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Insurance regulators weigh ban on underwriting factors they say harm minorities

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Over 40 years ago, Greg Squires watched members of the insurance industry grow defensive during a meeting that the National Association of Insurance Commissioners convened to address redlining — refusing coverage or otherwise engaging in discriminatory practices based on the income, racial or ethnic composition of a geographical area.

One person from a prominent insurer "just got up and stormed out of the room," recalls Squires, who was a research analyst for the U.S. Commission on Civil Rights and a member of the NAIC's Advisory Committee to the Redlining Task Force at the time. "He said, 'We don't have to do this, we don't have to listen to this, this is a private business.'"

Fast forward several decades and regulators are putting a renewed focus on how race plays into insurance practices. The death of George Floyd while in police custody brought racism to the forefront of the national dialogue. In summer 2020, NAIC President Commissioner Ray Farmer launched a special committee to examine race and insurance.

So far the committee has held several meetings where consumer advocates and regulators called for recognition of systemic racism and inherent bias in the insurance industry, offered thoughts on how to tackle the issues, and organized the committee into workstreams that will review specific issues. Heading into 2021, several state insurance regulators say they are closely scrutinizing underwriting factors that may have a disparate impact on certain communities.

Squires said insurance companies need to move beyond just making "nice statements" about how much they value diversity.

"What you really want to look at, if you can get the data, is where are they writing their policies, who's getting a homeowners' policy as opposed to just a fire [policy] ... what does the racial composition of their workforce look like, where are their agents placed?" said Squires, a professor of sociology, public policy and public administration at George Washington University. "There's clear evidence that agents are very heavily concentrated in white neighborhoods near suburban white homeowners, and you don’t see that many agents in black neighborhoods."

Underwriting factors under scrutiny

Race is already a factor that insurers across the board are prohibited from using when underwriting policies, but several prominent state regulators are looking to ban the use of other factors such as ZIP codes, education, occupation, income and credit scores that they believe have no place in underwriting algorithms, particularly when it comes to auto insurance.

New York Department of Financial Services Superintendent Linda Lacewell said in an interview that she has already told the industry that education and occupation are not "suitable factors," but is still looking to expand prohibitions on additional factors.

"Where you live and what your job is has no bearing on your driving record," Lacewell said. "I would go further to say that your credit history has no bearing in the risk that you're going to have a claim, and that is unfortunately still allowed in New York under state statute."

Lacewell said she anticipates there will be a lot of movement "in the right direction" due to the "laser focus" that is now being put on some of the factors that she said "may well not be necessary."

Washington Insurance Commissioner Mike Kreidler has also told S&P Global Market Intelligence that eliminating the use of credit scores in underwriting for auto, homeowners, renters and life insurance is among his top priorities, noting that using credit scores in underwriting tends to have a disparate impact on people of color.

Meanwhile, Michigan Department of Insurance Director Anita Fox said in an interview that her state is also among the handful of places that already prohibit some of those factors. Michigan's prohibitions include education, homeownership, occupation and gender.

"The idea is even if insurance companies could make the case that those factors might impact risk and the cost of claims, for example, they also have the impact of negative and disparate impact on certain communities," Fox said. "That's one way that systemically insurance may have inadvertently impacted communities by using what seemed to be innocuous characteristics because they relate to risk, but they were still disadvantaging certain groups."

Industry says current approach is appropriate

The industry, however, maintains that its current system of determining rates is appropriate.

Progressive CEO Tricia Griffith said she has been watching the NAIC's new Special Committee on Race and Insurance, and noted that a lot of different variables go into determining rates.

"What I would say is, insurance prices are clearly based on the customer's probability to have an accident or make a claim," Griffith said. "The loss costs that are associated with it show range of risk."

Griffith gave an example of three women who live in the same house and are around the same age with the same car and the same driving record and stated that they would all pay the same price "regardless of race, income, religion or ethnicity."

Loretta Worters, a spokesperson for the Insurance Information Institute, explained that there is a "direct correlation" between financial instability and the incidence of claims by drivers.

"It's been for years that the industry has seen this: the way you handle your credit says a lot about how responsible you are," Worters said. "Insurers want to reward responsible people by offering them better insurance products and charging them lower rates."

Worters also said insurers use ZIP code as a factor to identify areas with more crime. If someone keeps their vehicles in an area that has a higher crime rate such as Baltimore or Newark, she said, these individuals will have higher insurance rates.

"It doesn't matter about race, it has to do with the risks that are in that area," Worters said.

As regulators review these factors and determine whether they have a place in underwriting moving forward, they will need to continue striking a balance between safeguarding consumers and ensuring insurer solvency.

"Insurance is about protecting people," Lacewell said. "We've got to make it equally available to all on the same terms and conditions and make sure that some factors are not being used as a proxy, even inadvertently, for a prohibited factor, such as race."

In order for the NAIC's mission to be successful, Lacewell said the new Special Committee on Race and Insurance must lead to "action," not just a series of dialogues that result in "nothing, or something weak."

"On this cry for racial justice, which includes people being treated equally with respect to opportunities including in insurance, we've got to make sure that people are not protesting in vain," Lacewell said.

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