On August 13, 2020, the National Association of Insurance Commissioners (NAIC) president took the stage at NAIC’s Special Session on Race and Insurance. “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 said.
That extends to the housing market, too. In fact, in 2008, Michael Bloomberg said that redlining was to blame for the origins of the housing crash.
But how can that be? Redlining has been illegal for decades, ever since 1968, and yet it is to blame for a minimum of $212,000 lost to black families over the last four decades. Inexplicably, the practice continues.
It comes as no surprise to Matt Rostosky, a real estate investor and flipper who owns Cashofferky.com, a real estate investment firm in Louisville, Kentucky. “I believe that systemic racism exists in the home insurance industry,” he tells us definitively, noting his location in the South.
The truth is, it can happen anywhere, and it does.
What is Redlining?
You may relate redlining with the automotive industry, but its meaning in the housing world is far more dark. Simply put, redlining is when you are denied a loan because you live in a poor area that is deemed a financial risk to banks, lenders or insurance companies.
The name comes from the red ink used to delineate upper-class neighborhoods from those with lower incomes. It’s a practice that began in the 1930s with the support of the U.S. government. Banks and lenders began refusing loans based on race and address alone, targeting large metropolitan areas with large percentages of minority residents.
“The concept of redlining is well known since the 1960s,” explains Francisco Anes with Passive Income Wise. “Many measurements have been taken since then, but there is still a lot to do to make the situation better for these minority groups that are discriminated against.”
Discriminatory Underwriting Guidelines
The 2020 NAIC summit showed that “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.”
That is a problem, given that housing discrimination was made illegal with the 1968 Fair Housing Act. To follow was the 1977 Community Reinvestment Act (CRA), which requires lenders to report the details of all loans given to low-income borrowers. In return, they receive a rating for their compliance, ranging from “outstanding” to “substantial noncompliance.”
Research from the Pew Research Center shows that minorities suffer from discrimination in several specific areas:
- Legal and criminal justice system
- Access to good jobs
- Access to adequate healthcare
- Buying a home
It’s not just home insurance, either; it applies to car insurance, too.
“Your insurance score is used to help determine the premiums of most auto and home insurance policies,” says Sa El, the co-founder of Simply Insurance. “This score is also used to help determine if you are someone that is likely to file a claim against your insurance provider. While it doesn’t present itself as discriminatory, this score only benefits people who have a good credit rating and hurts the people who have a poor rating.”
Rostosky sees it, too. “Minorities are affected because insurance companies consider several factors when setting insurance rates,” he says.
It’s a losing battle for many, he explains. “For instance, they take into account unemployment rates (which is higher for minorities), population density (they tend to live in areas with higher population densities), and even environmental factors (they tend to live near areas with extreme weather conditions).”
How Your ZIP Code Impacts Your Rate
As the Director of Litigation for the National Consumer Law Center (NCLC), Stuart Rossman is also observing a new trend. “Although we rarely see redlining, what we do see is a lot of reverse redlining.”
Reverse redlining is what he calls “predatory lending,” where lenders actually target low-income neighborhoods to make a quick buck on questionable loans. It was prevalent in particularly hard-hit areas such as Hartford and New Haven, Conneticut, where the NCLC has joined a lawsuit against Liberty Bank for alleged redlining against Black and Latino communities.
As a history professor at Johns Hopkins University and expert on race and capitalism, Nathan Connolly explains, “The combination of rapid defaults and the refusal to issue new mortgages is what created a pretty sharp asymmetry between areas that were considered to be good for single-family home occupancy and those that were really primed for predatory forms of rental entrepreneurship.”
Research shows that when it comes to their finances, minorities are at a significant disadvantage compared to White communities – so much so that the average White household has almost ten times the wealth of a Black household. Real estate company Redfin reports that black homeowners are also almost five times more likely to buy a home in a redlined neighborhood than in a green one.
Black communities aren’t the only ones overpaying for insurance.
Nestor Solari, co-founder of Sigo, points out the issues affecting Hispanic communities. “Auto insurance coverage is broken into three risk categories with ‘non-standard’ insurance being the most expensive and reserved for riskier drivers, like people with a DUI conviction,” he explains. “But Latino customers are also being grouped into the same non-standard risk category as drunk drivers — why?”
“Low-income populations are primarily placed in the ‘non-standard’ bucket simply because they purchase the state-mandated minimum liability limit policy, the cheapest insurance available to drive legally,” explains Solari. “Minority neighborhoods have been gravely impacted, being charged up to 30 percent more than other areas with similar accident costs. More so, it’s been found that non-standard auto insurance is highly concentrated in states with rising Hispanic consumers like Texas, Florida and California.”
Worse, he says, is that many consumers may be unaware that they are paying more or even classified in this high-risk category.
It shows that though much time passed, there is still much to be done about the growing disparities between economic and racial differences in our country.
“That’s why it’s up for consumer groups and real estate agents to demand change and correct this unfair treatment,” Rostosky urges.
How You Can Help Bridge the Gap
Tatiana Height writes in a thesis for the University of Nebraska-Lincoln, “The black community in the United States has evolved out of a unique set of circumstances which have led to few black neighborhoods being able to prosper.”
This includes a combination of several different factors. For example, there is a serious lack of green space within Black neighborhoods, while most White communities feature cool shade from the many trees and parks. Height also notes that only 10% of urban regional planners are black.
That’s why for so many minority neighborhoods, it’s a matter of financial support to improve, maintain and invest in these communities to close the wealth gap.
In order for change to come to these areas, key initiatives will have to involve better job opportunities with higher-paying salaries, improving homeownership, and better investments and economic support with continued development in minority neighborhoods. Height also recommends “utilizing inclusionary zoning, zoning against the inequitable distribution of hazard sites, and revitalizing existing communities in-place.”
For its part, the NAIC has formed the NAIC Executive Committee, which is co-chaired by Farmer and is creating what he calls “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.”
An easy way to get involved in your everyday life is to simply be more selective in your own banks and insurers. “One way to support these minorities is to get your home insurance with insurance companies that work to eliminate racial prejudices,” says Anes.
When you shop for the best home insurance provider, ask about what practices and initiatives each company offers to eliminate unlawful redlining in American communities.
The Bottom Line
Although officially redlining has been illegal for decades, the practice still exists today among America’s many underprivileged and disadvantaged minority communities.
Experts agree that to close the gap, these communities need more help, with lenders and investors stepping up to help instead of turning a blind eye. It’s the only way to fix what Connolly notes has become “a snowball effect that compounded over generations.”
“It is the duty of the insurance sector to address racial inequality while promoting diversity in the insurance sector,” Farmer vows. “We welcome the public commitments of industry leaders to address these issues, and I am excited by the strong and personal commitment of my fellow commissioners to take action on these important subjects.”
Because, as he says, “If not us, who? If not now, when?”
Featured image by Counter / Getty Images.