A standards-setting organization for state insurance departments is launching a wide-reaching effort to scour through existing practices—in sales, pricing, underwriting and all other facets of insurance—to identify those that may disadvantage minorities, Ray Farmer, president of the group, the National Association of Insurance Commissioners, said in an interview.
The organization’s findings could potentially influence the way some of the biggest U.S. insurers—like State Farm, Berkshire Hathaway Inc.’s Geico, Progressive Corp. and Allstate Corp. —conduct their businesses.
The focus on the insurance industry is the latest sign of possible sweeping change to longstanding business norms in the wake of the May killing of George Floyd at the hands of Minneapolis police and the protests that followed.
“Everything about race and insurance is on the table,” said Mr. Farmer, who also is director of South Carolina’s insurance department.
The national association crafts proposed legislation and guidelines for adoption on a state-by-state basis.
Mr. Floyd’s killing “shined the spotlight on everything,” Mr. Farmer said. “We will look at everything in the insurance-regulatory system to make sure there are no unintended biases in there.” A key part of the association’s initiative aims at increasing employment opportunities for minorities, he said.
A large insurance trade group, Insurance Information Institute, said it would be better to focus on industry diversity than on the way carriers underwrite insurance.
“It would be a much less productive use of time and resources to revisit widely used and highly regulated ways to price risk which have proven beneficial to all customers,” said Chief Executive Sean Kevelighan.
Car-insurance premiums tied at least in part to credit scores, education and occupation have long been permitted as actuarially appropriate in many states, though they are criticized by some consumer groups that advocate for minority and low-income consumers.
These groups say that Black Americans are overrepresented in lower credit-scoring categories and underrepresented at higher levels of education and in some of the professional jobs that are favored under insurers’ methodologies, such as engineers, accountants and dentists.
The use of factors from applicants’ credit histories took off in the 1990s as Progressive and other car insurers used statistical analysis and high-speed computing to find new ways to assess applicants’ risk. Until then, most insurers relied heavily on a limited set of factors including gender, age, type of car driven, number of miles anticipated to be driven and traffic violations.
Use of occupation goes back more than half a century. Some insurance companies were founded to focus on particular professions. For instance, Geico originally was established to provide insurance for government employees and the military.
Auto insurers maintain that use of credit histories and occupation is powerful in helping to identify the applicants that will prove costliest in claims. The industry has struggled to explain why these things work as predictors of risk, with some speculating that people with good credit habits have meticulous behaviors that make them better and more cautious drivers.
Still, Michael Consedine, chief executive of the NAIC and a former Pennsylvania insurance commissioner, said that the regulatory group wants to challenge conventional thinking in areas like using credit factors by asking: “Are there better, fairer ways to do these things?”
Research shows that average credit scores for white and Asian customers are better than those for Black and Hispanic customers, said Birny Birnbaum, executive director of advocacy group Center for Economic Justice and a former Texas insurance regulator. “Insurance credit scores reflect and perpetuate historic racism and unfairly discriminate against Black and Hispanic communities,” he said.
Some car insurers give discounts for garages, multiple vehicles and car-home-combination insurance packages. Some also give credit to younger drivers for good grades. Critics have said these practices can favor the well-to-do.
The typical U.S. driver spent $611 annually for private-passenger auto-insurance liability coverage in 2017, the most recent year for which this data is available, according to the Insurance Information Institute.
Even some generally noncontroversial risk-measurement tools used by car insurers, such as state-motor-vehicle records, could show systemic racism against Black Americans. Affluent car owners can afford to hire lawyers to help with violation dismissals or downgrades and other actions that lessen the impact of a traffic violation or criminal offense in official records, lawyers say. Poorer Black Americans may not have that ability, they say.
The review of industry practices by the regulatory organization follows moves over the past several years by some individual states to roll back measures that consumer groups have decried as potentially discriminatory against minorities and unfair to less-affluent households.
For instance, New York’s Department of Financial Services banned use in the state of education and occupation as factors in auto-insurance premiums. Then-New York Superintendent Maria Vullo said those items were unfair and could drive up the cost of insurance for people who can least afford it.
In past reviews, regulators have found the annual-cost difference to a person with a favorable versus an unfavorable occupation can be in the single- to double-digit percentages.
The regulators’ association also aims to delve into products where artificial intelligence and other “Big Data” techniques are in nascent stages. These include life insurers’ growing use of algorithms for sizing up the health risks of applicants for death-benefit policies that are sold online. Algorithms can mimic the biases of the programmers who develop them.
In a June letter to NAIC, Mr. Birnbaum, the consumer advocate, said the organization should craft legislation that would address potential bias in algorithms. Insurers use these for marketing, pricing, claims settlement and antifraud efforts, he noted.
Opting to forgo some actuarially justified pricing factors isn’t unheard of for the insurance industry. Decades ago, life insurers quit figuring in the shorter average life expectancies of Black Americans in pricing policies as the civil-rights movement raised awareness of inequalities that stemmed from the poorer circumstances under which many Black Americans lived.