URBAN HOMEOWNERS INSURANCE MARKETS IN TEXAS: A SEARCH FOR REDLINING

There has been a continuing debate in Texas and other states about the availability and cost of home insurance to residents of inner city and minority neighborhoods. Consumer and community advocates contend that insurers engage in redlining, or unfair discrimination against minority areas, by charging excessive prices and limiting the supply of insurance. Unfortunately, insurance redlining allegations have been largely based on simple comparisons of minority and nonminority areas that do not consider the influence of other factors. In this article, the authors build on a more rigorous vein of research by using econometric analysis to identify measurable factors that affect urban homeowners insurance markets. While this study cannot conclusively prove or disprove the presence and negative effect of unfair discrimination, it assesses whether significant statistical evidence exists for such behavior. The authors conclude that no statistical evidence of redlining exists and that the risk of loss and the demand fo r insurance appear to primarily drive the terms of insurance transactions. This conclusion implies that measures directed toward enhancing safety and bettering economic conditions offer the best prospects for improving urban insurance markets. INTRODUCTION Problems with the availability and cost of home insurance in urban communities and allegations of industry "redlining" practices have received considerable political attention and generated an intense policy debate. This 40-year debate has progressed as urban communities and industry practices have evolved. Charges of explicit racial discrimination have changed to allegations of implicit unfair discrimination against minority areas caused by certain industry marketing, pricing, and underwriting methods. A resurgence of these allegations after the 1992 Los Angeles civil disturbance prompted investigations by state governments, the federal government, and other organizations. (1) In Texas, consumer organizations and the insurance department conducted studies on urban auto and home insurance and offered recommendations on remedial measures (see, for example, CEJ, 1997a and 199Th). Community and consumer advocates contend that insurers' underwriting practices and pricing systems unfairly discriminate against neighborhoods with older and lowvalue homes, resulting in excessive rates and diminished availability of coverage. That alleged underserved areas tend to have high-minority populations leads to charges of racial as well as geographic discrimination. (2) Industry critics call for strong legal and regulatory measures as well as voluntary efforts by insurers to correct this situation (Squires, 1997). (3) Insurers respond that risk and other economic factors account for higher rates and coverage limitations in urban areas and that remedial effort should focus on improving economic and safety conditions (Duncan, 1995). This is a difficult issue to resolve because of the complexity of urban insurance markets. Higher rates and more limited coverage in the inner city could be caused by a number of factors, including greater risk, substandard housing, low income, costly information and other barriers to market entry, and regulatory constraints, among others. Unfair discrimination is alleged to be a significant factor by some and refuted by others. In addition, certain industry underwriting and marketing practices, justified from a business perspective, may still have a negative effect on urban communities because of these areas' particular economic characteristics: The true nature and causes of urban insurance problems have important implications for the types of remedies that are warranted and likely to be most successful. Most prior research fails to provide an adequate understanding of urban homeowners insurance markets or a satisfactory basis on which to recommend appropriate remedies. Previous analyses of urban insurance markets in Texas and other states tend to rely on simple statistical comparisons of prices and availability measures across areas differentiated by their racial composition. …