Back on April 9, I blogged about the controversial suggestion by Greg Squires, a sociology professor at George Washington University, to require insurance carriers to collect and disclose data on the race and income of prospects and clients, to prove once and for all whether there is any prejudice–active or not–when pricing homeowners coverage. I said I didn’t think it was a bad idea, but many in the industry strongly disagree. I promised to give Greg an opportunity to explain his views, so here goes. Click on to read more about his position, and feel free to respond.
More Transparency Needed
In Sale Of Homeowners Insurance
By Gregory D. Squires and Constance Chamberlin
The current crisis in the financial markets should be a clarion call to all of us about the need for greater transparency in the provision of financial services. The insurance marketplace in particular lacks meaningful public disclosure, limiting our understanding of the way the market is being served, and stifling debate about important public policy issues.
Now is the time to support the requirement that insurers provide the same level of public information about applications and policies that the Home Mortgage Disclosure Act has required lenders to disclose about mortgage loans for more than 30 years.
The provision of homeowners insurance, like the availability of mortgage loans, is a critical element in the ability of consumers to build wealth and in the capacity of communities to maintain value.
Both industries are providers of critical financial services, and both have been determined as a matter of public policy to need some level of regulation.
Yet unlike the lending industry, insurers are not required to provide the information that will make appropriate review and regulation possible.
The Home Mortgage Disclosure Act, enacted in 1975, requires most mortgage lenders to disclose data on all loan applications–including race, gender and income of the applicant; disposition of the application; type, cost and amount of the loan; census tract and similar data.
In 2006 (the most recent year for which data are available), information on 27.5 million applications to 8,886 institutions were reported automatically, as a matter of course. As in all the preceding years, the reports provided critical information that allowed policymakers, lenders and community groups to evaluate the state of the market, and take the steps necessary to ensure that all communities had access to the credit necessary for a healthy economy.
Along with the Community Reinvestment Act and other fair lending laws, HMDA is credited with increasing access to credit in low-income and minority markets. For example, between 1993 and 2000, the share of loans made to blacks increased from 3.8 percent to 6.6 percent, the Hispanic share increased from 4 percent to 6.9 percent, and the share of low-to-moderate-income borrowers increased from 19 percent to 29 percent.
Research by the Federal Reserve, the Treasury, the Joint Center for Housing Studies at Harvard, and others has shown that such lending was profitable and the direct result of HMDA, CRA and other policy initiatives, as well as market forces.
According to former Federal Reserve Board Governor Edward Gramlich, who only recently passed away, there seems little doubt that most of these outcomes would not have occurred in the absence of CRA and other fair lending laws.
The data publicized in accordance with HMDA have helped lenders find new markets, assisted regulators in efforts to monitor the market, and enabled community groups to form effective partnerships with both lenders and regulators.
The value of HMDA was noted recently by Douglas Duncan, senior vice president for research and business development, as well as chief economist with the Mortgage Bankers Association, when he testified before the House Subcommittee on Financial Institutions and Consumer Credit.
According to Mr. Duncan, MBA uses HMDA data to assist its members in analyzing the industrys performance in serving the nation and identifying new markets and investment opportunitiesThe data fairly present a picture of the industrys work, offering information to further effective investment and, where appropriate, provide flags for further regulatory review.
Referring to the information on lending patterns provided by HMDA, Federal Reserve Board Governor Mark W. Olson reinforced the points made by the MBA when he told the same subcommittee that “the data prompt discussion, investigation, analysis and research that may deepen our understanding of why these patterns occur and allow us to increase fairness and efficiency in the home loan market.”
Such data collection could have similar salutary effects on the insurance market. Yet the industry has vigorously opposed such disclosures, citing three concerns in particularthe confidentiality of the policyholder will be violated; trade secrets will be revealed; and the data will be misinterpreted by the public and lead to frivolous lawsuits.
These are the same arguments made by the lending industry before the adoption of HMDA. The concerns, however, have proven to be unfounded.
Borrower confidentiality has not been breached, and trade secrets have not been revealed. There has been some litigation, but generally where egregious violations of law have occurred.
It is more reasonable to conclude that access to this information forestalled litigation that might otherwise have been filed by promoting voluntary partnerships among community groups and lenders to address the issues raised by the data.
There has been much talk about the need to modernize regulation of the U.S. financial service industries. The insurance disclosure proposed here constitutes a critical piece of that modernization.
Gregory D. Squires is a professor of sociology and public policy and public administration at George Washington University in Washington, D.C. Constance Chamberlin is president and CEO of Housing Opportunities Made Equal of Virginia Inc.