When Maryland regulators said this spring that the small company Erie Insurance had illegally avoided selling policies to people in predominantly black neighborhoods, Erie had a ready response: It said the company was being singled out for doing business as usual continued.

The Pennsylvania-based insurer, known for selling cheap auto and home insurance, then took an unusual step. She sued the Maryland Insurance Administration, saying the regulator was unfairly attacking her “frontline underwriting” practices – an approach in the insurance industry that requires agents to consider subjective factors when selecting clients.

Maryland regulators had begun investigating Erie’s business after independent agents who sold its policies accused Erie of punishing them for selling policies to black and Hispanic customers, most of whom were in densely populated areas Parts of cities like Baltimore lived where the insurer said the risk was too high. Often these are neighborhoods where 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 intended to, and in fact did, reduce business in densely populated urban areas with high minority populations” and ordered the company to provide representatives with a notice to pay compensation that they believed had been wrongfully withheld. Maryland is also conducting a broader review of Erie’s underwriting practices, even as Erie has challenged it in federal court.

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

The dispute shows how a long-used insurance industry technique ostensibly aimed at managing risk can open the door to bias. Rather than relying on a fixed set of data points to determine which customers qualify for which policies and at what price, frontline underwriting puts the onus on agents to determine who deserves an insurer’s services . When evaluating a client, agents are expected to decide whether a potential client appears honest or reliable, or to assess how tidy or well-maintained their home is.

“If underwriting happens at the individual agent level, there’s no way to verify it and you’re much more likely to be biased,” said Daniel Schwarcz, a professor at the University of Minnesota Law School, who points out focused on the topic of insurance law and regulation. “There are all kinds of conscious and unconscious biases.”

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, completed more paperwork and endured more visits from adjusters than white customers when purchasing insurance claim.

The accusation against Erie, however, is that its policies kept black and Hispanic homeowners off its customer lists in the first place.

“They had us create separate policies to weed out some of the people we shouldn’t write to in the inner cities,” said BJ Borden, a Baltimore agent who is one of seven people who claim Erie wrongly withheld compensation or terminated their agency contracts in Maryland.

Mr. Borden said that over several years, Erie managers punished him for selling policies to black Baltimore residents by cutting his commissions and threatening to terminate his sales contract entirely. Erie also pushed agents to direct most of their sales to other insurers they were authorized to sell to, Mr. Borden said.

Maryland’s case also highlights the patchiness 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 meet the financial guidelines that insurers have formally communicated to regulators. But almost no other state — including the 11 other markets where Erie operates — has this rule, which gives Erie and other insurers broad authority to limit their clientele.

The company was charged with redlining by federal authorities and agents in New York and Pennsylvania. But until Maryland’s order this spring, the only punishment Erie faced was a $225,000 fine and a federal order to open more agencies in minority neighborhoods and spend $140,000 on advertising to black clients agreed in 2009.

Aaron Alder, an agent in Pennsylvania, tried to report Erie’s behavior to regulators there in 2019, reporting to the Pennsylvania Insurance Department that Erie had warned him to stop selling policies in a ZIP code where the majority of residents were Hispanic, one statement, which he called “discriminatory.”

But because Mr. Alder’s main conflict with Erie was whether the insurer had wrongfully terminated his sales contract, the Pennsylvania regulator refused to address the issue of discrimination. An Insurance Ministry spokesman said the regulator has the power to investigate and punish companies for discrimination.

But if Maryland regulators find a broader pattern of redlining that could trigger federal scrutiny, Erie could face additional fines.

Mr. Cummings, the Erie spokesman, said Mr. Alder’s allegations were baseless and that the Maryland agents’ allegations were “objectively false.” He said the agents were upset because their commissions had been cut or they had been fired by the company for poor performance or paperwork, and that they had made no allegations about Erie’s practices before these disciplinary actions.

Founded in 1925, Erie is the 12th largest home insurer and 13th largest auto insurer in the country with a large presence on the East Coast. By the end of last year, the company had issued nearly $9 billion in property and casualty insurance policies, compared with $79 billion for State Farm, according to data from the National Association of Insurance Commissioners.

Erie offers policies that are often cheaper than most competitors, with generally more relaxed underwriting standards. This makes its products largely affordable. At the same time, to maintain profits, the insurer relies on its agents to ensure that an important metric – the loss ratio – does not become too high.

An insurer’s loss ratio is the ratio between expected claims and earned premiums. The higher this number, the lower the company’s profit. According to NAIC, Erie’s loss ratio of 78 percent is higher than the average of 67 percent for the 25 largest property and casualty insurers

Other insurers protect themselves from losing money by raising prices or tightening underwriting standards. Erie relies more on frontline underwriting, which, according to a sales guide the company issues to new agents and that Maryland regulators cited in their findings against Erie in May, is “about selecting and building the right relationships.” “.

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

The Maryland Insurance Administration would not say when it plans to complete its comprehensive review of Erie’s practices. Erie wants to bar Maryland regulators from discussing their findings, which are publicly available for now, or from imposing penalties until the broader investigation is complete. It also wants a court to overturn the regulator’s finding that Erie discriminated against potential customers.

Source : www.nytimes.com

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