In 1978 the Federal Insurance Administration concluded: Without question, insurance availability and insurance affordability The tentacles of in urban areas are crises of monstrous proportions. This is the same message issued by the National Advisory Panel in 1968. Both statements apply today. One small but important part of any viable urban policy must be a vigorous response to the continuing fact of insurance redlining. 8 Selected References on Insurance Redlining ACORN (1993) A Policy of Discrimination? Homeowners Insurance Redlining in 14 Cities Washington, D.C.: Association of Community Organizations for Reform Badain, David I. (1980) "Insurance Redlining and the Future of the Urban Core," Columbia Journal of Law and Social Problems 16 (1): 1-83. Byrne, Kevin J. (1980) "Application of Title VIII to Insurance Redlining," DeWolfe, Ruthanne, Gregory D. Squires, and Alan S. DeWolfe, "Civil Rights Implications of Insurance Redlining" DePaul Law Review 29 (2): 315-351. Hoyt, Josh and Maria Choca (1989) The Silent Partner: The Insurance Industry's Potential for Community Reinvestment Chicago: Woodstock Institute. Keenan, Gerald (1979) Insurance Redlining: Profits vs. Policyholders Chicago: National Training and Information Center. Nader, Ralph and Wesley J. Smith (1990) Winning the Insurance Game: The Complete Consumers Guide for Saving Money Los Angeles: Knightsbridge Press. Schachter, Rob (1981) Insurance Redlining: Organizing to Win Chicago: National Training and Information Center. Squires, Gregory D. (1979) "Community Self Insurance: of 'Redlining'" The Progressive 43 (12): 47-49. An Answer for the Victims Squires, Gregory D. and Ruthanne DeWolfe (1979) Insurance Redlining: Fact. Not Fiction Washington, D.C.: U.S. Commission on Civil Rights. Squires, Gregory D., Ruthanne DeWolfe, and Alan S. DeWolfe (1979) "Urban Decline or Disinvestment: Uneven Development, Redlining, and the Role of the Insurance Industry" Social Problems 27 Squires, Gregory D. and William Velez (1987) "Insurance Redlining and the Transformation of an Urban Metropolis" Urban Affairs Quarterly 23 (1): 63-83. (1988) "Insurance Redlining and the Process of Discrimination" 63-75. Squires, Gregory D., William Velez, and Karl Taeuber (1991) "Insurance Tobias, Andrew (1982) The Invisible Bankers: Everything the Insurance Industry Never Wanted You to Know New York: Simon and Schuster. SOCIAL PROBLEMS, Vol. 27, No. 1, October 1979 URBAN DECLINE OR DISINVESTMENT: UNEVEN DEVELOPMENT, GREGORY D. SQUIRES ALAN S. DEWOLFE The insurance redlining debate poses challenging policy issues for public officials and theoretical concerns for urban sociologists. Using disclosure laws recently enacted in a few states, researchers can now begin examining the underwriting practices of insurers by neighborhoods in selected cities. In this initial exploratory study, we review the controversy and some pertinent general conditions in the property casualty insurance industry. Then we examine the activity of property insurers in Chicago. We find that residents of neighborhoods having a high concentration of minority or low income families, or older homes, are experiencing difficulty in obtaining insurance, and for reasons that cannot be explained by those factors accounting for most insurance company losses, i.e., incidence of fire and of theft. These findings suggest-as its critics have charged and the insurance industry has generally denied-that redlining of many urban communities and discrimination against the poor and minorities are facts of insurance life, and contribute to the deterioration of those communities. We offer some policy recommendations for eliminating redlining and for stimulating reinvestment in urban neighborhoods. We also suggest that future research on issues pertaining to the uneven development of metropolitan areas will be more informative if based on the structural/disinvestment approach than on the individualistic/natural evolutionary one which has long dominated the study of urban sociology. The deterioration of older neighborhoods within major metropolitan areas has long concerned residents, social scientists and public officials alike. Explanations for that phenomenon, however, vary considerably. Some U.S. observers attribute the existence and persistence of poverty and urban slums to psychological and cultural defects of those inner city residents themselves (Lewis, 1966; Banfield, 1970). Others acknowledge that many larger forces are involved but emphasize that cities still contain "natural" communities (Suttles, 1972:7-18), or that since buildings ultimately deteriorate and people move as they move up the socioeconomic ladder, communities inevitably go through transitional phases (Myers, 1975; cf. Harvey, 1973). In recent years, however, more social scientists have been analyzing the "urban problem" from a structural perspective, emphasizing how the interaction of a variety of exploitative institutional forces accounts for the uneven development of metropolitan areas (Tabb, 1970; Blauner, 1972; Alcaly and Mermelstein, 1977). In particular, banks and savings and loan institutions' disinvestment practices (often summarized as "redlining"-the avoidance and/or withdrawal of financial investments in some urban areas and the concentration in other urban, or in suburban areas) has become the subject of much policy research (Shearer, 1976; Werner et al., 1976), the rallying point of many community groups (Dorfman, 1975; Naparstek and Cincotta, 1975), and the focus of much legislative activity.' However, banks and savings and loans are no longer the only financial institutions charged with redlining. In recent years the insurance industry has also become a target for community organizations and public officials. The charge of insurance redlining, e.g., using location in a particular urban area as a general basis for refusing to insure (or to continue to insure) or for varying 1. At the federal level two principal pieces of legislation which have been passed to make banks and savings and loans more sensitive to the credit needs of urban communities are the Home Mortgage Disclosure Act of 1975 and the Community Reinvestment Act of 1977. Several states have also enacted legislation, and North Dakota chartered a state-owned bank to serve those credit needs not being met by conventional institutions (Shearer, 1976). 80 SQUIRES, DEWOLFE AND DEWOLFE the terms under which insurance is available, has become a major political controversy in the late 1970's. The arguments in the insurance redlining debate generally utilize one of two broader perspectives on urban development. The insurance industry adopts an individualistic/natural evolutionary approach when it asserts that underwriting practices are based on the economia loss potential of individual risks, and that its activities merely reflect ongoing societal changes. Industry critics take a structural/disinvestment position when they charge insurers with refusing to make their products and services available in urban neighborhoods while readily serving suburban markets. While the public controversy has raged, there has been virtually no empirical research directed to resolving the underlying issues. In this study we first consider the critical importance of property insurance in U.S. urban areas. Then we contrast the perspectives of the insurance industry and its critics in the "redlining" debate in more detail. Next we analyze actual underwriting activity using the current case of Chicago. Because of recent Illinois disclosure requirements, the issue of whether or not underwriting activities reflect loss-related factors or are unfairly discriminatory can be examined empirically for the first time. Finally, we discuss some policy implications for urban residents, and brief theoretical implications for sociology. INSURANCE AVAILABILITY AND UNEVEN DEVELOPMENT For decades U.S. central city residents, particularly in minority areas, have often been unable to obtain property insurance at affordable rates (Kain and Quigley, 1975; Federal Insurance Administration, 1978; President's National Advisory Panel on Insurance in Riot Affected Areas, 1968). But property insurance is often seen as essential, and vitally linked to the rise and fall of housing conditions and community development. As the President's Advisory Panel on Insurance concluded: 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 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. Comunities without insurance are communities without hope (1968:1). The coexistence of insurance unavailability and urban decline was well-documented in that Panel's report, and reaffirmed in the Federal Insurance Administration's study of property insurance ten years later (1978). Nonetheless, the importance of property insurance in efforts to meet the growing demand for housing, to make that housing available on an equal opportunity basis, and to maintain the vitality of older urban communities has been ignored by most researchers. Some still maintain that “housing is still for the most part a matter of free choice, limited by economic capacity and tastes" (Glazer, 1975:159-9). But it is becoming increasingly evident that a variety of institutional forces, including the insurance industry, are shaping housing and development patterns. To explain the exclusion of minorities from predominantly white suburbs, for example, it is no longer sufficient (if it ever was) to concentrate on such factors as income differences, the housing preferences of minorities, or white attitudes towards integration (Hermalin and Farley, 1973; Pettigrew, 1973). Most minority homeseekers still encounter racial steering practices when they seek assistance of realtors (Pearce, 1979; U.S. Department of Housing and Urban Development, 1978). Lending institutions frequently reject applications for mortgages and home improvement loans for subjective reasons, i.e., ones having little to do with the credit-worthiness of the risk, to the detriment of urban communities-particularly those with low income and minority residents (U.S. Department of Housing and Urban Development, 1977). At least to some extent the behavior of the real estate and lending industries has been shaped by constraints placed on them by the Urban Decline or Disinvestment 81 insurance industry. Lenders will not extend mortgages or home improvement loans if there is no insurance to secure the loans. Realtors are not anxious to show homes to potential buyers if they suspect that insurance (and, therefore, a mortgage) will not be available. Also, the insurance companies themselves are often major investors, e.g., in apartment or office complexes or shopping centers, not simply sellers of insurance policies. Frequently their investment practices discriminate against urban and minority communities, for reasons other than the "strictly economic" ones emphasized in their political activities (Orren, 1974). Much has been learned about the institutional web of housing discrimination and the uneven development of metropolitan areas, but much less has been discovered about the role of the insurance industry in such discrimination and uneven development. A major reason heretofore has been that researchers have not gained access to crucial evidence. Data recently made available by the Illinois Department of Insurance, however, now enables researchers to begin serious analyses of insurance underwriting practices, at least in one state. To understand fully the significance of the empirical findings pertaining to underwriting practices even in one city, however, it is necessary to consider some aspects of the structure of the insurance industry even more specifically, especially to identify various factors contributing to the unavailability of essential insurance. Risk assessment in the underwriting process represents only one such factor. THE PROPERTY CASUALTY INSURANCE INDUSTRY: SOME GENERAL FACTORS Like many banks and savings and loan companies, many contemporary insurance companies are very powerful financial institutions. In 1976 the insurance industry generated approximately $130 billion in premiums and administered approximately $434 billion in assets (Insurance Information Institute, 1977:3, 11). Just in property casualty insurance, over 2,800 companies collected almost $60 billion in premiums in 1976 and earned approximately $1.3 billion (aftertax) profits from their underwriting and from their investment activities combined (National Association of Insurance Commissioners, 1977; INA Corporation, 1976:5). In 1914 the U.S. Supreme Court ruled that because insurance companies are uniquely important as depositories of vast sums of money and as vehicles of risk distribution protecting a large part of the nation's wealth, public interest required public control of the industry (German Alliance Insurance Co. v. Kansas, 233 U.S. 389, 1914). Regulation was, however, placed at the state level,' and this process itself deserves more critical study because in many communities in the United States today residents are still unable to purchase adequate insurance at affordable rates. Certainly the availability and affordability of property insurance are affected by a number of factors, some obvious. Some risks are simply too great to be insured at any cost. Also, as construction costs rise, so do insurance premiums. Inadequate enforcement of building codes and insufficient police protection also add to compensable losses, and, therefore, to cost of insurance. But other factors limiting the amount of insurance available are frequently overlooked or simply not understood. Meeting Financial Surplus Requirements Insurance companies are required to meet specified surplus requirements, i.e., to maintain assets over and above loss reserves and keep them available to meet potential liability obligations. Such requirements operate like bank reserve requirements, restricting the amount of insurance the companies can write. When profits from underwriting or investment activities decline, as was 2. In 1945 Congress passed the McCarran-Ferguson Act which exempts the insurance industry from federal antitrust statutes "to the extent that such business is regulated by State law" (15 U.S.C. §012 (1976)). |