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the Continental Insurance Home- surers lost money on their underwrit- stockholders, but it limits the amount owners Underwriting Manual, demon ing operations, the investment profit of insurance available to the public strates the subjective nature of much amounted to $2.8 billion Underwrit- A.M. Best estimated that $2.25 billion insurance underwriting "There is also ing losses are not as serious as the was moved upstream from insurers to the type who has never lived anywhere ""bottom line" would indicate. In parent commanies haruman 10

parent companies between 1969 and but in a rural area. He commutes to an 1976, for example, only sixty-six cents 1973. So the amount of insurance industrial plant, does odd jobs, lives on were paid out in losses for every pre available to homeowners is frequently relief or lets his wife make the living mium dollar earned. Administrative determined by the investment whims You can usually spot his place. Some expenses accounted for fifteen cents of a few elite financiers, and by events times in the summer he can be seen and agents took twenty cents in com- taking place in distant parts of the sitting on his front porch without his missions.

globe. The insurability of a risk and the shirt He is not a good risk." A recent The amount of damage done to the demand for insurance are often totally study by the Midwestem Regional buildings and the people in a com- * irrelevant. As Gelvin Stevenson conOffice of the U.S. Commission on Civil munity is virtually irrelevant to the in cluded, "Suddenly, when the survival Rights found that in Chicago insurance dustry, so long as there is an adequate of Hartford's North End or Chicago's is less available in neighborhoods con (positive) spread between the number Logan Square depends on what is best

for ITT, Chile does not seem so far away.". ... ... . .

Insurers often argue that higher losses, and therefore higher premiums · or even unavailability in certain markets, are caused by inadequate police protection and building inspections (resulting in higher crime rates, particularly arson), increasing costs of construction, and inflation in general

This argument might be persuasive if it taining significant minority or low-in- of dollars received and those paid out were not for the fact that the insurance come populations or older homes, and Loss reduction is, at best, a secondary mechanism itself provides inadequate that the relationships between race, consideration. Reliance by the industry incentives for loss reduction activities poverty, and age of buildings to in- . on such underwriting criteria as age, Through its redlining practices, in fact, surance underwriting practices held sex, and geographic. location, rather the industry contributes to the decline even after the effects of fire and theft than on individually controllable fac of neighborhoods and to those condi- two factors which account for 75 per tors also discourages loss reduction on tions which create compensable losses. cent of all losses are removed

the part of those insured, since their The industry does not simply respond : Loss experience undoubtedly plays a premiums are dictated by factors which to changing social conditions, it is a part in an insurer's decision to write a they cannot influence. Recently James major force in shaping those condipolicy and how much to charge for it Stone, the controversial former Massa dons. What is required is an alternative Equally evident is the fact that such chusetts Insurance Commissioner, de insurance mechanism which endecision-making is often subjective, scribed the operation of the industry as courages responsible behavior and is discriminates against urban neighbor "the cost-plus servicing of an ever-in- not grounded in the dictates of private hoods and minority residents, and is a creasing claims load." ;

· profit. . .. .: : . major cause of urban decline. But the Another factor which limits in:

. solution to insurance availability and surance availability is industry surplus

any major corporations have disinvestment does not rest in develop requirements. Companies are generally

faced escalating insurance costs ing fairer underwriting criteria. The un restricted to writing three dollars of in

in recent years, and have derlying cause of insurance redlining is surance for every dollar of surplus developed some interesting responses. a fundamental conflict between the available to meet potential liabilities. Ford Motor Company, Honeywell, profit interests of private insurance When profits decline from poor under- . and 3M are just some of the corporacompanies and the insurance needs of writing or investment experiences, as tions which have established non-profit urban communities.

was the case for most insurers in the self-insurance mechanisms to protect The primary objective of any in early 1970s, the amount of insurance some of their assets. In doing so they surance company (or of any other busi to be written must be restricted.

have kept insurance costs down and reness) is to make a profil Basically, this Corporate mergers have also tained funds that formerly were allo means taking in more dollars in pre affected company surplus. Frequently, cated to insurance companies. This is miums and returns on investments the parent corporation will use the one area where community groups than are paid out in losses and adminis surplus of the insurance company to should follow the lead of private industrative expenses. The industry does pay a dividend to its stockholders or for try. fairly well. Even in such a "bad" year a variety of other investment purposes. What the redlining dilemma calls for as 1976, when property casualty in This may prove profitable for the is the creation of an insurance mecha


48 / DECEMBER 1979

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'It is possible for the public
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Insurance program. ....

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nism. geared toward loss reduction tion of surplus revenues for safety and market results in the most efficient rather than profit maximization. If loss-reduction activities, and other Pose dollars which currently go to local investment projects, rather than. services, the solution to availability agents as commissions (approximately for the payment of dividends to problems rests in fostering a healthy 20 per cent of homeowners' pre- anonymous and distant investors. In competitive business environment. miums) and as dividends to company addition, funds collected to meet Most regulators take the same line. As stockholders (the 21 per cent under reserve requirements would be Illinois Commissioner Richard writing profit achieved by the industry deposited in local banks for purposes of Mathias stated, “Competition is the in 1977 was described by Business local investment

ultimate solution to problems of Week as “windfall profits reminiscent Policyholders in such a company availability." of the embarrassment of riches that would rightly believe that the company A key aspect of the competitive enfaced the giants of the oil industry... would be responsive to local needs. vironment is adequate rates. If comwhen the Arabs quadrupled the world They would recognize a more direct panies cannot generate a profit in cerprice of oil'') were reinvested in com link between their personal actions and tain markets, those markets will not be munities in part for various safety ac their insurance costs, and therefore served. Therefore, as the industry adtivities, this would substantially reduce would have a greater incentive to act in visory committee to the Redlining insurance costs and contribute to the development rather than the decline of those neighborhoods. ...

Such an insurance mechanism is currently being examined. Under a grant from the National Fire Prevention and Control Administration of the U.S. Department of Commerce, a California-based research group, the

Institute for Local Self-Government, is · exploring the feasibility of establishing

a municipal fire insurance program a responsible manner. In addition to Task Force of the National Association The basic concept underlying this increasing insurance availability, such a of Insurance Commissioners (the ornodel is that surplus revenues gener- program would allow urban residents. ganization of the highest ranking inled by a municipality in the sale of fire to exercise greater control over their surance regulator in each state) coninsurance would be used to increase resources, to benefit more from those cluded, “Profit is the necessary corbuilding inspections, install smoke resources, and to have more influence nerstone upon which social responalarms, update fire fighting equipment, on the development of their local sibility can be buill". If consumers unand take any other safet; initiatives neighborhoods.

derstood these economic facts of life as - deemed appropriate by that com Building alternative institutions is well as the specific inner workings of an ...munity. The objective, of course,

never an easy task. Many problems will insurance company, most insurers would be to reduce fire losses in the

have to be resolved in the process of believe, the redlining controversy community, along with insurance creating successful alternative in would be defused":"", costs.

surance mechanisms. Funds to capital. The insurance industry is well aware In Wisconsin and Alabama, state

ize the company will have to be found. of its overriding interests, and how owned property is self-insured by the Professional risk-management experts those interests conflict with the provistate itself. Both programs have proved

will be needed. Legal and marketing
will be needed. Legal an

sion of insurance to inner-city neighsuccessful and have resulted in millions' assistance will be essential. No doubt "borhoods. Public relations efforts and of dollars being returned to the general the private insurance industry will not legislation which prohibits geographic fund which formerly went to pay for in

stand idly by. Attorneys for State Farm underwriting or requires disclosure of surance premiums. It is possible for the are already studying the legality of the where companies are selling insurance public sector to operate a successful in municipal insurance concept in Califor will have little more than symbolic surance program, despite the indus

nia because of fears that it could draw a effects. As long as the redlining debate try's propaganda about the greater effi substantial amount of business away is carried out at this level, and as long ciency of the private sector.

from conventional insurers. The task as essential insurance services are proIn Chicago, representatives of one will not be easy, but it is necessary. vided primarily by publicly regulated government agency, a private busi

but privately owned profit-making corness, and a community organization.

porations, little will change. Actions are beginning to explore the feasibility nsurers like to characterize the like the one taken by the linois of a private, community-based non redlining controversy as little more Department of Insurance against ICI profit insurance service. Again, the than a misunderstanding on the and W.W. Vincent & Co. will continue

asic distinction between this approach part of an ill-informed citizenry. Since, to serve up the delusion that things will and that taken by a conventional in according to the industry, the pursuit change, though they actually remain surance company would be the utiliza- of private profit by individuals in a free the same


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Gregory D. Squires and William Velez

Insurance redlining and the racially discriminatory consequences
of the sale of property insurance have been documented in several
cities throughout the United States. In this study teams of "test-
ers" -comparably qualified insurance consumers who differed
only in the racial composition of the neighborhood of the homes
they sought to insure-contacted three Milwaukee area insurance
companies regarding the possibility of purchasing insurance for
their homes. Though no blatantly discriminatory behavior was ex-
hibited, agents representing these companies expressed a clear pref-
erence to pursue business in white communities and placed
additional barriers in the way of testers from nonwhite neigh-
borhoods. These findings parallel changes in other institutional sec-
tors of the housing industry where blatantly discriminatory
behavior has generally given way to more subtle forms of bias.
Policy recommendations are offered to reduce existing racial dis-
parities in the availability of insurance and to open up housing
markets in general for minorities.

When Congress passed the federal fair housing act in 1968 it stated its intention “to replace the ghettos with truly integrated and balanced living patterns.”: This sweeping legislation was enacted in part because Congress recognized that the reality of housing discrimination had become less a matter of explicit racial prejudice and more the result of subtle biases in various institutional sectors of the nation's housing industry. While overt bigotry has certainly not disappeared, subsequent research has confirmed the prevalence of diverse institutional practices which, though not necessarily racially motivated, have served to reinforce dual housing markets in cities across the United States. Redlining by insurance companies constitutes one set of such practices. Though the term “redlining” is most


The Review of Black Political Economy / Winter 1988

commonly associated with certain discriminatory practices by lending institutions, property/casualty insurance companies have exhibited similar behavior in their underwriting activities. This study examines the process of insurance redlining in one major midwestern city.

In each of the key sectors of the housing industry, explicit, intentional racially discriminatory practices have gradually given way to subtle forms of bias. Compliance with racially restricted covenants by realtors has given way to racial steering. * Explicit utilization of race in mortgage lending and appraisal practices has given way to underwriting decisions based on neighborhood characteristics such as the age and value of housing, which have similarly adverse effects on minority communities. Whereas insurers formerly used racial classifications to evaluate potential consumers, they too now use neighborhood characteristics in a manner that adversely affects minority communities.“


At least since the mid-1960s, when several urban areas experienced race riots, revolts, and other forms of civil disobedience, many insurers have concluded that urban communities are uninsurable. Underwriting manuals have frequently included maps with red lines drawn on them to indicate areas where policies should not be written, or should be written only after careful examination, and frequently at higher cost or with special exclusions. The racial composition of the neighborhoods within the red lines was frequently cited as the justification for such policies."

Growing awareness of the problems associated with insurance redlining generated protest activity and other forms of direct action by community groups against the practices of insurers, regulators, and elected officials around the nation. In response to this pressure, government agencies at all levels launched their own investigations.' Lawsuits charging insurers with unlawful racial discrimination in violation of the federal fair housing act have been won (Dunn v. Midwestern 427 F. Supp. 1106 (S.D. Ohio 1979). Several states passed anti-redlining laws, community groups negotiated reinvestment commitments with some insurers, and many urban residents formerly denied coverage have been able to obtain insurance.10 The industry itself responded with its own analyses of the problems and voluntary programs aimed at better informing the public about the nature of the insurance industry." And all parties to the debate have utilized available academic research on redlining and related issues.12

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