INSURANCE REDLINING

Stevenson, Gelvin

Insurance redlining A new front in the battle to save people's homes Gelvin Stevenson Anew front has been opened in the struggle to save people's homes from the arbitrary decisions of...

...Although well intended, FAIR Plans have accelerated and legitimized redlining...
...It can then pass unwanted policies on to a state reinsurance facility...
...It allowed companies to sell insurance to higher-income consumers whose new homes had fire-resistant construction and new wiring, as well as more open space to diminish the risk of fire spreading from an adjacent property...
...These companies have become just as unresponsive and discriminatory as their competitors, the stock companies...
...Once redlining begins, its extent tends to be governed by an insurance company's capacity...
...One problem with legislative solutions is that they can become problems in themselves...
...The need for control over capital flows into and out of the industry is not yet widely recognized, though it is an important determinant of capacity...
...Once commitments had been negotiated with lenders to provide mortgages in areas they had deemed "undesirable," prospective purchasers discovered that banks would not grant mortgages on properties not covered by insurance...
...Legislation sponsored by Representative Elizabeth Holtzman, New York Democrat, has made them more equitable and requires consumer representation but the insurance industry is vigorously resisting these changes...
...Physical damage insurance and liability insurance were separate policies, and single-family homes didn't carry premiums large enough to make both policies profitable after sales and underwriting expenses...
...Even when they do not reduce capacity, insurers can increase redlining by shifting from one line of insurance to another or from one locale to another...
...In Washington, D.C., House and Senate committees have held hearings, and the Justice Department is investigating to determine whether redlining violates fair housing statutes...
...There are other progressive strategies anti-redlining groups can pursue...
...Louis, Hartford, New Haven, Boston, Providence, and New York...
...acquired Great American Insurance Co., and Firemen's Fund American Insurance Companies belong to American Express...
...Insurance companies currently have the option of repairing damaged property instead of paying cash to the owner, but, for a variety of reasons, rarely exercise it...
...As the anti-redlining struggles mature, community advocates must move beyond "What's wrong with insurance companies...
...Best Co., which keeps score for the insurance industry, estimated that $2.25 billion was moved upstream to parent companies by insurers in the five years from 1969 through 1973...
...Monitoring will be helped considerably by disclosure legislation requiring companies to reveal the location and number of policies they write, renew, cancel, or refuse to renew...
...Homeowner (or multi- peril) policies solved the problem: Legalized during the early 1940s, they combined several types of policies into one, generating larger premiums and lowering expenses...
...Education/Instruction in Hartford began its campaign with a study of local redlining...
...Fire insurance operated by a municipality would, it is argued, bring insurance into the fire-prevention and suppression system, providing monetary incentives for improved fire protection...
...Most legislation being actively considered will do little to stop redlining...
...Such laws, passed in Illinois but decisively defeated in New York, build awareness of redlining, demonstrate its existence and extent, and permit rigorous monitoring of the insurance industry's performance...
...Pitched battles against insurance redlining are currently being fought in Chicago, Gary, Detroit, St...
...Communities are often at the mercy of financial and investment decisions made by multinational corporations...
...The process leads directly to redlining...
...International Telephone and Telegraph, for example, owns the Hartford Fire Insurance Company...
...They pay a small premium (a sure loss) in order to protect against the chance of a large loss...
...Yet the limited coverage, lower-quality service, stigma, and often' higher rates (two to four times as high as voluntary rates in New York) have made FAIR Plans unsatisfactory substitutes for coverage in the voluntary market...
...In Chicago, the Metropolitan Area Housing Alliance, a citywide coalition of housing groups, Gelvin Stevenson, a political economist, lives in a redlined section of the Bronx...
...E/I filed shareholders' resolutions with all three, but withdrew the Aetna Life and Casualty resolution on the basis of good-faith meetings and follow-up action by senior company officers, who spoke to the issue at the annual meeting and promised to investigate any decline in homeowners' policies...
...In 1968, Congress responded to industry's fears of continuing riot losses by passing the Urban Riot Reinsurance Act...
...The appropriate target of anti-redlining activity should be expanded to encompass the entire insurance process and structure the intertwining of capacity, underwriting practices, mergers and conglomerization, profit making, selection competition, and lack of democratic control over insurance companies...
...If all of a neighborhood's property were owned by the local neighborhood association, the capital investment function could be accomplished through a revolving capital fund which would provide capital for new construction (mortgages) and rehabilitation (home improvement loans) as well as repair of fire damage (insurance...
...it was easier and cheaper to base selection on subjective judgments...
...For example, a customer who "can be seen sitting on his front porch without his shirt" and a homeowner who is "just plain ornery" are bad risks, according to one company's instruction manual...
...Full Insurance Availability is the FAIR Plan alternative advocated by the Federal Insurance Administration and being considered in Michigan...
...The subjective nature of redlining has also been documented in a report prepared for the Illinois Department of Insurance by former Assistant Attorney Anton R. Valukas...
...What we've done so far is only the tip of the iceberg...
...This increases redlining...
...It did not pay for a company to inspect the properties to determine if they actually were good risks...
...Illinois, Michigan, and Missouri have passed anti-redlining legislation...
...While Full Insurance Availability goes a long way toward protecting the consumer against redlining, the industry is certain to find new ways of denying insurance to unwanted customers, and while every abuse can be countered by new regulations or laws, the continual cat-and-mouse game discourages customers...
...has publically attacked Allstate, the giant insurance subsidiary of Sears, Roebuck and Co., for redlining older neighborhoods...
...He noted that the form used by Allstate underwriters when they inspect a property "includes a space to evaluate the condition of the neighborhood as 'deteriorating,' 'stable,' 'excellent,' 'good,' 'fair,' or 'poor...
...This money is invested in stocks and bonds...
...Robert J. Schraeder, vice president of A.M...
...Federal, state, and local legislation has been considered and, in some instances, enacted...
...A house may be safe and carefully maintained, but if it is in the wrong area an area around which the insurers have drawn a red line its owner is out of luck...
...At the Travelers meeting, Boyd Hines, E/I director and the North End's state assemblyman, confronted Board Chairman Morrison H. Beach with specific cases of redlining...
...They include community monitoring of underwriting practices and capital flows, attempts to gain control over the insurance companies themselves, and the creation of municipal or local insurance companies...
...In New York, the Interfaith Center on Corporate Responsibility has formed a working group on reinvestment issues to develop new strategies to counter mortgage redlining and plant closing as well as insurance redlining...
...Several strategies are being pursued by anti-redlining forces...
...Should FAIR Plans to abolished...
...Reinsurance might be purchased to safeguard against a conflagration...
...Efforts to curb redlining are being mounted at all levels of government...
...Such reliance on local community control would be an appropriate outcome of the fight against insurance redlining...
...Municipal fire insurance is being 'What we've done so far is only the tip of the iceberg' suggested as an alternative by the Berkeley-based Institute for Local Self-Government...
...Laws designed to stop insurers from limiting coverage because of the geographic location of a risk will only cause companies to use more subtle reasons, such as age of structure and potential for arson...
...Guild rules from Fifteenth Century England stated, "If the house of any brother or sister is burnt by mishap, every brother and sister shall give a halfpenny towards a new house...
...Armed with the data, they met with officials of three companies headquartered in Hartford: Aetna Life and Casualty, the unrelated Aetna Insurance Company owned by Connecticut General, and Travelers Insurance Company...
...Premium prices for the new homeowner policies were based on these suburban properties...
...Lower-income owners desired less inclusive policies and smaller premiums, which were less profitable...
...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...
...The 1977 ratio was $2.55 to $1...
...City Investing now owns the Home Insurance Company, National General Corp...
...Or should they be more tightly monitored and even taken over by community and consumer forces...
...Insurance redlining A new front in the battle to save people's homes Gelvin Stevenson Anew front has been opened in the struggle to save people's homes from the arbitrary decisions of profit-oriented financial institutions...
...Lending institutions secure their stake by requiring at least enough hazard insurance to cover the value of their mortgage...
...Insurance profits could fund fire prevention, which would lower fire losses and further increase profits, which could be used for general revenue or reduced premiums...
...Working with state insurance regulators has yielded mixed results, depending, essentially, on how closely a state's insurance commissioner is aligned with the industry...
...Surplus is like retained profit, and represents capital needed to support policies, provide for emergencies, and finance growth...
...It may pull capital out of its insurance subsidiary and invest it in another business...
...The question of insurance capacity has received little notice so far from anti-redlining forces, which tend to focus on subjective and discriminatory underwriting practices...
...While municipal fire insurance is not intended to stop redlining, it could clearly do so...
...Other conglomerates have also been attracted by the cash flow and capital reserves of insurance companies...
...In the years following World War II, older properties were the first to be selected out in this process...
...In pre-capitalist societies, risk-sharing was accomplished through normal communal mechanisms...
...But this device might work against older cities, where fire losses are greater...
...Insurance companies in states with FAIR (Fair Access to Insurance Requirements) Plans were promised Federal reinsurance against riot losses...
...Senator Howard Metzen-baum, the Ohio Democrat whose hearings publicized these examples, commented, "On that basis, maybe a number of us in Congress fall into the 'bad risk' category...
...FAIR Plans are property insurance pools set up to provide insurance to customers unable to buy it in the voluntary market redlining victims...
...Hartford will have to diminish the amount of insurance it sells, and will do so by expanding its redlined areas...
...Inevitably, this subjective selection process tends to work against blacks and Hispanics...
...It must be seen as a capital maintenance or investment function part of a local plan for maintaining old and building new capital...
...Denials and countercharges have made front page news in Chicago, and the Illinois Department of Insurance is now examining Allstate's records...
...As hearings by Senator Metzenbaum have shown, many mutual insurance companies, theoretically owned by their policyholders (who are also their stockholders), are actually controlled by management...
...There is also a long tradition of alternative institutions mutual and (more loosely organized) reciprocal insurance companies on which community groups could build...
...Other shareholders expressed both positive responses ("This has also happened to the average person like myself), and negative responses ("Management shouldn't be told whom to underwrite____This proposal leads to socialism") . The specific cases were referred to the board's "social responsibility" committee...
...requires a new vision of insurance' inquire about insurance for comparable houses in the black and Hispanic North End and the still white South End...
...The unavailability of insurance also meant some people were unable to protect the life savings invested in their homes...
...they could not be tailor-made to each property...
...But if they ignore the importance of capacity, the "fair access" they seek will only mean access to a smaller and smaller pie...
...In its present form, insurance protects only the owner's financial interest in a building...
...They are confronting companies directly with proxy motions and negotiations while also using the media, courts, regulatory agencies, and legislative bodies...
...Insurance for new homes was not profitable...
...It purports to solve redlining by requiring every company to accept every application for insurance...
...It works this way: Insurance companies are limited, partly by internal operational procedures and partly by regulatory restrictions, to writing no more than $3 in premiums for every dollar of policyholders' surplus...
...The need for this new front arose out of victories won against redlining by banks...
...As their preferred suburban market grows, insurance companies become more reluctant to insure urban properties...
...In Hartford, the "insurance capital of America," Education/Instruction, a bilingual civil rights advocacy group, has documented insurance redlining abuses by several companies in black and Hispanic neighborhoods...
...If the ITT management decides it can increase profits by expanding Won-derbread and Fresh Horizons operations (Continental Bakeries), or building more Sheraton hotels, rather than by selling insurance, it will pull its "surplus" out of Hartford and make more bread or build more hotels or whatever else ITT does...
...On the other hand, when profits are higher in insurance, the conglomerates send capital "downstream...
...Such transactions increased in 1976 and 1977, as higher insurance premiums propelled property insurers' profits skyward...
...Consumer representation on company boards can also be raised as an issue...
...Each of the twenty-eight FAIR Plans is independent and owned and operated by the private insurers, which share the FAIR Plan's losses (and rare profits) in proportion to their share of total business in the state...
...Avoiding a clash between old and new cities would require some equalization of burden...
...This community capital fund would perform the functions of banks and insurance companies, rendering them superfluous...
...Once set and approved by state insurance regulators, the rates were difficult to change...
...But there was no statistical basis for labeling a neighborhood "bad" or "undesirable," Valukas pointed out, and there were no studies showing which factors associated with "deteriorating" neighborhoods actually increased risk...
...The mass exodus to the suburbs helped...
...Its achievement will require more of what E/I Director Boyd Hinds says is needed now "a collaborative effort with other community groups to nail down these national companies...
...It" is easier for insurers to deny customers insurance when they can be referred to FAIR Plans...
...If capacity decreases some policies must be dropped, so redlining increases...
...if the market declines, insurance companies must write fewer policies...
...Massachusetts Insurance Commissioner James Stone has articulated what residents of minority and integrated neighborhoods know too well: "Subjective risk assessment can easily mask racial prejudice...
...Now insurers had an incentive to get into the action...
...These are not problem-free, however...
...Insurance companies still seem to be shifting much of their business to the suburbs, where inflation in construction and repair costs is increasing the amount of insurance coverage homeowners need...
...And mutuals can be caught in the same capacity constraints as stock companies unless they follow more conservative investment practices...
...While homeowners are not legally required to increase their coverage, insurance companies have successfully used inflation to sell more insurance...
...Within the Department of Housing and Urban Development, the Federal Insurance Administration has issued a highly critical report on redlining and the Office of Neighborhoods, Voluntary Associations and Consumer Protection has convened a task force on insurance redlining and will issue a handbook for public officials and community groups...
...The growing number of insurance companies owned by multinational conglomerates has added a new dimension to the capacity problem: The parent company puts its capital where it will earn the most money...
...The survival of neighborhoods, therefore, can hinge on the fluctuations of a company's assets, which depend, in turn, on the stock market or international capital markets...
...And it is unclear how the reinsurance facility's capital will be provided...
...The seeds of insurance redlining were sown during the housing boom that followed World War II...
...Things might have been different if insurance companies engaged in price competition, but with rates based on predicted losses for an entire class of buildings, they compete by selecting the best customers...
...By focusing on the purpose of the property its use value rather than its exchange value insurance could be structured to repair and rebuild damaged property automatically...
...Insurance is the process in which people join together to share risk...
...Just as savings banks combine many people's savings into the capital mortgages needed to build a home, insurance combines small payments premiums into the capital (paid claims) needed to repair or replace damaged property...
...When companies want to increase their business, they relax their underwriting standards...
...They found a clear pattern of redlining in the North End...
...and ask, in the best radical tradition, "What is insurance and how can it best be provided...
...Insurance redlining the denial of property insurance based on location is under attack by community groups and governmental units across the country...
...Today's America, however, requires a new vision of insurance...
...Parent companies would still be able to pull capital out of their insurance subsidiary and drop more policies into the reinsurance facility...
...An insurance company does not automatically rebuild a damaged building it gives money to the insured...
...At the same time, momentum is mounting against the McCarran-Ferguson Act, which exempts the insurance industry from Federal regulation...
...Still, community-based mutual insurance companies could be useful in some instances...
...The organization gathered complaints from residents and agents and performed a telephone test of insurance availability...
...Insurance companies have stopped issuing or renewing policies in many neighborhoods...
...Staff members called agents of various companies to Today's America...
...When they want to limit their customers, they toughen their selection standards...
...Approaches that rely exclusively on the private market leave untouched the industry's inefficiency (only about sixty cents of every premium dollar is paid in claims) and its potential for abuse...
...Urban properties were given short shrift in this process...

Vol. 43 • March 1979 • No. 3


 
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