Discrimination in Insurance Underwriting Guidelines 2023
Underwriting guidelines are used by the insurance industry to decide who to insure and how much to charge them. Risk is what insurance is all about, so insurance companies make these rules to figure out when they will take on that risk and when they won’t because someone is too risky to insure.
Insurance companies aren’t allowed to treat people differently based on things like race, but certain facts about people are used to measure risk and set rates.
This means that there needs to be some kind of discrimination and that it is legal. Still, questions about what is fair and what isn’t are getting more and more attention, especially since the murder of George Floyd in 2020.
Discrimination Already in Place
The insurance industry’s rules are set by the National Association of Insurance Commissioners (NAIC). In response to the George Floyd protests, the NAIC held a special session on race to look into the link between insurance and racial discrimination.
Even though overt racial discrimination has become less common, NAIC members say it still happens, especially when big data is used. Also, as we’ll talk about below, lawsuits and investigations have said that long-standing discriminatory practices, like redlining and charging different people different rates based on their race, still affect the industry.
These groups are not all there is to choose from. For example, health insurance has been a source of worry, especially because of rules set by the federal government. For instance, on June 19, 2020, the U.S. Centers for Medicare and Medicaid Services issued a final rule called Nondiscrimination in Health and Health Education Programs or Activities.
Ricardo Lara, the California Insurance Commissioner, was one of the first people to say that the decision made it harder for LGBTQ+ people, people with disabilities, and people whose first language is not English to get health care.
Different kinds of bias
Underwriting rules use risk profiles as a way to do a type of discrimination. They divide people into high-risk and low-risk groups to figure out premiums and try to get customers to stop doing dangerous things. Even though this is okay, the history of underwriting is full of discrimination that is not okay. This is called unfair discrimination.
Under U.S. law, there can’t be any unfair discrimination in underwriting guidelines. Unfair discrimination is when people are treated differently because of their race, nationality, gender, or religion. Different kinds of discrimination can take different forms, such as higher prices, weaker policies, or even being denied coverage.
In 2013, the University of Michigan Law School did a review of anti-discrimination laws and found that they “vary a great deal” by state and by type of insurance. It also said that a “surprising” number of jurisdictions didn’t have specific laws against unfair discrimination based on race. This suggests that the federal government needs to play a bigger role in regulating race-based discrimination in insurance.
Guidelines for Underwriting Discrimination
Redlining and Real Estate Redlining is a form of discrimination that has gotten a lot of attention in recent years because of how it keeps making things unequal. The practice goes back to the time when Franklin Delano Roosevelt was president.
During that time, the federal government started insuring home mortgages to help more Whites become homeowners and grow the White middle class. The Home Owners’ Loan Corp. (HOLC), a government agency, put neighborhoods all over the country into groups based on how dangerous they were thought to be.
Maps had different colors for each neighborhood based on how dangerous it was. Communities that were mostly made up of people from ethnic and racial minorities were colored red (hence the term “redlined”). Lenders wouldn’t give loans in these areas because they were seen as “risky.” In short, redlining took resources away from communities of color, like loans and insurance.
In its 1938 Underwriting Manual, the Federal Housing Administration (FHA) made clear that these maps were based on race. In a section called “Quality of Neighborhood Development,” it even listed “incompatible racial and social groups” and the “probability of the location being invaded by such groups” as underwriting negatives, along with “flimsy construction” and “freaky architectural designs.”
“If a neighborhood is to stay stable, it is important that the same social and racial classes continue to live there. The manual said that a change in social or racial occupancy usually leads to instability and a drop in values.
Life insurance and race
In the United States, the life insurance industry has a long history of reinforcing racial hierarchies, according to an article by Mary L. Heen in the Northwestern Journal of Law & Social Policy.
She writes that after Reconstruction, the insurance industry used high death rates and natural racial differences to explain why freed slaves got only two-thirds of the benefits that White people got from life insurance.
When setting premium rates, companies with race premiums often ignored statistics that didn’t fit their preconceived hierarchies, such as the fact that women have a lower death rate. This suggests that the risk involved wasn’t the main reason why premiums were set.