Back on April 9, I blogged about the controversial suggestion by Greg Squires, a sociology professor at George Washington University, to require insurance carriers to collect and disclose data on the race and income of prospects and clients, to prove once and for all whether there is any prejudice--active or not--when pricing homeowners coverage. I said I didn't think it was a bad idea, but many in the industry strongly disagree. I promised to give Greg an opportunity to explain his views, so here goes. Click on to read more about his position, and feel free to respond.
More Transparency Needed
In Sale Of Homeowners Insurance
By Gregory D. Squires and Constance Chamberlin
The current crisis in the financial markets should be a clarion call to all of us about the need for greater transparency in the provision of financial services. The insurance marketplace in particular lacks meaningful public disclosure, limiting our understanding of the way the market is being served, and stifling debate about important public policy issues.
Now is the time to support the requirement that insurers provide the same level of public information about applications and policies that the Home Mortgage Disclosure Act has required lenders to disclose about mortgage loans for more than 30 years.
The provision of homeowners insurance, like the availability of mortgage loans, is a critical element in the ability of consumers to build wealth and in the capacity of communities to maintain value.
Both industries are providers of critical financial services, and both have been determined as a matter of public policy to need some level of regulation.
Yet unlike the lending industry, insurers are not required to provide the information that will make appropriate review and regulation possible.
The Home Mortgage Disclosure Act, enacted in 1975, requires most mortgage lenders to disclose data on all loan applications--including race, gender and income of the applicant; disposition of the application; type, cost and amount of the loan; census tract and similar data.
In 2006 (the most recent year for which data are available), information on 27.5 million applications to 8,886 institutions were reported automatically, as a matter of course. As in all the preceding years, the reports provided critical information that allowed policymakers, lenders and community groups to evaluate the state of the market, and take the steps necessary to ensure that all communities had access to the credit necessary for a healthy economy.
Along with the Community Reinvestment Act and other fair lending laws, HMDA is credited with increasing access to credit in low-income and minority markets. For example, between 1993 and 2000, the share of loans made to blacks increased from 3.8 percent to 6.6 percent, the Hispanic share increased from 4 percent to 6.9 percent, and the share of low-to-moderate-income borrowers increased from 19 percent to 29 percent.
Research by the Federal Reserve, the Treasury, the Joint Center for Housing Studies at Harvard, and others has shown that such lending was profitable and the direct result of HMDA, CRA and other policy initiatives, as well as market forces.
According to former Federal Reserve Board Governor Edward Gramlich, who only recently passed away, “there seems little doubt that most of these outcomes would not have occurred in the absence of CRA and other fair lending laws.”
The data publicized in accordance with HMDA have helped lenders find new markets, assisted regulators in efforts to monitor the market, and enabled community groups to form effective partnerships with both lenders and regulators.
The value of HMDA was noted recently by Douglas Duncan, senior vice president for research and business development, as well as chief economist with the Mortgage Bankers Association, when he testified before the House Subcommittee on Financial Institutions and Consumer Credit.
According to Mr. Duncan, “MBA uses HMDA data to assist its members in analyzing the industry’s performance in serving the nation and identifying new markets and investment opportunities…The data fairly present a picture of the industry’s work, offering information to further effective investment and, where appropriate, provide flags for further regulatory review.”
Referring to the information on lending patterns provided by HMDA, Federal Reserve Board Governor Mark W. Olson reinforced the points made by the MBA when he told the same subcommittee that "…the data prompt discussion, investigation, analysis and research that may deepen our understanding of why these patterns occur and allow us to increase fairness and efficiency in the home loan market."
Such data collection could have similar salutary effects on the insurance market. Yet the industry has vigorously opposed such disclosures, citing three concerns in particular—the confidentiality of the policyholder will be violated; trade secrets will be revealed; and the data will be misinterpreted by the public and lead to frivolous lawsuits.
These are the same arguments made by the lending industry before the adoption of HMDA. The concerns, however, have proven to be unfounded.
Borrower confidentiality has not been breached, and trade secrets have not been revealed. There has been some litigation, but generally where egregious violations of law have occurred.
It is more reasonable to conclude that access to this information forestalled litigation that might otherwise have been filed by promoting voluntary partnerships among community groups and lenders to address the issues raised by the data.
There has been much talk about the need to modernize regulation of the U.S. financial service industries. The insurance disclosure proposed here constitutes a critical piece of that modernization.
Gregory D. Squires is a professor of sociology and public policy and public administration at George Washington University in Washington, D.C. Constance Chamberlin is president and CEO of Housing Opportunities Made Equal of Virginia Inc.
Comments (4)
The problem with the argument is the premise itself. "We think the insurance industry discriminates, so prove that you don't." It's like responding to the question, "Have you stopped beating your spouse?"
We have an apple and orange comparison in the first place. To obtain a home loan, one must have homeowners insurance, and if you don't, the bank is permitted to force-place coverage at a fairly steep price to the homeowner.
To own a car, although state law mandates insurance, a very large segment drives without it by choice in many instances becasue they can't afford the cost. But affordability and discrimination are not the same thing.
If the professor wants evidence of how the insurance industry has increased its appetite for drivers, he should study the decline of the residual market for some clues before adding another layer of privacy invasion by demanding that insurers inquire about the race of their customers so that some agency can provide reports on "progress."
He might want to spend some of his time researching the impact on minorities of the predatory home lending practices, that I assume will show a dramatic "improvement" over the past few years, until these good people are evicted by the forward-looking lenders he praises in his paper.
I just do not see advancing insurance availability or reducing his presumed discrimination by asking what your race is on an insurance application. It will do little to help the driver who can't afford insurance. And in today's economy, that problem is color-blind already.
Posted by Frank Cacchione | April 24, 2008 8:53 AM
Posted on April 24, 2008 08:53
How could anyone object to more transparency in the marketplace? Our free market system will collapse if we allow sellers of any product to claim they should not allow anyone else to look at the market because of "concerns" about "trade secrets" and "data being misinterpreted".
We should all realize that these "concerns" are big red flags that tell us we need to take a close look at this industry and we can start with more information.
Posted by James W. (Jay) Speer, Virginia Poverty Law Center | April 28, 2008 7:27 PM
Posted on April 28, 2008 19:27
It seems to me that Mr. Squires quotes statistics that could be used to refute the theory that homeowners insurers discriminate against minority or poor homeowners.
He says “between 1993 and 2000, the share of loans made to blacks increased from 3.8 percent to 6.6 percent; the Hispanic share increased from 4 percent to 6.9 percent; and the share of low-to-moderate income borrowers increased from 19 percent to 29 percent.”
Correct me if I am wrong, but I believe none of those loans were made without proof of a property insurance policy. Lenders just do not let the policyholder go bare with respect to insurance coverage.
Mr. Squire himself states that these loans were made. It seems quite reasonable to assume that property insurers did not get in the way of these trends, but rather supported them in step with the banks. What other conclusion can you reasonably make?
Given that, what justification is there for imposing yet another regulatory requirement on an industry that is heavily regulated already?
Additional regulations have real costs. Ultimately, the consumers pay the costs. What is the justification for adding more costs to the homeowners transaction?
Posted by Charles Toney | May 2, 2008 5:26 PM
Posted on May 2, 2008 17:26
Gosh, just what we need, another layer of beauracracy overseeing what to my mind's eye is an academic approach to social engineering--well-meaning or not.
I have been in the P&C business for over 30 years and a bank director for over 20. I am well familiar with reporting for such issues as CRA, and it takes time and money to do it properly.
The reality is that results are skewed when an area has little diversity, either ethnic or economic.
Conversely, they are equally skewed when an area has a concentration of ethnic and economic factors that lead to a lack of need or desire for financial services.
The information garnered can be massaged to show results that don't reflect the state of the industry.
At the "touch-labor level"--our level as agents--we will be reticent to engender resentment from insureds, prying further into their lives than they want, when many are buying what they perceive as a "commodity," not a service.
Agents, I'm afraid, will tend to be "creative" when completing the newly required information.
Indureds will be bombarded with additional sales material and satisfaction surveys based on the newly accumulated and analyzed information.
Hold fast, companies! Don't give into another idea to "open" the indusrty to the new wave of social management.
Private industry has done a good job, with a few bumps in the road, to police itself.
Posted by Peter Dodge, President, The Merle B. Grindle Agency | May 5, 2008 12:40 PM
Posted on May 5, 2008 12:40