"The needless deaths of Ahmaud Arbery, Breonna Taylor and George Floyd have led to a movement on racial equality, that we cannot ignore."
-- Ray Farmer, NAIC president, opening remarks at the NAIC Special Session on Race and Insurance, Aug. 13, 2020
Attempts to identify and eliminate race-based discrimination from American daily life have taken hold in ways not seen in the past. These efforts are long overdue. According to the Pew Research Center, areas affected by discrimination include the criminal justice system, access to good jobs and adequate healthcare, voting, shopping, and buying a home.
Another area in which race-based discrimination has a lengthy history is insurance, where some practices, such as race-based premiums, were common for 250 years.
- Racial discrimination has been part of the insurance sector landscape for more than 250 years.
- The NAIC has begun an intensive member-led effort to combat racial discrimination in the insurance sector.
- Early forms of discrimination, such as race-based premiums and redlining, have been replaced with the subtler damage from coverage discrimination and rates based on big data.
- Lack of minority representation in the insurance sector has alienated minority consumers and exacerbated the problem of discrimination.
- Regulation of big data, consumer education, and increasing minority participation in the insurance industry are some remediation efforts suggested by NAIC.
NAIC Special Committee on Race and Insurance
In response to member-led discussions, The National Association of Insurance Commissioners (NAIC) Executive Committee announced on Jul. 23, 2020, the formation of a special committee focused on Race and Insurance.
“Within the NAIC, we’re seeing unprecedented discussions between our members and stakeholders on race and its role in the design and pricing of insurance products, as well as our collective need to improve diversity in the insurance sector particularly in senior leadership roles,” Farmer noted. "It is the duty of the insurance sector to address racial inequality while promoting diversity in the insurance sector. If not us, who? If not now, when?”
These issues were thoroughly aired in a special session on race and insurance on Aug. 13, 2020, as part of the 2020 NAIC Summer National Meeting.
The NAIC is a non-governmental, non-regulatory, standard-setting organization whose membership is made up of chief insurance regulators from all 50 states, the District of Columbia, and five U.S. territories.
From a historical perspective, according to NAIC Secretary-Treasurer, Chlora Lindley-Myers, confronting racial discrimination in the insurance industry has been like a roller-coaster ride. Noting that the industry has eliminated many forms of direct racial discrimination, Lindley-Myers points out that subtle, less obvious forms of discrimination remain.
Race-based life insurance premiums
George Nichols III, president and CEO of The American College of Financial Services, says race-based life insurance premiums, which were part of the marketplace until passage of the Civil Rights Act in 1964, credited Black customers with only two-thirds of the value of their policies compared to White customers. On top of that, he says, Black policyholders were charged a 30 to 40% premium.
Nichols further notes that despite the provisions of the Civil Rights Act of 1964, it wasn't until 2000 that the regulatory community brought action against 90 companies resulting in a $556 million settlement involving about 14.8 million policyholders.
According to Dr. Robert Klein, former professor of risk management and insurance at Georgia State University, discrimination in both home and auto insurance was accomplished through a practice known as redlining, an explicit form of discrimination in which a literal red line was drawn on a map outlining urban areas considered to be high risk.
Redlining grew out of the National Housing Act of 1934, which established the Federal Housing Administration (FHA). The FHA Underwriting Manual, created in 1936, laid out specific segregationist policies, including phrases such as: "The Valuator should investigate areas surrounding the location to determine whether or not incompatible racial and social groups are present, to the end that an intelligent prediction may be made regarding the possibility or probability of the location being invaded by such groups." and "Recommended restrictions include ...prohibition of the occupancy of properties except by the race for which they are intended."
In those areas, insurance companies would either not write policies or would charge higher rates. Despite the fact that courts subsequently found redlining based on race to be illegal, a 2018 study by Consumer Reports and ProPublica found disparities in auto insurance prices between minority and White neighborhoods that could not be explained by risk alone.
Credit-based insurance scores
Redlining, Klein says, gave way to a more implicit type of discrimination using credit scores as measures of risk in the 1990s. According to NAIC, that practice, started by the Fair Isaac Corporation (FICO), continues today in states where it is legal. Although Klein and others consider credit-based insurance scores discriminatory, FICO says its insurance scores are "completely non-discriminatory and use no data on gender, nationality, ethnicity, address or income."
Discriminatory underwriting guidelines
Birny Birnbaum, executive director of the Center for Economic Justice, mentions two types of discrimination with historic roots based on underwriting guidelines that made it difficult, if not impossible, for minorities to obtain either auto or home insurance in Texas. In the first case, underwriting guidelines required anyone seeking auto insurance to have had previous insurance. Many members of minority groups did not because it was not required until 1991. Underwriting guidelines for home insurance were based on age and value which, regulators discovered, was a proxy for race given past discrimination in the neighborhoods where these homes were located.
Lack of minority representation in the insurance industry
Another area in which discrimination has long roots is the lack of minority representation in both the insurance industry and the regulatory agencies that oversee it. Dr. Leroy Nunery II, founder & principal of PlūsUltré LLC, blames much of this on lack of exposure, experience, networking, and education within minority communities, something he says insurance companies and regulators need to pay more attention to going forward.
Research continues to be the basis for NAIC findings of continued discrimination. Insurance Commissioner of Connecticut Andrew N. Mais notes the importance of this research in uncovering practices such as the use of big-data, algorithmic-based underwriting models (proxy discrimination), and others that disadvantage minority groups when it comes to access to affordable healthcare, as well as to other insurance products.
Effect of big data and algorithmic models
Consumer advocate and retired insurance executive Sonja Larkin-Thorne has testified before Congress on her concerns about big data, including unregulated use; lack of privacy, accuracy, and transparency; unreliable sourcing; and unintentional bias and discrimination.
She notes that these unregulated datasets collect information on shopping habits, driving patterns, race, age, occupation, education, voting history, marital status, work salary, and Facebook friends, among others. This, in turn, she says, produces "unregulated algorithms that insurance companies are using in rates and underwriting."
Ultimately, Larkin-Thorne says, what is needed is federal and state regulation, and laws requiring companies to unlock the data and resulting algorithms so consumers know what's being collected and how it's being used to underwrite and price insurance products.
In the first half of 2019 (before COVID-19), more than 27% of Hispanics and over 13% of Black Americans did not have health insurance compared to 9.8% of White Americans.
Access to affordable quality healthcare
Dr. Dora Hughes, Associate Research Professor of Health Policy & Management at the Milken Institute School of Public Health at George Washington University suggests that the number of Americans without health insurance, which stood at 30 million before COVID-19, is undoubtedly higher now. That population is disproportionately made up of members of minority groups.
Discrimination, Hughes says, has moved from preexisting conditions, discriminatory pricing, and longer waiting periods, which are now illegal, to practices that amount to coverage discrimination through charging more for conditions that are more prevalent among some groups. These prevent patients—often minority-group members with complex health issues—from obtaining appropriate medical care.
An additional form of discrimination comes when certain drugs used to treat diseases more common to minorities are placed on the highest formulary tier. Finally, Hughes notes, that physicians in high minority population urban areas tend to receive lower private insurance reimbursement rates, discouraging medical professionals from serving in those areas.
In addition to problems related to the use of big data, Dr. Hughes suggests that policymakers address health equity, which she defines as care tailored to each minority group. Insurance coverage must take those needs into consideration, she says. This includes the implementation of value-based insurance that offers lower copays for chronic conditions to help bring the overall cost of treatment down.
Increasing Diversity in the Insurance Sector
The NAIC is focused on the need to increase diversity within the insurance sector to include the insurance industry and regulatory areas where the NAIC is involved.
A business imperative
New York Executive Deputy Superintendent My Chi To says, "Increasing the representation of people of color, women, and other underrepresented groups in the insurance industry and beyond is not only the right thing to do, it is a business imperative." She points to research that shows diverse teams perform better, innovate more, and are more effective at managing risk. "Insurance, she notes, "is all about managing risk."
Data and accountability
NAIC member discussions also point to the need for transparency and measurable data in order to see what works and what doesn't. Commitment to diversity, To says, is not something you sprinkle at the top of your organization. It's really a commitment that has to permeate the entire organizational culture and every aspect of the business.
Create a pipeline for talent
In addition to a commitment to diversity, NAIC members need to promote the creation of "a pipeline of diverse, talented people who will grow into the leaders of tomorrow," Deputy Superintendent To states.
Recommended Consumer-Based Actions
To date NAIC's "listen and learn" efforts have yielded a number of suggestions to address the issue of race and insurance:
- Recognize proxy discrimination as discrimination against protected classes and address it when it occurs.
- Develop better regulatory data collection and analysis to identify discrimination and trace disparate impact similar to the way it is done with financial regulation.
- Update insurance codes and traditional market conduct exams to ensure that such things as risk placement are fair and not discriminatory.
- Provide opportunities for consumer education in minority communities to empower those consumers.
- Strengthen consumer voices in each state through the implementation of dedicated consumer agencies.
- Provide oversight of unregulated big data and vendors of algorithms currently used to establish pricing and claims settlement.
- Continue conversations about race on an ongoing basis within the insurance sector.
NAIC's formation of a Special Committee on Race and Insurance and the recent panel discussion at the NAIC summer session were good first steps but, as Birnbaum notes, "We have to understand why, despite consumer advocates raising these issues at the NAIC for decades, insurers and regulators failed to acknowledge the severity of the problem until the murder of George Floyd.
Director Farmer believes this moment is different, noting that an unprecedented 51 out of 56 state and regional regulators are members of this NAIC special committee. "We have a historic opportunity," Farmer says, "as a regulator, a community, and as an important sector of the financial services industry to commit real, meaningful, and lasting change."
The first open meeting of the NAIC Special Committee on Race and Insurance will take place online on Sept. 17, 2020. The purpose of the meeting will be to review work done by the Special Committee to date and take comments from members of the Special Committee and interested parties regarding:
- The current level of diversity and inclusion within the insurance industry, the insurance regulatory community and the NAIC;
- Access by people of color and historically underrepresented groups to insurance products and coverages;
- The existence of current practices or barriers in the insurance sector that potentially disadvantage people of color and/or historically underrepresented groups in the areas of: (a) life insurance and annuities; (b) health insurance; and (c) property and casualty insurance; and
- Steps insurance regulators and/or the insurance industry can take to: (a) increase diversity and inclusion within insurance industry, state insurance departments, and the NAIC; and (b) address practices that potentially disadvantage people of color and/or historically underrepresented groups.