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last updated on March 30, 2007

COMMUNITY REINVESTMENT ACT

THE ISSUE IS. Application of the Community Reinvestment Act (CRA) to the insurance industry.

IT'S IMPORTANT BECAUSE. In recent years, consumer lobbyists, community organizers, some members of Congress and many state legislators have raised the issue of applying the CRA to the insurance industry. The issue will have an even higher profile at the federal level as the Congress begins to consider seriously proposals for an optional federal charter for insurers, as some members have discussed including a CRA requirement for insurers that elect the federal option. Many members of Congress are also concerned that using credit scoring in the underwriting process may discriminate against low-income people.

The CRA was passed by Congress in 1977 to encourage banks and thrifts to lend in certain communities - particularly low-income, minority neighborhoods - in which they accept deposits. The rationale was that these financial institutions receive direct benefits from the federal government - most prominently, deposit insurance - and so it is reasonable for them to meet certain social obligations. In particular, the Congress was concerned that banks meet the borrowing needs of the communities from which they collected deposits. Here, the Congress was concerned about the practice of "redlining," whereby banks refused to make loans in low-income areas.

Insurance companies, which are not depository institutions, have not been subject to CRA requirements. Proponents of applying CRA to insurance companies believe that consolidation is erasing the boundaries between financial services companies, such that CRA should apply to all financial services companies. However, important differences remain between banks and insurance companies.

First, insurance companies are chartered to provide insurance, not credit. Insurance companies would violate their fiduciary duty to policyholders as well as safety and soundness requirements of state insurance investment laws if they were to extend credit in the manner and to the degree contemplated by the CRA.

Second, banks enjoy federal benefits not available to insurance companies. The federal government insures bank deposits and grants other financial advantages to depository institutions, providing a quid pro quo for banks' social obligations under CRA. Insurance companies do not enjoy the same federal benefits.

Finally, insurance companies do not unfairly discriminate. It is unnecessary to extend CRA to insurance companies because the industry does not unfairly discriminate against low-income and minority communities - the assertion made against the banking industry that led to the creation of CRA. To the contrary, insurance companies participate in many voluntary programs in disadvantaged and minority areas and are seeking to expand their business in urban areas.

Existing laws prohibit unfair discrimination, insurance regulators enforce anti-discrimination laws and residual markets exist to cover high-risk properties. Further, most insurance companies do not have a geographic community. The Community Reinvestment Act is by definition oriented to a specific geographic "community." Many insurers have no similar geographic orientation.

The idea of extending CRA to insurance companies is not only fundamentally flawed; it is impractical from a policy standpoint. Subjecting the industry to an unnecessary government mandate would: 1) raise policyholders' premiums, 2) weaken the insurance industry financially, 3) undermine its competitive position, and 4) jeopardize its ability to pay customers' claims, especially in catastrophic situations.

NAMIC POSITION. While many problems continue to exist in our nation's urban centers, imposing lending and social investment obligations on insurance companies, which are not in the lending business, will not solve the problems. It will only create new ones. Moreover, attempts to legislate community involvement on an industry already making a considerable investment would serve precious few while harming many. The insurance industry should be given credit for its proactive stance rather than burdened with additional legislation. The record shows that the insurance industry contributes to communities because giving back to one's own community is good business and is the socially responsible thing to do.

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