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the Continental Insurance Homeowners Underwriting Manual, demonstrates the subjective nature of much insurance underwriting: "There is also the type who has never lived anywhere but in a rural area. He commutes to an industrial plant, does odd jobs, lives on relief or lets his wife make the living. You can usually spot his place. Sometimes in the summer he can be seen sitting on his front porch without his shirt. He is not a good risk." A recent study by the Midwestern Regional Office of the U.S. Commission on Civil Rights found that in Chicago insurance is less available in neighborhoods con

surers lost money on their underwriting operations, the investment profit amounted to $2.8 billion. Underwriting losses are not as serious as the "bottom line" would indicate. In 1976, for example, only sixty-six cents were paid out in losses for every premium dollar earned. Administrative expenses accounted for fifteen cents and agents took twenty cents in commissions.

The amount of damage done to the buildings and the people in a community is virtually irrelevant to the industry, so long as there is an adequate (positive) spread between the number

'What is required is an alternative which... is not grounded in the dictates of private profit'

taining significant minority or low-income populations or older homes, and that the relationships between race, poverty, and age of buildings to insurance underwriting practices held even after the effects of fire and theft -two factors which account for 75 per cent of all losses are removed.

Loss experience undoubtedly plays a part in an insurer's decision to write a policy and how much to charge for it. Equally evident is the fact that such decision-making is often subjective, discriminates against urban neighborhoods and minority residents, and is a major cause of urban decline. But the solution to insurance availability and disinvestment does not rest in developing fairer underwriting criteria. The underlying cause of insurance redlining is a fundamental conflict between the profit interests of private insurance companies and the insurance needs of urban communities.

The primary objective of any insurance company (or of any other business) is to make a profit. Basically, this means taking in more dollars in premiums and returns on investments than are paid out in losses and administrative expenses. The industry does fairly well. Even in such a "bad" year as 1976, when property casualty in

- of dollars received and those paid out. Loss reduction is, at best, a secondary consideration. Reliance by the industry on such underwriting criteria as age, sex, and geographic location rather than on individually controllable factors also discourages loss reduction on the part of those insured, since their premiums are dictated by factors which they cannot influence. Recently James Stone, the controversial former Massachusetts Insurance Commissioner, described the operation of the industry as "the cost-plus servicing of an ever-increasing claims load."

Another factor which limits insurance availability is industry surplus requirements. Companies are generally restricted to writing three dollars of insurance for every dollar of surplus available to meet potential liabilities. When profits decline from poor underwriting or investment experiences, as was the case for most insurers in the early 1970s, the amount of insurance to be written must be restricted.

Corporate mergers have also affected company surplus. Frequently, the parent corporation will use the surplus of the insurance company to pay a dividend to its stockholders or for a variety of other investment purposes. This may prove profitable for the

stockholders, but it limits the amount of insurance available to the public. A.M. Best estimated that $2.25 billion was moved upstream from insurers to parent companies between 1969 and 1973. So the amount of insurance available to homeowners is frequently determined by the investment whims of a few elite financiers, and by events taking place in distant parts of the globe. The insurability of a risk and the demand for insurance are often totally irrelevant. As Gelvin Stevenson concluded, "Suddenly, when the survival of Hartford's North End or Chicago's Logan Square depends on what is best for ITT, Chile does not seem so far away."

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Insurers often argue that higher losses, and therefore higher premiums or even únavailability 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 were not for the fact that the insurance mechanism itself provides inadequate incentives for loss reduction activities. Through its redlining practices, in fact, the industry contributes to the decline of neighborhoods and to those conditions which create compensable losses. The industry does not simply respond to changing social conditions, it is a major force in shaping those condidons. What is required is an alternative insurance mechanism which encourages responsible behavior and is not grounded in the dictates of private profit.

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any major corporations have faced escalating insurance costs in recent years, and have developed some interesting responses. Ford Motor Company, Honeywell, and 3M are just some of the corporations which have established non-profit self-insurance mechanisms to protect some of their assets. In doing so they have kept insurance costs down and retained funds that formerly were allocated to insurance companies. This is one area where community groups should follow the lead of private industry.

What the redlining dilemma calls for is the creation of an insurance mecha

48 DECEMBER 1979

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nism geared toward loss reduction rather than profit maximization. If hose dollars which currently go to agents as commissions (approximately 20 per cent of homeowners' premiums) and as dividends to company stockholders (the 21 per cent underwriting profit achieved by the industry in 1977 was described by Business Week as "windfall profits reminiscent of the embarrassment of riches that faced the giants of the oil industry... when the Arabs quadrupled the world price of oil") were reinvested in communities in part for various safety activities, this would substantially reduce 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. The basic concept underlying this model is that surplus revenues generRed by a municipality in the sale of fire insurance would be used to increase building inspections, install smoke alarms, update fire fighting equipment, and take any other safety initiatives deemed appropriate by that community. The objective, of course, would be to reduce fire losses in the community, along with insurance

costs.

In Wisconsin and Alabama, stateowned property is self-insured by the state itself. Both programs have proved successful and have resulted in millions of dollars being returned to the general fund which formerly went to pay for insurance premiums. It is possible for the public sector to operate a successful insurance program, despite the industry's propaganda about the greater efficiency of the private sector.

In Chicago, representatives of one government agency, a private business, and a community organization. are beginning to explore the feasibility of a private, community-based nonprofit insurance service. Again, the asic distinction between this approach and that taken by a conventional insurance company would be the utiliza

tion of surplus revenues for safety and loss-reduction activities, and other local investment projects, rather than. for the payment of dividends to anonymous and distant investors. In addition, funds collected to meet reserve requirements would be deposited in local banks for purposes of local investment.

Policyholders in such a company would rightly believe that the company would be responsive to local needs. They would recognize a more direct link between their personal actions and their insurance costs, and therefore would have a greater incentive to act in

market results in the most efficient creation and delivery of goods and services, the solution to availability problems rests in fostering a healthy competitive business environment. Most regulators take the same line. As Illinois Commissioner Richard Mathias stated, "Competition is the ultimate solution to problems of availability."

A key aspect of the competitive environment is adequate rates. If companies cannot generate a profit in certain markets, those markets will not be served. Therefore, as the industry advisory committee to the Redlining

'It is possible for the public sector to operate a successful insurance program.

a responsible manner. In addition to increasing insurance availability, such a program would allow urban residents to exercise greater control over their resources, to benefit more from those resources, and to have more influence on the development of their local neighborhoods.

Building alternative institutions is never an easy task. Many problems will have to be resolved in the process of creating successful alternative insurance mechanisms. Funds to capitalize the company will have to be found. Professional risk-management experts will be needed. Legal and marketing · assistance will be essential. No doubt the private insurance industry will not stand idly by. Attorneys for State Farm are already studying the legality of the municipal insurance concept in California because of fears that it could draw a substantial amount of business away from conventional insurers. The task will not be easy, but it is necessary.

Insurers like to characterize the redlining controversy as little more than a misunderstanding on the part of an ill-informed citizenry. Since, according to the industry, the pursuit of private profit by individuals in a free

Task Force of the National Association of Insurance Commissioners (the organization of the highest ranking insurance regulator in each state) concluded, "Profit is the necessary cornerstone upon which social responsibility can be built.". If consumers understood these economic facts of life as well as the specific inner workings of an insurance company, most insurers believe, the redlining controversy would be defused.

The insurance industry is well aware of its overriding interests, and how those interests conflict with the provision of insurance to inner-city neighborhoods. Public relations efforts and legislation which prohibits geographic underwriting or requires disclosure of where companies are selling insurance will have little more than symbolic effects. As long as the redlining debate is carried out at this level, and as long as essential insurance services are provided primarily by publicly regulated but privately owned profit-making corporations, little will change. Actions like the one taken by the Illinois Department of Insurance against ICI and W.W. Vincent & Co. will continue to serve up the delusion that things will change, though they actually remain the same.

THE PROGRESSIVE / 49

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INSURANCE REDLINING AND
THE PROCESS OF DISCRIMINATION

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

64

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.

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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 realtors3 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."

INSURANCE REDLINING, URBAN DISINVESTMENT,

AND RACIAL DISCRIMINATION

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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