COMMUNITY SELF-INSURANCE
Squires, Gregory D.
Community self-insurance An answer for the victims of 'redlining' Gregory D. Squires Communities without insurance are communities without hope. — Report of the President's National Advisory...
...Commission on Civil Rights, but the views expressed are his own...
...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...
...Congress is threatening to intervene in the regulatory process...
...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...
...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...
...He commutes to an industrial plant, does odd jobs, lives on relief or lets his wife make the living...
...Through its redlining practices, in fact, the industry contributes to the decline of neighborhoods and to those conditions which create compensable losses...
...Sometimes in the summer he can be seen sitting on his front porch without his shirt...
...The insurance industry is well aware of its overriding interests, and how those interests conflict with the provi-jsion of insurance to inner-city neighborhoods...
...The task will not be easy, but it is necessary...
...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...
...Loss reduction is, at best, a secondary consideration...
...Another factor which limits insurance availability is industry surplus requirements...
...He is not a good risk...
...Companies are generally restricted to writing three dollars of insurance for every dollar of surplus available to meet potential liabilities...
...Actions like the one taken by the Illinois Department of Insurance against ICI and W.W...
...The pervasiveness of insurance redlining and disinvestment in Chicago and other metropolitan areas throughout the United States demonstrates the inadequacy of the traditional case-by-case regulatory approach when it comes to securing socially responsible behavior on the part of major financial institutions...
...Under the McCar-ran-Ferguson Act passed in 1945, Congress relegated insurance regulation responsibilities to the states...
...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...
...It was the most serious step yet taken by what is generally considered the most progressive insurance department in the country to discourage insurers from redlining — refusing to sell insurance to individuals because of the neighborhood in which they live...
...is . . . irrelevant to the industry...
...The insurability of a risk and the demand for insurance are often totally irrelevant...
...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...
...No doubt the private insurance industry will not stand idly by...
...The industry acknowledges that older communities and particularly those with large minority populations are experiencing insurance availability problems...
...Loss experience undoubtedly plays a part in an insurer's decision to write a policy and how much to charge for it...
...If those 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...
...Report of the President's National Advisory Panel on Insurance in Riot-Affected Areas (1968) The Illinois Department of Insurance made a big splash not long ago when it fined the Insurance Company of Illinois (ICI) and its managing agent, W.W...
...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...
...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...
...Building alternative institutions is never an easy task...
...In Wisconsin and Alabama, state-owned property is self-insured by the state itself...
...But even if the department's decision should be upheld, the impact on redlined communities will be negligible...
...Best estimated that $2.25 billion was moved upstream from insurers to parent companies between 1969 and 1973...
...Most regulators take the same line...
...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...
...Many major corporations have faced escalating insurance costs in recent years, and have developed some interesting responses...
...Community organizations, on the other hand, charge that the industry makes subjective decisions about people based on such factors as age, sex, and geographic location — factors which have little to do with actual or anticipated loss or with the personal behavior of individual risks...
...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...
...The current debate over insurance redlining focuses on the underwriting practices of insurers, but it fails to address the underlying causes of insurance unavailability, redlining, and discrimination...
...The problem persists, however, and is unlikely to be solved by any of the steps now being taken...
...The insurance redlining debate has been a major controversy in recent Gregory D. Squires is with the Midwest Regional Office of the U.S...
...The reason is not age or race per se, but simply the fact that such areas have higher losses...
...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...
...Corporate mergers have also affected company surplus...
...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 of dollars received and those paid out...
...But the solution to insurance availability and disinvestment does not rest in developing fairer underwriting criteria...
...The industry generally contends that its underwriting practices are based on the anticipated loss experience of individuals as determined from its analysis of objective data collected over the years...
...In addition, funds collected to meet reserve requirements would be deposited in local banks for purposes of local investment...
...Some companies are taking voluntary actions to improve communications with consumers and resolve individual complaints...
...The industry does not simply respond to changing social conditions, it is a major force in shaping those conditions...
...Basically, this means taking in more dollars in premiums and returns on investments than are paid out in losses and administrative expenses...
...years...
...Legal and marketing assistance will be essential...
...will continue to serve up the delusion that things will change, though they actually remain the same...
...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...
...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...
...Anton Valukas concluded in his investigation for the Illinois Department of Insurance that "none of the agents interviewed were able to pinpoint any statistical basis by which they or their companies made the determination that a particular area was 'bad' or 'uninsurable.' " The following statement, which up until a few years ago was included in 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...
...Underwriting losses are not as serious as the "bottom line" would indicate...
...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...
...Administrative expenses accounted for fifteen cents and agents took twenty cents in commissions...
...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...
...Under a grant from the National Fire Prevention and Control Administration of the U.S...
...The company and the agency plan to appeal the decision...
...Community groups are protesting insurance company practices and successfully negotiating concessions from some to open up new agencies in urban neighborhoods, to develop new insurance policies for urban markets, and even to invest some money in various housing and development projects...
...A key aspect of the competitive environment is adequate rates...
...Vincent & Co...
...As Illinois Commissioner Richard Mathias stated, "Competition is the ultimate solution to problems of availability...
...See "Insurance Redlining," by Gelvin Stevenson, in the March 1979 issue...
...The objective, of course, would be to reduce fire losses in the community, along with insurance costs...
...Therefore, as the industry advisory committee to the Redlining 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...
...Vincent & Co., $104,000 for "redlining" older, predominantly minority neighborhoods in the city of Chicago...
...Since, according to the industry, the pursuit of private profit by individuals in a free 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...
...The basic concept underlying this model is that surplus revenues generated 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...
...This is one area where community groups should follow the lead of private industry...
...If companies cannot generate a profit in certain markets, those markets will not be :served...
...Policyholders in such a company would rightly believe that the company would be responsive to local needs...
...Again, the basic distinction between this approach and that taken by a conventional insurance company would be the utilization 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...
...Insurers like to characterize the redlining controversy as little more than a misunderstanding on the part of an ill-informed citizenry...
...Legislation has been adopted in Illinois, Missouri, Minnesota, Wisconsin, and other states prohibiting insurers from refusing to sell insurance to individuals because of geographic location and requiring disclosure of '. .. the damage...
...The industry does fairly well...
...A recent study by the Midwestern Regional Office of the U.S...
...This argument might be persuasive if it were not for the fact that the insurance mechanism itself provides inadequate incentives for loss reduction activities...
...This may prove profitable for the stockholders, but it limits the amount of insurance available to the public...
...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...
...Commission on Civil Rights found that in Chicago insurance is less available in neighborhoods conWhat is required is an alternative . . . which...
...In doing so they have kept insurance costs down and retained funds that formerly were allocated to insurance companies...
...where policies are being written...
...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 'It is possible tor the public sector to operate a successful insurance program...
...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...
...Among the critics are several insurance commissioners whose departmental studies have revealed that many agents do, in fact, write off some neighborhoods for reasons based on no empirical evidence whatsoever...
...Even in such a "bad year as 1976, when property casualty insurers lost money on their underwriting operations, the investment profit amounted to $2.8 billion...
...People who are less likely to have their houses damaged or to be robbed pay lower premiums, while those who are more careless (or who live in a "bad" neighborhood) pay more — if insurance is available to them at all...
...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...
...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...
...The primary objective of any insurance company (or of any other business) is to make a profit...
...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...
...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...
...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...
...Professional risk-management experts will be needed...
...What is required is an alternative insurance mechanism which encourages responsible behavior and is not grounded in the dictates of private profit...
...You can usually spot his place...
...What the redlining dilemma calls for is the creation of an insurance mechanism geared toward loss reduction rather than profit maximization...
...In 1976, for example, only sixty-six cents were paid out in losses for every premium dollar earned...
...Such an insurance mechanism is currently being examined...
Vol. 43 • December 1979 • No. 12
