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12/18/01: The following is an excerpt from an article that ran in the current edition of ShelterForce on Community Reinvestment (or lack thereof) by the insurance industry. Considering it's stated that the industry holds over $4 trillion in assets (that's a four with 12 zeros behind it!), community development advocates need to pay attention.
Insurance Companies Should be Held to the Same Standards as Banks
By Andrea Caliz Luquetta and Deborah Goldberg
Low-income neighborhoods and communities of color have been fighting for decades to get equal access to financial services, fend off predatory lenders, and get the banking industry to reinvest in their communities. A host of hard-won tools, including the Community Reinvestment Act (CRA) and the Home Mortgage Data Disclosure Act (HMDA), have helped. Though there is plenty more to be done, banks are clearly recognized as players in the community-development world with responsibilities and roles to fill.
For most community groups, however, the insurance industry represents uncharted territory, despite the fact that its relationship with low-income communities is similar to that of the banking industry. Some key differences in the way the insurance industry is regulated have helped to keep it below many advocates' radar. But at a time when the industry is moving toward providing traditional financial services, having regulations and relationships in place is increasingly important, and there are many ways to encourage the insurance industry to take a stronger role in developing low-income neighborhoods.
Like banks, insurance companies play a big role in low-income communities. Low-income people and people of color are substantial insurance consumers. Homeownership has increased markedly among these groups during the past decade, and all new homeowners need homeowners' insurance. Most states require auto insurance, and low-income people also buy substantial amounts of life and credit insurance. According to the American Council of Life Insurers, households earning less than $40,000 purchased 56 percent of all life insurance policies in 1997.
All of these premium dollars add up. The latest figures show that the insurance industry controls over $4 trillion in assets, making it a key player in the capital markets. A significant chunk of those dollars comes from low-income communities, but no one knows how much is reinvested in these communities or in community-development efforts. Insurance regulators, like bank regulators, are primarily concerned with the solvency of the industry, and may even cite this as a reason to discourage so-called "social investments" in low-income and minority areas, assuming that they could not possibly be safe, never mind profitable. Insurance companies do invest a fair amount in real estate, however, implying that community investment may not be an unattainable goal.
Despite being such a large market, people living in poor communities or communities of color also face pervasive problems with discrimination and redlining by the insurance industry. Some are refused homeowners insurance because of their location. Since homeowners insurance is generally required by a mortgage lender, these homebuyers may be forced to go to a FAIR (Fair Access to Insurance Requirements) plan, the last-resort state-sponsored insurer. Only 25 states have FAIR plans at all, and those vary in coverage. Most are both more costly than the voluntary market and vastly inferior - some just cover for fire; others don't offer full replacement value coverage.
Neighborhood redlining, racial discrimination, failure to invest in the locations where they make their profits - sounds just like the problems that community groups have been making headway on with banks for years. But the two industries are not directly analogous. Perhaps the most important difference is that insurance companies are regulated almost exclusively by the states, despite the fact that most major insurers have multi-state operations. State regulation generally leaves much to be desired...
A significant difference between the regulation of banking and insurance is the near-complete lack of systematic public information about company activities at the neighborhood level. Efforts to win disclosure laws have met resistance from insurance-friendly state legislatures. Insurance companies have been extremely aggressive in their efforts to prevent any public disclosure of data about where they do business, filing lawsuits in a number of cases to prevent states from making this information public. As a result, according to recent research by Greg Squires of George Washington University, only eight states collect any data at all, and in each case they are collected at the zip code rather than census tract level. Only four of those states make public information about individual insurance companies, rather than industry aggregates. Even where data are available, they are nowhere near as detailed as the data on mortgages made public under the Home
Mortgage Disclosure Act.
In the absence of strong regulatory oversight, the burden of enforcement has fallen on consumers' shoulders; however, consumers lack the tools that have proven critical in persuading banks to serve low-income communities. These include good, comparable public data, a reinvestment mandate, and a mechanism for holding institutions accountable for their performance.
Much of the difficulty is that in the insurance arena, there is no Community Reinvestment Act (CRA)-equivalent, no publicly stated mandate that the benefits of public support come with a public responsibility to serve all of a company's communities, including low-income areas. And yet, like banks, which benefit from FDIC insurance, insurance companies receive a substantial public benefit - they are exempt from anti-trust laws. This is a huge economic boon, and grounds for holding the industry to the same standards that apply to banks.
Andrea Caliz Luquetta is the director of housing and community reinvestment at the Massachusetts Association of Community Development Corporations. She monitors the implementation of the first state-mandated insurance industry community investment program. Deborah Goldberg is the co-director of the Neighborhood Revitalization Project at the Center for Community Change, and leads its work with the insurance industry. She is also a consumer representative to the National Association of Insurance Commissioners.