Insurance Industry Facing its Criticisms
“The senseless killings of Ahmaud Arbery, Breonna Taylor, and George Floyd have sparked a racial equality movement that we cannot ignore.”
—Ray Farmer, NAIC president, delivered the opening comments at the NAIC Special Session on Race and Insurance on August 13, 2020. Attempts to uncover and remove race-based prejudice in American everyday life have gained traction in unprecedented ways. These initiatives are long overdue. According to the Pew Research Center, bias affects the justice system, access to excellent employment and appropriate healthcare, voting, shopping, and house ownership. Another field with a long history of race-based discrimination is insurance, where some behaviors, such as race-based pricing, have been prevalent for almost 250 years.
The National Association of Insurance Commissioners (NAIC) Executives Committee collectively announced the creation of a special committee focusing on Race and Insurance on July 23, 2020, in response to member-led discussions. “Within the NAIC, we’re witnessing unprecedented conversations among our members and stakeholders about race and its influence in the design and pricing of insurance products, as well as our collective need to enhance diversity in the insurance sector, particularly in senior leadership roles,” Farmer said. “It is the insurance industry’s responsibility to address racial inequity while fostering diversity in the insurance industry.” Who else but us? When, if not now?”
Profound Issues
According to NAIC Secretary-Treasurer Chlora Lindley-Myers, fighting racial prejudice in the insurance sector has been a roller-coaster ride in the past. Lindley-Myers notes that while the industry has eradicated many instances of outright racial discrimination, subtler, less visible forms of prejudice continue.
According to George Nichols III, president, and CEO of The American College of Financial Services, race-based life insurance rates, which existed until the Civil Rights Act was passed in 1964, compensated Black clients with just two-thirds of the value of their policies compared to White customers. In addition, he claims that Black customers were given a 30% to 40% premium increase. Despite the provisions of the Civil Rights Act of 1964, Nichols adds that it wasn’t until 2000 that the regulatory community took action against 90 businesses, resulting in a $556 million settlement affecting around 14.8 million policyholders.
According to Dr. Robert Klein, a former professor of risk management and insurance at Georgia State University, stereotyping for both home and auto insurance was managed accomplished through a process called redlining, an explicit form of discrimination in which a symbolic red line was drawn on a map outlining high-risk urban areas. The National Housing Act of 1934, which established the Federal Housing Administration, gave rise to redlining (FHA).
The FHA Underwriting Manual, published in 1936, outlined specific segregationist policies, such as: “The Valuator should investigate areas surrounding the location to ascertain whether or not incompatible racial and social groups are present so that an intelligent prediction regarding the possibility or probability of the location being overrun by such groups can be made.” Further, “Recommended limits include…prohibiting possession of properties by anybody other than the race for whom they are meant.”
Insurance firms either refuse to write policies in specific locations or demand higher premiums. Even though courts later ruled that racial discrimination was prohibited, a 2018 Consumer Reports and ProPublica investigation discovered variations in vehicle insurance costs between minority and White communities that could not be explained solely by risk. As a result of the report, the state of California compelled two insurers, Nationwide and USAA, to reduce their rates. In addition, the NAIC said in 2020 that it would investigate industry practices to see if they negatively impact minorities.
Insurance Scores – Credit based
Klein claims that in the 1990s, redlining gave place to a more implicit sort of discrimination based on credit scores as risk indicators. According to the NAIC, that method, pioneered by the Fair Isaac Corporation (FICO), is still practiced in jurisdictions where it is permitted. Even though Klein and others believe credit-based insurance ratings are discriminatory, FICO claims their insurance scores are “totally non-discriminatory and use no data on gender, nationality, race, residence, or income.”
Underwriting Guidelines – Discrimination
Birney Birnbaum, executive director of the Center for Economic Justice, notes two forms of discrimination that have historical origins in underwriting criteria that made it difficult, if not impossible, for minorities to get a vehicle or house insurance in Texas. In the first instance, underwriting requirements demanded that everyone seeking vehicle insurance have prior insurance. Many members of minority groups did not participate since it was not mandatory until 1991. Home insurance underwriting rules were based on age and value, which regulators determined was a proxy for race, given previous prejudice in the communities where these properties were located.
Monitoring – Loopholes
Another long-standing source of prejudice is the absence of minority representation in the insurance sector and the regulatory authorities that govern it. Dr. Leroy Nunery II, founder, and principal of PlsUltré LLC, attributes much of this to a lack of exposure, expertise, networking, and education among minority groups, which he believes insurance firms and regulators should focus on in the future.
Ongoing Challenges
The NAIC’s claims of ongoing prejudice are still based on research. Connecticut Insurance Commissioner Andrew N. Mais emphasizes the significance of this research in uncovering practices such as the use of big data, algorithmic-based underwriting designs (proxy discrimination), and others that hinder minority groups in access to affordable healthcare and other insurance products.
Effect of Major Data and Info
Sonja Larkin-Thorne, a consumer advocate and former insurance executive, spoke before Congress on her worries about big data, including unregulated use, a lack of privacy, accuracy, and openness, untrustworthy sourcing, and inadvertent prejudice and discrimination. She points out that these uncontrolled databases capture information on, among other things, shopping habits, driving patterns, race, age, occupation, education, voting history, marital status, job income, and Facebook connections. She claims this results in “unregulated algorithms that insurance firms use in prices and underwriting.”
Finally, Larkin-Thorne believes that federal and state oversight and regulations mandating corporations to unlock the data and resultant algorithms are required so that customers understand what is being gathered and how it is being used to underwrite price insurance policies.
Health Care Access – Affordability and Quality
Dr. Dora Hughes, Associate Study Professor of Health Policy & Management at George Washington University’s Milken Institute School of Public Health, believes that the number of Americans without health insurance, which was at 30 million before to COVID-19, is undoubtedly more significant now. Moreover, members of minority groups make up a disproportionate share of that population. According to Hughes, discrimination has shifted from preexisting diseases, discriminatory pricing, and lengthier waiting times, which are already banned, to behaviors that approximate coverage discrimination by charging more for more frequent conditions among specific populations. These prevent patients, typically members of minority groups with significant health conditions, from receiving adequate medical care.
Another kind of prejudice occurs when particular pharmaceuticals intended to treat diseases more frequently among minorities are put on the top tier of the formulary. Finally, according to Hughes, physicians in significant minority metropolitan regions tend to earn lower private insurance payments, deterring medical professionals from working in those locations. Dr. Hughes advises that authorities address health equality, which she describes as treatment targeted to each minority group, and challenges associated with using big data. According to her, insurance coverage must take these requirements into account. This includes implementing value-based insurance, which reduces copays for chronic diseases to help reduce overall treatment costs.
