These figures were based on quotes given by agents to testers, and are based on policies offering similar levels of coverage. The results of this study seem to indicate problems as serious in its dimensions as those identified by the Hughes panel in 1968. The causes of this problem are, however, varied, and can perhaps best be introduced through some examples of the barriers ACORN members have faced in trying to obtain homeowners insurance. 3. Obstacles to Obtaining Homeowners Insurance: Examples The following are examples of the obstacles facing low-income and minority consumers in obtaining coverage. In Minnesota, an ACORN member in the Philips neighborhood of Minneapolis, who had recently bought her home through the ACORN loan counseling program, wanted to switch her homeowners insurance to the same carrier as her auto insurance carrier. She was refused insurance for the bizarre reason that "her house was too big." In Chicago, several members in the same area of town, had their premiums doubled, or in some cases were outright canceled, without the insurer offering any reason. In some cases these members owned their homes for up to twenty years, and had no abnormal claims history. Many members have reported they were either unable to get insurance, were canceled or had their premiums raised because an abandoned property appeared on their block. At the same time, however, members who have considered buying and rehabbing abandoned properties were also refused insurance. Another member in Minnesota, who had been a policy-holder for twenty years with the same company had her policy canceled after two small claims --one for a dog bite and the other for vandalism. In addition many members across the country reported the identical problems we discovered in our phone surveys. They were told "Nobody will insure you there", "Only the FAIR plan will cover you there", "We don't write policies for houses that old", "We don't write policies for houses which are only worth that much." And the final barrier, of course, is the high price of coverage. As our survey showed, even for conventional policies the cost for residents of low income areas was as much as 250% more than for suburban areas. Another member is currently paying $92.50 a month for her insurance over $1,000 a year for a low-income homeowner!. - - Perhaps the most tragic case we have encountered was that of an ACORN member in St. Louis whose house recently burned down. The man's principal asset with which he might have started a business or sent a child to school -- was unprotected. He had in fact been canceled only a month earlier for an unrelated reason. A tragic story, but one which would perhaps be seen by an underwriter as optimum risk management. The logic here is akin to the cartoon of the homeowner opening a letter in his mailbox reading "Dear policy-holder, we have canceled your policy because our records have shown that you have not had a claim for over five years, so we figure you're due for one." 4. Modes of Redlining: Causes of Problems of Insurance Availability, Affordability and Quality There seem to be two problems with insurance availability. The structure of the industry is such that there is an enormous potential for discriminatory redlining -- that is, in industry terms, unfair, or "irrational", discrimination. This problem is aggravated by inadequate state level regulation and oversight, as well as the complete lack of any federal regulation, or concerted efforts to prosecute insurance redlining where it is discovered. There is also, as we are all aware, a problem with our inner cities. The problem is not just abandoned houses in our neighborhood, but neighborhoods that have themselves been abandoned: by the banks, the insurance companies and even its residents. The effect of this abandonment was made clear in the L.A. riots, but is made no less clear on a daily basis to anyone who lives in these neighborhoods. The insurance industry is not exclusively to blame for these problems, but it is certainly not exempt from responsibility. Addressing this problem requires more far reaching solutions than insurance reform alone, but we may be certain that urban aid packages and enterprise zones will all be wasted if adequate and affordable insurance are not made available. Currently, however, the structure of the insurance industry is such that it continues to perpetuate the problem. The industry's response is often that problems in availability are actually caused by rate regulation. According to a State Farm report, “It is axiomatic that whenever the actuary is prevented from adjusting prices to fit the book of business, the underwriter is forced to adjust the book of business to fit the price permitted." It is also axiomatic, however, that if an insurer wishes to adjust the book of business to avoid certain area, they can do so by adjusting the price. There are in fact a variety of ways in which insurers are responsible for low levels of coverage in urban areas, and a variety of ways in which an insurer can effectually redline. Techniques for redlining can be broken down into two categories: blatant and subtle. The blatant forms are fairly straightforward. Despite several state attempts at "anti-redlining" statutes, an insurer can still usually flat out refuse to insure someone based on the area in which they live. An insurer can also blatantly redline by offering prohibitory rates, that is, offer an unreasonable quote that is well beyond the ability of a policy-seeker to afford. Finally, an insurer can use underwriting criteria which clearly redline whole areas or classes of people, such as the age of the dwelling, the construction of the dwelling or the value of the dwelling. As you know, the use of criteria that have the effect of discrimination is illegal in employment --and should be prohibited for insurance as well under the Fair Housing Act. Subtle redlining is really endemic to the structure of the system. There are many ways in which the price, quality and coverage of a policy can be varied, often based on short cuts and generalizations, rather than the individual analysis of risk. Higher prices may often lead to the unwillingness to buy a home, while inferior levels of coverage take away the incentive to renovate or upgrade them. Other subtle forms of discrimination include requirements for detailed inspections applied in lowincome and minority areas, but not in high-income neighborhoods. This means that, on the whole, people in these neighborhoods are more likely to pay surcharges or to be refused coverage for reasons that go undetected in other neighborhoods. Another common complaint is the disparate treatment of claims. Inspections of claims may be more common in certain neighborhoods than in others, an inspection which the insurer will avoid inflicting on its more select customers for fear of losing their business. Cancellations, based on one or two claims are also more likely to be inflicted on policy-holders on the wrong side of the tracks. Finally there is the issue of agent location and marketing. Agents who do not live or work in the neighborhood they insure not only cannot offer equal service, they are also more prone to view intuitively the inner-city as uniformly high risk. This is no surprise when all they see of the neighborhoods they insure is the latest crime segment on the nightly news. The comparison can be drawn here to the same problem we have had with banks. Lenders that have large portfolios of loans in low-income areas often 8 find that those loans perform better than their conventional portfolio -- while lenders without outposts in minority neighborhoods often use the grossest stereotypes. There are also, however, numerous tactics companies can use to explicitly redline neighborhoods, or cancel policy holders they already have in certain neighborhoods. For example, in Minnesota, one agent anonymously described the following scheme. The insurance company cancels an agent, and redistributes the policies they held to another agent. The original agent would be earning a 10% commission on policies they had solicited, while the new agent would only receive 2%. The new agent is then informed by the company that the properties must be re inspected, with the goal of dumping whole areas. However, the agent will subsequently receive a 4% commission on those policies he or she retains after reinspection, covering any loss caused by cancellations. Another agent was flat out told to reinspect all properties over fifty years old in a certain territory, because actuarial analysis showed a higher risk level for properties over fifty years old. However, an Aetna study from earlier years claimed that the only significant difference in loss patterns for differently aged properties was at the five year age barrier. If this difference is significant, then it is clear there would still be a difference between properties over 50 years old and under 50 years old, on average. The fifty year threshold, however, may be largely arbitrary, and may therefore be used to dump the older areas of town, which are generally in the inner city. The effect of the system of establishing rates based on geographic territories has also been substantially higher prices for low-income and minority families, who account for the bulk of inhabitants in high rate areas. 5. State Regulation: Inadequate and Ineffective A few states have passed anti-redlining statutes. However, these are usually fairly ineffective, and poorly enforced. The NAIC model laws language for anti-redlining statutes relates only to “refusing to insure" someone based solely on their geographic location. Some states also make cancellations subject to the restriction. However such language does not prohibit the use of underwriting criteria which have the effect of redlining or discriminating. The most comprehensive legislation addressing redlining problems was enacted in Michigan. This statute requires that the owner of any building meeting property code may obtain premium coverage with the insurer of his or her choice. FAIR plans are also available, and offer full coverage at a price which reflects the average price of similar conventional policies. Michigan also has a cap on the difference in territorial rates any company may set, and limits the number of territories to three. Nevertheless, a member from Detroit was repeatedly refused coverage by one insurer, and referred to the FAIR plan she was never asked whether her property was up to code. When she asked to speak to the agents supervisor, he informed her that coverage could be made available, but it would cost three times as much as the FAIR plan. Clearly, then, such laws make little difference if they are not enforced. The current system of state level regulation is insufficient and inadequate. According to a 1988 report by the Consumer Insurance Information Group (CIIG) and the Association of Professional Independent Agents (PIA National), insurance departments have inadequate resources to regulate carriers. Four states, New York, California, Florida and Texas, control more than half of all funds and staff dedicated to insurance regulation in the country. - The report also showed that the average department has less than four actuaries the individuals charged with assessing risk and evaluating company rate filings. This pales in comparison to the number of actuaries analyzing and filing the rates for the insurance companies. In Chicago, the rate filing manual for one company may be as long as 1500 pages! It the insurers' risk analysis is faulty or based on prejudice, it is unlikely that the insurance department would ever discover it. Years earlier a similar criticism was made by then Detroit city council president Carl Levin, regarding the time constraints facing the department when evaluating rate hikes. "These rigid time constraints are a substantial problem in the rate making process. The insurance bureau receives approximately 7500 filings each year, about 1500 of which request rate increases, and has five staff people available to review them. The time pressures and the sheer volume work against an adequate review of all rate increase requests." And the departments do seem to be a little too close to the industry. Another PIA study showed that at least 38% of insurance commissioners had worked for the industry prior to serving the state, while almost half would work for the industry after serving an average of only 3.3 years. Also, less than a fourth of the states have elected officials who are directly responsible to consumers of insurance. - To summarize, the current insurance system, in attempting to pool similar risk, has the effect of placing an excessive burden on urban residents who are usually low income and minority. The problems, if not endemic to the system itself, are aggravated by an industry that may still "exaggerate its urban losses"; an industry that, because of the lack of federal regulation, inconsistent and inadequate legislation, little judicial enforcement and inadequate state regulation is given too much opportunity to underwrite based on poor or unsubstantiated conventional wisdom, intuition and shortcuts. And we should keep in mind that blatant discrimination and redlining are still a fact of life. The NAACP case currently under appeal is over a case, where an agent was allegedly instructed by an insurer to stop writing so many policies in black neighborhoods. 6. Insurance Redlining and Economic Development Overpriced and substandard quality insurance contributes to abandonment and urban decline, and leaves.urban businesses and residents poorly situated to compete with their suburban counterparts. This dilemma is illustrated by the response of one of the trade groups to our recent study. A spokesperson for the group argued that "[o]f course insurance is more expensive in inner cities. But so are groceries." Unfortunately she had it reversed -- it is groceries that are made more expensive because insurance is more costly in urban areas. The state of America's low- and moderate-income and minority neighborhoods requires swift and decisive leadership by the new Administration and the new Congress to stop the downward spiral of poverty, violence and urban flight that threatens the viability of thousands of communities nationwide. The President pledged in his campaign to articulate a "third way" to address intractable problems confronting the nation. Nowhere is such a break from liberal and conservative orthodoxies more necessary than in the area of neighborhood revitalization. The President articulated a vision for new solutions to problems of inner-city decline, focusing on the creation of partnerships between the government, private industry and non-profit community groups as the best hope for change. In particular, he returned repeatedly to the question of the availability of credit and financial services as the central question underlying the imperative of recreating our inner cities. - Indeed, the development of thriving neighborhoods with expanding opportunities for homeownership and entrepreneurship hinges on the availability of credit and insurance. Mortgage lenders will often not make loans without insurance no insurance means no home. In addition, the success of any urban aid or enterprise zone legislation will be a foregone failure without affordable insurance. A small business cannot remain competitive with its suburban counterparts if its insurance costs twice as much, and without adequate insurance, a small business cannot risk expansion. And the jobs that do exist are made inaccessible by over-priced auto insurance. The first presidential commission on insurance availability put it simply: "communities without insurance are communities without hope." Recommendations: A Ten-Point Plan to End Insurance Redlining Congress and the Administration can take several affirmative steps to end insurance redlining, including: 1. Requiring disclosure of homeowners policies written by carriers, on a census tract basis Insurance companies should be required to publicly disclose policies written, denied, and canceled by census tract, as well as the race, income and gender of applicants. In addition, companies should report the value and other characteristics of the property being insured, as well as the level of coverage and premiums charged. Such disclosure is essential in order to assess the extent, quality, and price of coverage in neighborhoods of different income and racial compositions, as well as to monitor compliance with non-discrimination laws. Companies should be required to disclose publicly their underwriting criteria. This is essential in order to be able to evaluate whether or not underwriting criteria or reasons for rejection or reinspection are being selectively applied to certain neighborhoods or groups, and whether standards employed may have a discriminatory effect. Companies should be required to disclose the location of agents who sell their policies, on a zip code basis. The absence of agent representation in low-income or minority neighborhoods not only indicates an unwillingness to do business, but also makes it impossible to accurately underwrite risk. 4. Requiring disclosure of investments of policy-holder premiums Companies should be required to disclose publicly their investments of policy-holder premiums, with particular emphasis on investments that support affordable housing and job-creation in areas in which the carriers collect premiums. 5. Requiring disclosure of reasons for termination of policies, or increases in rates. Policy-holders today can be left stranded by the whim of a company, despite having held a policy for many years without making significant claims. The least that consumers deserve is advance notice of termination or of increases in rates. 6. Expanding the Fair Housing Initiatives Program for testing of insurance companies Testers should be used to monitor compliance with anti-discrimination laws and regulations, including those governing underwriting, inspection and claims policies and practices. Given the apparent prevalence of pre-screening of applicants based on the racial characteristics of neighborhoods, testing is an essential compliance tool. 7. Investigating and prosecuting insurance redlining under the Fair Housing Act |