New book: Insurance Redlining, edited by Gregory Squires

Insurance Redlining: Divestment, Reinvestment, and the Evolving Role of Financial Institutions
edited by Gregory D. Squires
Urban Institute Press, 253 pages.

This new book, a collection of data and studies from various authors, examines the still-prevalent practice of redlining (the refusal to write policies in certain areas) of homeowners insurance.  Skillfully edited by Gregory Squires, the University of

Wisconsin-Milwaukee professor who is considered a leading expert in the field, Insurance Redlining breaks down the phenomenon of redlining by gathering data from the insurance industry, state and federal agencies, and private fair housing groups.  The book is an attempt to discover why, in 1997, insurance companies are still refusing to sell insurance in African-American and Hispanic neighborhoods.

 Spokespeople for the insurance industry have tried to reinforce the idea that policy writing and underwriting are scientific processes, devoid of any discriminatory activity.  Yet, in the past 40 years, leaders in the insurance industry have been documented making discriminatory statements and decisions.

 The book details a 1958 report from the National Inspection Company entitled “Report on Negro Areas of Chicago.” The report observed that “Puerto Ricans, Mexicans, Japanese, and Hillbillies” were moving into “Negro areas” of Chicago.  It concluded by saying, “Any liability in the areas described should be carefully scrutinized and, in the case of Negro dwellings, usually only the better maintained, owner-occupied risks are considered acceptable for profitable underwriting.”

 In 1977, the book reports, the chief actuary of the New York Department of Insurance said, “Take Harlem, for example.  They don’t need any insurance because they don’t have anything of value to insure.”  In 1988, an American Family sales manager told one of his agents, “Very honestly, I think you write too many got to sell good, solid premium paying white people.”

 Squires’ opening chapter sets the tone for the rest of the book, in which research uncovers a clear pattern of discrimination among the nation’s top insurers.  Policies often appear to be written, priced, and serviced according to factors other than risk.

 Homeowners in racially identifiable or integrated neighborhoods are at a serious disadvantage when attempting to purchase a homeowner’s policy.  Studies in the book show “a doughnut pattern” of agency offices in urban cities:  no offices located in the inner city, while a ring of offices in the suburbs surrounds it.  Insurers say that this should not matter because most business is handled over the phone.  However, studies by the National Fair Housing Alliance showed that, even on the telephone, some agents are not willing to work in minority neighborhoods.

 Despite claims to the contrary, insurers often make underwriting decisions based on invalid criteria.  In a chapter entitles “The Discriminatory Effects of Underwriting Guidelines,” D.J. Powers points out that many insurers use credit reports in the underwriting process, despite having no valid data to justify their use.   After all, most homeowners premiums are paid by a mortgage lender, not the consumer.  And, premiums are paid a year in advance.  Powers reports that the Texas Department of Insurance requested several large insurers to provide data supporting the correlation between credit risk and insurance risk.  The companies pointed to a report in the July 1993 Best’s Review which had asserted such a correlation.  The report was written by an employee of Equifax, a company that sells credit reports.  The author admitted that his study was flawed.

 The book makes a great case against the insurance industry’s practices.  Although most insurers will not release loss data, research has shown that losses on policies in inner city neighborhoods are roughly equivalent to losses in affluent suburban neighborhoods.  This directly contradicts what has been asserted by the industry.  The book further illustrates that, even when African-American and Hispanic homeowners are able to buy insurance, they often do not receive the same level of service as their white counterparts.

 While the book sometimes overwhelms the reader with statistics and terms unfamiliar to those outside the insurance industry, it is well-written, well-organized, and well-documented.  It sheds light on a growing problem which cannot be solved without cooperation between civil rights groups, the insurance companies, and the US government.  More than anything, this book shows that the practice of insurance redlining is fiscally stupid.  While banks that have been forced into urban neighborhoods are discovering that there are profits to be made with inner city customers, insurance companies apparently remain unconvinced.  Either through voluntary internal guidelines or new external regulations, insurance companies need to learn how to operate in a diverse society.  By continuing redlining, they are only losing money.

 To order a copy of Insurance Redlining, send a check or money order for $24.95 for paperback, or $67.50 for cloth cover, plus $3 shipping to: