In search of the ‘right’ customers, an insurer is accused of discrimination

In search of the 'right' customers, an insurer is accused of discrimination

When regulators in Maryland said this spring that the small company Erie Insurance had illegally avoided selling policies to people in mostly black neighborhoods, Erie had a ready answer: It said it was allowed to conduct business as usual. Was being selected for.

The insurer, which is based in Pennsylvania and known for selling affordable auto and homeowners policies, took an unusual step. It sued the Maryland Insurance Administration, arguing that the regulator was unfairly attacking its “frontline underwriting” practices – an approach in the insurance business that requires agents to consider subjective factors when choosing clients. it occurs.

Maryland regulators began investigating Erie’s business after independent agents selling its policies accused Erie of being penalized for selling policies to black and Hispanic customers, the majority of whom were from cities such as Baltimore. Lived in densely populated areas where the insurer said there was a very high risk. Often, these are the neighborhoods in which Black Americans and other minority groups were forced to live for much of the 20th century due to laws and racist lending practices known as redlining.

In May, Maryland officials concluded that Erie’s practices were “designed to discourage business, and reduce business in dense urban areas with high minority populations,” and ordered the company to pay agents’ compensation. Ordered, which was said to have been improperly withheld. Maryland also is conducting a broader review of Erie’s underwriting methods, even though Erie has pushed back against it in federal court.

“We are confident that the business goals and service expectations we have set for all of our agents are appropriate and that our underwriting practices comply with all applicable state insurance laws and regulations,” Erie spokesman Matthew Cummings said in an email. ” The allegations against him are false. A spokesperson for the Maryland Insurance Administration declined to comment.

The controversy reveals how a long-used insurance industry technique clearly targeted managing risk, can open the door to prejudice. Instead of relying on a fixed set of data points to determine which customers qualify for which policy and at what price, Frontline puts the responsibility on underwriting agents to determine who is eligible for the insurer’s services. As they evaluate a client, agents are expected to judge whether the potential client seems honest or trustworthy, or assess how clean or well-kept their home is.

“If you have underwriting happening at the individual agent level, there’s no way to review it and it’s much more likely you’re going to get bias,” said Daniel Schwarz, a professor at the University of Minnesota Law School. , which focus on insurance law and regulation. “This includes all types of conscious and unconscious bias.”

Insurers have also been accused of discriminating against black and Hispanic customers in other ways. A lawsuit filed in federal court in Chicago accuses State Farm, the nation’s largest insurer, of racial bias after a study showed that black customers waited longer, filed more paperwork and were less likely to get insured. faced more visits to claims adjusters than white customers when trying to claim.

But the charge against Erie is that its policies kept black and Hispanic homeowners off its customer rolls in the first place.

“They gave us different guidelines to exclude certain people,” said Baltimore agent BJ Borden, one of seven people who claim Erie unfairly withheld compensation or terminated their work. “Which they didn’t want us to write about in the inner cities.” Agency Contracts in Maryland.

Mr. Borden said that over several years, Erie managers had punished him for selling policies to Black Baltimore residents by cutting his commissions and threatening to void his sales contracts altogether. Erie also pressured agents to direct a larger share of their sales to itself rather than to other insurers whose policies they were authorized to sell, Mr. Borden said.

The Maryland case also highlights the weakness of insurance regulation, which varies from state to state. Maryland law requires insurers to sell policies to all customers who want to buy them and who meet financial guidelines formally disclosed by insurers to regulators. But almost no other state — including the 11 other markets in which Erie operates — has a rule that gives Erie and other insurers broad authority to shrink their customer pools.

The company has faced charge of redistribution by federal officials and agents in New York and Pennsylvania. But until Maryland’s order this spring, Erie had faced only a $225,000 fine and a federal order to open more agencies in minority neighborhoods and spend $140,000 advertising to black customers, which Erie agreed to do in 2009 Was.

Aaron Elder, an agent in Pennsylvania, tried to tell regulators there about Erie’s behavior in 2019, telling the Pennsylvania Department of Insurance that Erie had warned him to stop selling policies in a ZIP code where most The residents were Hispanic, instructions he said were “discriminatory.”

But because Mr. Elder’s main dispute with Erie was over whether the insurer improperly terminated his sales contract, the Pennsylvania regulator declined to address the discrimination issue. A Department of Insurance spokesperson said the regulator has the authority to investigate and penalize companies for discrimination.

But if Maryland regulators determine a widespread pattern of redlining, which could in turn attract federal investigation, Erie could be on the hook for additional monetary penalties.

Mr. Cummings, the Erie spokesman, said Mr. Elder’s claims were baseless and the allegations by agents in Maryland “are objectively false.” He said the agents were disgruntled because their commissions were reduced or they were fired by the company for poor performance or shoddy paperwork, and they had not made any claims about Erie’s practices before these disciplinary steps.

Founded in 1925, Erie is the nation’s 12th largest home insurer and 13th largest auto insurer with a large presence on the East Coast. As of the end of last year, it had issued less than $9 billion in property and casualty policies, while State Farm had issued $79 billion, the data showed. National Association of Insurance Commissioners Shows.

Erie offers policies that are generally cheaper than most competitors, with weaker underwriting standards. This makes its products widely affordable. Also, to maintain its profits, the insurer depends on its agents to keep a key metric – its loss ratio – from getting too high.

An insurer’s loss ratio is the relationship between the claims it makes and the premiums it earns. The higher that number, the lower the company’s profits. At 78 percent, Erie’s loss ratio is higher than the 67 percent average of the 25 largest property and casualty insurers, according to NAIC data.

Other insurers avoid losing money by raising prices or tightening underwriting standards. Erie relies more on frontline underwriting, which it describes as “about choosing and developing the right relationships,” according to a sales guide the company issues to new agents that Maryland regulators used in their lawsuit against Erie. Cited in May’s findings.

In an email, Mr. Cummings, the Erie spokesman, said the exercise helped agents “better understand each risk.”

The Maryland Insurance Administration declined to say when it expected to conclude its comprehensive review of Erie’s practices. Erie wants to prevent Maryland regulators from discussing their findings, which are available for public viewing now, or imposing any fines until the broader investigation is concluded. He also wants the court to throw out the regulator’s ruling that Erie discriminated against potential customers.

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