Reinvestment Act to the rest of the financial services industry, including insurers.

At the time of this writing, Congress is considering legislation that would protect the industry against losses related to terrorism and other catastrophes in the wake of the attacks of September 11, 2001. Such a public bailout would greatly strengthen the argument that the industry should be covered by a CRA-type mandate. Advocates are requesting that any federal support be accompanied by requirements that insurers: 1) provide affordable, high-quality insurance across all markets, including low- and moderate-income communities; 2) disclose industry data comparable to that required of banks under HMDA; and 3) use in-dustry premium dollars in ways that support community development.

Community reinvestment advocates, community development organizations, and civil rights groups that have not focused on the insurance industry would do well to study these examples and consider how to apply them in their own communities. Efforts like these will be needed to ensure that the insurance industry truly meets the needs and interests of under-served communities.