Testing for Discrimination in Home Insurance

Authors: Galster, George C.     Urban Institute     Smith, Robin     Wissoker, Douglas A.     Zimmermann, Wendy     Hartnett, Kara    

Residential segregation continues to be one of the most important domestic challenges facing America. Fighting discrimination against those who seek to exercise choice in where to live is a central and long-standing responsibility of the United States Department of Housing and Urban Development (HUD). It is also a key support to the National Homeownership Strategy, which seeks to dramatically raise homeownership rates for all Americans, regardless of race, color, religion, sex, familial status, disability, or national origin, by the year 2000.

Paired testing methods, wherein carefully matched individuals or properties are subject to observed and recorded treatment in the private marketplace, have emerged as powerful tools for detecting and combating housing discrimination. By measuring differences in treatment, such tests support enforcement actions. HUD has successfully used such testing methods for more than two decades. The landmark 1977 Housing Market Practices Survey and the 1991 Housing Discrimination Study both demonstrated the extent to which white, African-American, and Hispanic testers seeking to rent or buy housing - individuals comparable for ethnic background - were treated differently by housing rental andsales agents. Similar methods have been employed successfully to generate evidence of discrimination in employers' hiring practices.

Discrimination in the provision of housing insurance may have important consequences for the vitality of America's neighborhoods. Recent studies by interest groups, independent researchers, and government agencies indicate that homeowners in heavily minority neighborhoods are less likely to have private home insurance, are more likely to have policies that provide more limited coverage in case of a loss, and are likely to pay more for comparable policies. These differences in outcomes might be caused in part by discrimination in the policies or practices of the home insurance industry.

Testing for Discrimination in Home Insurance represents a useful, exploratory effort to apply testing methods to the study of such policies and practices. HUD contracted with the Urban Institute to conduct an exploratory study of neighborhood-based discrimination in the provision of quotes for home insurance. The study looked at moderate-income minority and non-Hispanic white neighborhoods in Phoenix and New York. Testers telephoned insurance agents to obtain over-the-phone or written quotes for homes that were carefully matched. Further, these properties were located in neighborhoods that were matched on a range of traits but differed in terms of racial/ethnic make-up.

This study has several key limitations which readers should bear in mind. First, it is limited to first-time home buyers in moderate-income neighborhoods in only two cities, Phoenix and New York. For these reasons, and because industry practices vary widely city-to-city, no generalizations about all homeowners or all cities should be made. Second, the researchers examined only the first stage in securing home insurance - that of obtaining a price quote for policies - and not the other stages and domains that might be subject to racial/ethnic discrimination. These include additional underwriting policies or practices that might precede policy issuance, claims adjustments (after a policy is written and a loss occurs), cancellation of policies, and even agency location. Most of the analyses in this study did not reveal reliable evidence of discrimination by insurance agents based on the racial/ethnic mix of the study neighborhoods. However, several modest, statistically significant differences in insurance policy options and service requirements favored mostly white neighborhoods. The study also finds higher insurance prices for comparable properties in mostly Hispanic, as opposed to mostly white, neighborhoods in Phoenix, but this was in keeping with the state-approved rating territories. It is possible that the drawing of the rating territory boundaries was itself discriminatory, but that important policy issue could not be addressed in this study. Indeed, future research should focus on aspects of home insurance beyond the provision of quotes by agents, including the designation of rating territories, underwriting, and claims adjustments. In general, readers should treat this as the first rigorous foray into a domain about which we have much to learn and promising techniques to refine. This study by The Urban Institute moves us in that direction.

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