Insurance Redlining: Is it Happening in Your Neighborhood?

 

 A Study by:

New Jersey Citizen Action,

The Citizen Policy and Education Fund and

New Jersey Policy Perspective

 

 

• Overview
• Findings
• Results of Surveyed Homeowner's Insurance Agents Compared with Market Share Statistics
• Results of Survey of Homebuyers
• Conclusion
• Appendices
  
  

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Overview

As hard as it is for low- and middle-income people to save the money to buy a home, in many cases being able to afford the purchase price is still no guarantee of a piece of the American Dream. All too often, the barrier to home ownership comes down to being able to insure the house for which one has worked and saved.

 

The refusal of insurance companies to offer affordable policies – or sell any at all – is a significant problem. This "redlining" is especially prevalent in urban areas. New Jersey Citizen Action (NJCA) and the Citizen Policy and Education Fund (CPEF) examined both the accessibility and affordability of homeowner's insurance. Our research gathered data on how many insurance agents in urban areas write homeowner's insurance as well as the actual quotes consumers received when shopping for this coverage.

 

The impetus for this study grew out of the experiences relayed to us by homebuyers who bought homes through the loan counseling service that NJCA offers to low and moderate-income first-time homebuyers in the state. These homebuyers have said to us for years that they encounter difficulty when they attempt to insure the home they have worked hard to purchase.

 

For this investigation, we sent homebuyers a survey to find out from what companies they received quotes when shopping for homeowner's insurance. (The survey can be found in Appendix A). We also called urban insurance agents as if we were consumers, to find out if they wrote homeowner's insurance and with what companies.

 

Our study of our homebuyers looks at this issue on a personal level. Three years ago we developed a program with Prudential Property and Casualty Insurance Company of New Jersey to address this problem.

 

Through the program, our clients can apply for homeowner's insurance at a special 10% base discount through our office with the assistance of our loan counselors. This discount is only offered to NJCA clients and insures the home at full-value. In addition to the 10% discount, our clients may also qualify for other discounts if their homes are new, have protective devices and if the homebuyer is a senior citizen. With these additional discounts, consumers can receive up to a 32% discount in total on homeowner's insurance from Prudential. NJCA clients are advised to get two additional quotes for homeowner's insurance. Not all clients choose Prudential's policy. Clients may choose another company because of an established relationship or if their home does not qualify under Prudential's underwriting criteria. Even after we introduced this program with Prudential, some clients still experienced difficultly obtaining affordable homeowner's insurance and indicated to us that further inquiry was needed.

Speaking with agents is one way to detect insurance redlining since just as neighborhood bank branches are one important sign of a lender's willingness to invest resources in and establish relationships with neighborhood residents, neighborhood insurance agents represent an insurance company's financial and symbolic link to a community. Insurance redlining is not only carried out by a company's decision about the neighborhoods in which it will conduct business, but also by its decision about the agents to whom they will grant contracts. If insurance companies refuse to grant contracts to local agents or communicate (whether directly or indirectly) to contracted agents a refusal to insure certain areas in urban, low-income and predominately minority areas, insurance companies effectively redline residents of those communities.

 

When looking at this problem on a larger scale, it is important to note that insurance agents who are unable to secure contracts with private insurers are forced to write policies exclusively for the FAIR Plan – policies for which they receive less commission if they were to write for a private company. The FAIR (Fair Access to Insurance Requirements) Plan is an insurance plan administered by the state for properties considered "high risk" that cannot or will not be insured in the voluntary market. The FAIR Plan, which should be considered as a "last resort" for consumers, will cover any property but provides limited coverage of fire damage only. One problem in urban areas is that some agents cannot obtain contracts with private insurance companies and can only write limited coverage under the FAIR Plan.

 

Another problem that is even more difficult to detect occurs when the agent has contracts with private companies but the companies demonstrate a pattern of not insuring in low-income areas or providing exceedingly higher quotes in these areas. While banks must reject customers who do not qualify for loans, insurance companies are not required to reject customers requesting quotes in the same way. Many times, for customers who live in areas or homes that the company does not want to insure, insurance companies do not call customers back or they provide an extremely high quote. Insurance agents can also play an indirect role in redlining when a customer requests a quote and the agent does not even contact specific companies to obtain a quote if the agent knows from the outset that those companies will not insure a home in a particular area. Since insurance companies are not forced to deny insurance applicants directly and they are not subject to disclosure laws, they are able to escape the type of public scrutiny faced by banks.

Findings:

• Only 41% of all homeowner's insurance agents surveyed had contracts with private companies who would write in their respective city.
• 22% of all homeowner's insurance agents surveyed said that they had contracts with companies who would not write in their respective city.
• Although State Farm has the largest market share of homeowner's insurance in the state (13%) it had contracts with only 8% of the insurance agents surveyed.
• The price of Homeowner's Insurance was significantly higher for Hispanics than other race groups The average Prudential quote for urban homebuyers is nearly half the average quote from other companies in urban areas.
• Within the Black and White race groups, Prudential quotes were 38% and 52% lower than other companies.
  
  

 

Results Table for Surveyed Homeowner's Insurance Agents

Don't know/no answer – The researcher was either unable to determine if the agent provided homeowner's insurance after leaving three phone messages that were unreturned or there was no answer at the agent's office after three attempts.

 

Refuse – The homeowner's insurance agent either refused to provide information about with which companies he or she had contracts, or refused to return three phone messages.

 

Companies won't write – The agent stated that he or she had contracts with private companies but the companies would not write in certain areas of the city or would not write in the city at all.

 

Said to go on FAIR Plan – the insurance agent said that he or she could only write the FAIR Plan in the given location.

 

Has Companies – The agents had contracts with private insurance companies that would write homeowners insurance in the given location.

 

Results Tables for each individual city are located in Appendix C - in the tables for each individual city, the column labeled "Companies" shows the list of companies with whom the insurance agents had contracts.

 

The most significant finding in this aspect of the study was that only 41% of homeowner's insurance agents have contracts with insurance companies that would write in their respective cities. This shows that consumers in these four cities have very limited choices if they want to insure their homes through a local agent and with a private insurance company. This is one indication of insurance redlining.

 

A surprisingly large amount of agents surveyed (22%) were candid with our researcher and actually indicated that companies would not write policies in certain areas or in the entirety of the respective city. The majority of these agents who were candid on this issue are located in Trenton. Although fewer agents indicated that they did not have contracts with private companies and could only write the FAIR Plan, these findings are especially important for Camden where only three agents were found. Since we only found three homeowner's insurance agents in the entire city of Camden, this is a definite indicator that homeowner's insurance is not readily available from local agents.

 

Results of Surveyed Homeowner's Insurance Agents Compared with Market Share Statistics

 

In all four cities we found that, because some agents have multiple contracts, there was a total of 65 contracts with private insurance companies amongst the 39 agents who write homeowners policies. The following table shows the percentage of agents who had contracts with companies in all four cities combined:

 

Top Ten Companies with most contracts among Agents surveyed	Percentage of Contracts among Agents Surveyed
Philadelphia Contributionship/Germantown	17%
Lloyds of London	11%
Prudential	11%
State Farm	8%
Farmers	6%
Franklin	5%
Allstate	5%
De Bellis	3%
Mercer Mutual	3%
Chubb	2%

• While State Farm has the largest market share in the state at 13%[1], it has contracts with only 8% of the insurance agents surveyed in this study.
• Of the agents surveyed, Allstate has only 5% of the contracts in these four cities even though they have the third largest market share (9%) in the state.
• No agent had a contract with Liberty Mutual even though Liberty Mutual has the sixth largest market share (5%) in the state.
• Only five agents named either First Trenton, Franklin Mutual, USAA or Cumberland even though they have the seventh, eighth, ninth and tenth largest market share respectively in the state. [2]
  
  

Results of Survey of Homebuyers

 

Since NJCA clients can receive a special discount of up to 32% on homeowner's insurance with Prudential, these quotes were analyzed separately and used as a comparison throughout the study. As mentioned earlier, not all buyers chose or were eligible to purchase policies with Prudential.

 

The most significant finding is the high cost of insurance for Hispanics when price is sorted by race category. While the average purchase price for Asians, Blacks and Whites were all within $40.00 of each other, the average price for Hispanics is $303.27 higher than the highest of the other three race categories.

 

Average Purchase Price of Homebuyers Insurance According to Race and Company

                       

Prices by Company	Asian	Black	Hispanic	White
Total Average Price	$465.33	$446.75	$768.60	$430.40
Prudential Average Price	$455.20	$318.25	$720.00	$241.00
Non-Prudential Average Price	$516.00	$511.00	$801.00	$499.27

The significant differences between the Prudential and non-Prudential price according to race occurred within the Black and White homeowners. For Blacks, the Prudential price was $192.72 (52%) less than the average non-Prudential price. For Whites, there was also a $258.27 difference in the Prudential and non-prudential price and a difference of $189.00 (38%) between the total average price and the Prudential price. For Blacks and Whites, Prudential shows much more than the 10% base discount and the 32% possible discount compared to the other companies. For Hispanics and Asians the difference is not as significant. Even though this drastic difference between Prudential and non-Prudential prices occurred within two out of the four race groups, Black and White respondents made up 2/3 of the study respondents and therefore suggests that price inflation among low and moderate-income homeowners occurs more often than not.

 

To rule out any possibly that price differences could be attributed to other variables, we also looked at the purchase price and unit number of homes purchased by the respondents to see the type of homes which correspond with the purchase price of homeowner's insurance. This information is found in the tables below.

 

House Price of Respondents According to Race

House Price	Asian	Black	Hispanic	White	All Races Combined
Average House Price	$206,567.00	$142,667.00	$216,778.00	$190,275.00	$187,600.00
$50-$100K	0%	17%	0%	19%	11%
$100-$149K	0%	42%	11.1%	19%	19%
$150-$200K	33%	33%	33.33%	19%	32%
$201K-$249K	67%	0%	33.33%	12%	19%
$250K-$300K	0%	8%	11.11%	19%	11%
$300-$350K	0%	0%	11.11%	12%	9%

 

Unit Size According to Race

Number of Units	Asian	Black	Hispanic	White	All Races Combined
1 Family Homes	100%	75%	67%	88%	83%
2 Family Homes	0%	25%	22%	12%	15%
3 Family Homes	0%	0%	11%	0%	2%

 

When analyzing house price and unit size, we were not able to find statistical evidence to explain why Hispanic respondents paid significantly higher prices for homeowner's insurance than other groups. While 33% of the Hispanic homebuyers bought two and three family homes, Blacks were not significantly different with a 25% purchase rate of 2-family homes. Also, while the average house price for Hispanics was $216,777.77, there was not a significant difference between this and the average house price of Asians ($206,566.66).

 

The high price of homeowner's insurance for Hispanics may be attributed somewhat to a higher house price and unit size, yet the difference between the unit size of Hispanic and Black homebuyers and the house price between Hispanic and Asian homebuyers is not significant enough to reflect the disproportionately large difference of $303.27 in average insurance price.

 

NJCA has found that is common for Hispanics in our program to purchase two and three-family homes in urban areas; if Hispanics are known in the insurance industry to purchase multi-family homes this may be used as an opportunity to inflate insurance premiums and create a norm of high insurance rates within Hispanic communities.

 

There is also a large difference in the average quote for urban homebuyers who receive quotes from Prudential versus those from other companies. The average quote for urban homebuyers from Prudential was almost half that of any other company in an urban area. (See Appendix B for definition of Urban and Suburban Communities)

Urban

 

Companies	# of Urban Policies Purchased	Percentage of Urban Policies Purchased	Average Urban Quote
Prudential	30	33%	$331.40
Non-Prudential	45	67%	$611.90
Prudential & Non-Prudential Combined	75	100%	$518.40

 

Suburban

 

Companies	# of Suburban Policies	Percentage of Suburban Policies Purchased	Average Suburban Quote
Prudential	60	43%	$487.21
Non-Prudential	110	57%	$496.50
Prudential & Non- Prudential Combined	170	100%	$492.21

 

 

While it is not surprising to find that insurance is more expensive for those in urban areas, it is significant to see that the urban Prudential quote is 46% less than the average of urban quotes received from other companies. This difference is obviously greater than the expected 10% base discount or even the possible 32% discount with Prudential. The large difference suggests other companies are substantially overcharging in urban areas. This finding requires further study.

 

Another anecdotal finding is that one homebuyer indicated he could only find insurance with Philadelphia Contributionship (13^th largest market share) at the expensive rate of $861.00 per year, we found in our survey of insurance agents that this company had the most contracts in urban areas. This is cause for much concern since the company with one of the highest rates in this study was also found to be offered most often by urban agents.

 

Conclusion

 

This study strongly suggests that a larger investigation with formally-reported information from insurance companies will also uncover that urban and low-moderate income consumers have more difficultly in accessing affordable insurance in the state. Insurance companies' disclosure of demographical information of all policies is vital to the discovery and prevention of insurance redlining in New Jersey. The problem of affordable and accessible insurance in the state will only persist without state insurance disclosure legislation which would allow the public to hold insurance companies accountable for fair access and pricing. While NJCA has begun to uncover insurance redlining with this study, this study cannot show the problem in its entirety without access to that information on a statewide level.

In our survey of insurance agents, we found overall that while a majority of agents are providing more options than the FAIR Plan for coverage, many times the companies with which they have contracts will not write in the surrounding city or the agent writes a surplus line of insurance at a higher rate. Even when agents wrote with non-surplus, private insurance companies, the percentage of agents who wrote with the companies with the highest market share did not come close to matching the percentage of market share the top companies represent. In other words, we can deduce from this research that the companies with the highest market share in the state do not occupy a similar percentage of market share in these four urban centers.

 

It is obvious from this research, which was conducted with information available to any consumer, that certain areas of the state are underserved by insurance companies or even agents. As mentioned, Camden has a noticeable lack of homeowner's insurance agents with a total of three in the city proper and two out of three of those agents said the FAIR Plan was the only insurance they could write in Camden while the third agent only wrote with an expensive surplus line. This is evidence that strict monitoring of insurance companies must take place and the public must have access to monitoring information to keep a watchful eye on where insurance companies choose to do business.

 

With this study, NJCA has identified a need for insurance disclosure in New Jersey. If this information on insurance companies and policies was available, the reasons for drastic differences in quotes and prices that we found in this study would be more apparent. Similar to how the public can view information on banks' lending as a result of the federal Community Reinvestment Act, under state insurance disclosure laws, the public would have the ability to see more clearly the disparities in cost and availability of specific policies throughout the state.

  

 

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Appendix A

                                    Homeowner's Insurance Survey – Fax completed survey to 973-643-8100

                  Name: ______________________________________                                          Date: __________________________

 

                  Address:______________________________________________________________________________________________

                                    Street Address                                                                                 City                                              Zip Code                                                                                                                                                                  

                  Home Phone Number:_________________    Please indicate your income level:  o up to $32,000 o $32,001 - $39,500 o $39,501 and above

                 

                  What Insurance Companies did you contact when purchasing your homeowner's insurance?

 

A.     _____________________________________ B.______________________________________ C. _______________________________________

 

 

 

 

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Appendix B

 

• Urban Communities: Teaneck, Lakewood, Newark, Irvington, Orange, Elizabeth, Hackensack, Paterson, Passaic, East Orange.
  
  
• Suburban Communities: East Windsor, Clifton, Lyndhurst, Hawthorne, Edison, Millford, Piscataway, Englewood, Ridgefield Park, Ewing, Roebling, Little Ferry, Lawrenceville, East Brunswick, Mahwah, Bloomfield, Kearny, Hillsdale, Belleville, Dunellen, Westhampton, Montague, Hamilton, Vauxhall, Woodbridge.

 

 

 

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Appendix C

Asbury Park
Insurance Agents	No answer/do not know	Refuse	Will not write	Go on Fair Plan	Has Companies	Names of Companies
1					X	Lloyds of London, DeBellis
2		X
3					X	State Farm
4		X
5		X
6					X	State Farm
Total (6)	0	3	0	0	3

 

 

  

Camden
Insurance Agents	No answer/do not know	Refuse	Will not write	Go on Fair Plan	Has Companies	Name of Companies
1					X	Lloyds of London
2				X
3				X
Total (3)	0	0	0	2	1