US Insurance Regulators Pledge To Address Racism And Discrimination Within The Industry

The National Association of Insurance Commissioners (NAIC) has announced the formation of a special committee focused on Race and Insurance.

“Our regulatory system and insurance, in general, is a reflection of the society it aims to protect, and while state insurance regulators have worked to eliminate overt discrimination and racism, we all have been increasingly aware that unconsious bias can be just as damaging to society,” said Mike Consedine, NAIC’s CEO, in a statement.

The NAIC committee will do the following:

• Conduct research and analyze the level of diversity and inclusion within the insurance sector.
• Engage with a broad group of stakeholders on issues pertaining to race, diversity and inclusion in the insurance sector.
• Determine whether current practices exist within the insurance sector that potentially disadvantage minorities.
• Make recommendations to the executive committee and membership by the end of the year regarding steps a) both insurance regulators and the insurance industry can take to increase diversity and inclusion; b) that should be taken to address practices that potentially disadvantage minorities; and c) to ensure ongoing engagement of the NAIC on these issues through existing committees, task forces and working groups.

In addition to the committee, the NAIC will hold a special session on Race and Insurance during its three-week virtual NAIC Summer 2020 National Meeting, beginning the week of July 27.

A Call For Action

In a June 18, 2020 letter “To Address Societal Systemic Bias and Inherent Racism in Insurance By Explicit Recognition of Disparate Impact as Unfair Discrimination in Insurance,” the Center For Economic Justice (CEJ) called on the NAIC to explicitly recognize the impact of discrimination against protected classes.

The CEJ says that the era of big data analytics and the insurance industry’s growing use of third-party data and complex algorithms has dramatically increased the potential for algorithmic bias and discrimination through indirect means. The CEJ cites the industry’s use of insurance credit scores, criminal history scores, facial analytics for life insurance underwriting, and occupation and educational levels as examples of data that reinforces inherent bias and systemic discrimination.

The CEJ called for the development of data collection and analysis by insurance regulators so that both regulators and the public can monitor outcomes (such as insurance rates charged) for all consumers, to identify discriminatory outcomes and to trace any problems to the causes.

The CEJ says the NAIC can accomplish this if it develops a model law addressing algorithmic bias. States would then need to implement the model law, because insurance is regulated at the state level. And there would have to be guidance for insurance companies on identifying and eliminating discrimination in marketing, pricing, claims settlement and anti-fraud efforts.

Furthermore, the CEJ says that the states and NAIC should collect data on whether changes actually reduce discrimination in insurance.

Black Drivers Pay More Than White Drivers For Auto Insurance

Structural racism in the auto insurance industry and the use of several socio-economic factors in setting rates disproportionately harms Black drivers, according to several reports conducted over the past decade by the Consumer Federation of America (CFA).

“The companies will insist that they never ask for a customer’s race, but if they are serious about confronting systemic racism, it is time they recognize that their pricing tools use proxies for race that make government-required auto insurance more expensive for Black Americans,” said Doug Heller of the CFA in a statement.

State laws say that insurance companies can’t make decisions on rates or coverage based on race, religion, nationality or ethnicity. But most auto insurance companies regularly use non-driving factors as part of setting rates. And these factors can be inherently discriminatory, such as:

• Drivers who rent rather than own a home
• Single drivers rather than married drivers
• Drivers with less education
• Driver occupation
• Drivers with poor credit scores

The industry has been able to use these factors by demonstrating a “correlation” between the factors and claims made, essentially arguing that drivers with these attributes make more claims or more expensive claims. And most state regulators have long approved rates based on these “correlations.”

The CFA believes the insurance industry should make changes to its business model, including:

• State insurance commissioners should step in to prohibit the use of pricing factors that have a disparate impact on drivers of color.
• If regulators fail to take action, state lawmakers should prohibit the use of factors that make auto insurance more expensive for Black drivers.
• Insurance companies should identify and eliminate pricing systems that systematically force Black drivers to pay higher auto insurance premiums.

Few States Have Addressed Non-Driving Pricing Factors

Some states have taken steps to address non-driving pricing factors. For example, California, Hawaii and Massachusetts prohibit the use of credit history in setting auto insurance premiums. New York prohibits the use of education level or occupation as a pricing factor. Michigan’s auto insurance reform recently eliminated the use of non-driving factors for auto insurance rates.

The NAIC’s committee on Race and Insurance has indicated it will address non-driving price factors. “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 roles,” said Ray Farmer, NAIC President and Director of the South Carolina Department of Insurance.