Insurance Underwriting Guidelines Discrimination

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In this article we will know about insurance underwriting guidelines discrimination. Underwriting standards are used by the insurance business to determine who will be insured and at what rate. Because insurance deals with risk, insurance companies develop these standards to determine when and under what conditions they will assume that risk—and when they will not because someone is too hazardous to insure.

While insurance firms are not allowed to discriminate based on variables such as ethnicity, guidelines utilize specific facts about persons to assess risk and establish prices. This implies that discrimination is both essential and legal. Nonetheless, debates over what constitutes fair or unfair discrimination have gained prominence, particularly since George Floyd’s murder in 2020.

Existing Discrimination

The National Association of Insurance Commissioners (NAIC) is the insurance industry’s standard-setting body.

In reaction to the George Floyd demonstrations, the NAIC conducted a special session on race to investigate the relationship between insurance and racial prejudice.

Though overt racial discrimination has grown less widespread, NAIC members reported that manifestations of discrimination persist, particularly in the use of big data.

Furthermore, as detailed below, lawsuits and investigations have claimed that long-standing discriminatory practices, including as redlining and race-based premiums, continue to harm the sector.

The categories listed here are not exhaustive. Another source of concern has been health insurance, particularly in light of federal regulations. On June 19, 2020, the Centers for Medicare and Medicaid Services issued a final rule titled Nondiscrimination in Health and Health Education Programs or Activities.

California Insurance Commissioner Ricardo Lara, among others, instantly slammed the verdict as a barrier to healthcare access for LGBTQ+ persons, those with disabilities, and anyone whose primary language is not English.

Types of Discrimination

Underwriting rules rely on a sort of risk-based discrimination. They divide people into high- and low-risk categories to calculate premiums and urge clients to reduce dangerous behavior.

Though this is permissible, the history of underwriting is rife with unacceptable prejudice, also known as unjust discrimination.

Underwriting rules cannot utilize unfair discrimination under US law. Discrimination against protected classifications, such as race, national origin, gender, or religion, is illegal.

The type of discrimination can range from higher pricing and weaker insurance to rejecting coverage.

According to a 2013 legal study conducted by the University of Michigan Law School, anti-discrimination regulations “vary a great lot” by state and between insurance types. It also stated that a “surprising” number of jurisdictions lacked specific legislation prohibiting unfair discrimination based on race, implying that the federal government should play a stronger role in regulating race-based discrimination in insurance.

Notable Examples of Discrimination in Underwriting Guidelines

Redlining and Housing

For its ongoing impact on inequality, redlining, a type of discrimination, has attracted public attention recently. The tradition dates back to the presidency of Franklin Delano Roosevelt.

In order to increase homeownership and the size of the White middle class at the time, the federal government started insuring mortgages. A government organization called the Home Owners’ Loan Corp. (HOLC) assigned areas around the nation a risk rating based on things like:

  • Age and condition of housing
  • Access to transportation
  • Community amenities
  • Proximity to undesirable properties (e.g., polluting industries)
  • Residents’ employment status and economic class
  • Residents’ ethnic and racial composition

According to danger, the neighborhoods were color-coded on maps. Communities that were predominately made up of minorities in terms of race and ethnicity were highlighted in red (thus, “redlined”). Lenders declined to issue loans in these places because they were deemed “dangerous.” In brief, redlining excluded communities of color from financial services like loans and insurance.

The explicitly racial component of these maps was described in the Federal Housing Administration’s (FHA) 1938 Underwriting Manual. It also listed “incompatible racial and social groups” and the “potential of the place being occupied by such groups,” in addition to “flimsy construction” and “freakish architectural designs,” as underwriting negatives in a section titled “Quality of Neighborhood Development.” “The same social and racial classes must continue to occupy homes in a neighborhood if it is to remain stable. A shift in social or racial occupancy typically causes instability and a loss of values, according to the manual.

These maps’ and the racially discriminatory covenants that accompanied them had disastrous long-term consequences on wealth growth and real estate values.

Civil Rights Act

More explicit kinds of discrimination have since been made unlawful. In the 1948 case Shelley v. Kraemer, the United States Supreme Court ruled that racial covenants are unenforceable because they violate the 14th Amendment.

The Civil Rights Act of 1964, for example, made many sorts of racial discrimination unlawful.

This had an effect on race-based life insurance premiums, which will be examined further below.

Several other improvements in this area would especially address redlining. The 1968 Fair Housing Act, enacted following the assassination of Rev. Dr. Martin Luther King Jr., prohibited racial redlining.

The 1965 Housing and Urban Development Act, which was intended to integrate federal housing initiatives, introduced grants for low-income homeowners, rent subsidies for the aged and physically challenged, increased access to public housing, and preferential loans for military veterans.

In addition, the 1975 Home Mortgage Disclosure Act requires lenders to report census data pertaining to their lending (HMDA).

Despite this, there have been reports of discrimination in the workplace. A series of New York cases, for example, claimed that redlining tactics persisted into the twenty-first century.

Race and Life Insurance

According to a Northwestern Journal of Law & Social Policy essay by Mary L. Heen, the life insurance market has a history of maintaining racial hierarchies in the United States. After Reconstruction, she adds, the insurance industry used high death rates and fundamental racial inequalities to justify life insurance that provided liberated enslaved people with only two-thirds of the benefits provided to White people.

When setting premium rates, companies with racial premiums tended to dismiss any information that did not suit established hierarchies, such as women having a lower death rate, implying that the risk involved was not the primary motivating reason in setting premiums.

Such behaviors persisted until the twentieth century. For example, in 1940, the NAIC produced a research on mortality rates by race, which insurers then utilized to calculate race-based premiums.

According to the NAIC, the report fostered discriminatory underwriting policies until the use of race was prohibited.

At the time, insurers carried two rate books, one showing higher rates for Blacks, who mostly purchased “industrial life insurance” to meet burial costs. Black people’s policies provided less coverage and were more expensive, with premiums as much as 30% more.

Race-based premiums were lawful until 1964, under the administration of Lyndon B. Johnson, when civil rights campaigners pushed for the Civil Rights Act to be passed.

Race and Auto Insurance

Automobile insurance plans first debuted in the United States in 1897. New Hampshire was the first state to establish a state insurance law requiring insurers to provide particular types of coverage, known as an assigned risk plan, in 1938. No-fault insurance was implemented later, in 1970, in Massachusetts. In the 1970s, there would also be guaranteed access to motor insurance. According to the NAIC, South Carolina approved a statute in 1976 that guaranteed vehicle insurance access to everyone within its territory who qualified.

Other modifications in the 1970s focused on automobile insurance. Among the main items from that and the next decades are:

  • In 1977, a state report from the Michigan Insurance Bureau advocated making vehicle insurance underwriting criteria subject to the bureau’s inspection in order to eliminate “subjectivity.”
  • Massachusetts established a statewide system for regulating auto insurance in 1978, ensuring access and prohibiting the exploitation of protected features to set premiums.
  • The Michigan Supreme Court ruled in 1978 that no-fault insurance rules were unconstitutional.
  • The Government Accountability Office (GAO) performed a comprehensive examination of auto insurance in 1986, revealing how states that restricted the variables that insurers used for pricing were illegal.

Investigations in recent years have found that tactics such as redlining have persisted in subtle forms in the auto insurance business. A Consumer Reports and ProPublica analysis released in 2017 that analyzed payout data discovered disparities in vehicle insurance costs in California, Illinois, Missouri, and Texas that its authors claim cannot be explained by differences in risk, implying a “subtler kind of redlining.”

“The companies will insist that they never ask for a customer’s race,” said Doug Heller, an insurance expert for the CFA. “But if they are serious about confronting systemic racism, it is time they recognize that their pricing tools use proxies for race that make government-required auto insurance more expensive for Black Americans.”

H.R. 3693 and H.R. 1756 have been introduced in the United States Congress to restrict discriminatory vehicle insurance practices. These two measures from 2019 attempted to limit the use of income proxies and credit scores to establish policy rates, but they died in committee.

Fair Isaac Corp. (later FICO) and ChoicePoint pioneered the use of credit scores in vehicle insurance in 1995.

Critics claim it acts as a “surrogate for redlining” and raises premium prices for communities of minority.

Colorado passed legislation in 2021 that protects a number of classes against discrimination in underwriting, including race, sexual orientation, and gender identity and expression. Insurance companies must explain that their “use of external data and complex algorithms does not discriminate on the basis of these classifications,” which include race, gender, sexual orientation, and gender identity.

“Under this new regulation, insurance firms will have to demonstrate that their pricing practices do not result in unfair discrimination against otherwise good drivers,” Consumer Reports’ Chuck Bell stated. “Colorado now has the tools it needs to put an end to discrimination and ensure that vehicle insurance is priced fairly so that everyone can afford the coverage they require.”

Use of Algorithms

To determine insurance prices, insurance companies utilize sets of instructions known as algorithms (and trade stocks and manage asset liability, among other uses). Algorithms, on the other hand, can contribute to discrimination in insurance underwriting. As part of a congressionally mandated modernization project, the FHA developed an algorithmic underwriting system for single-family forward mortgages in 2020. It was the FHA’s first such system, which it claimed would assist streamline the mortgage process.

However, concerns remain concerning the actual impact of algorithmic insurance processes.
Advocates claim that these algorithms encourage or prolong bias, prompting governmental recommendations to solve the problem. The 2020 Data Accountability and Transparency Act, for example, would have established a federal agency to protect privacy and prohibit the use of personal data to discriminate against protected groups.

It also focused on underwriting methods and would have necessitated continual testing for bias in the use of such algorithms.

When bias was discovered, it would have required proof that the algorithm was necessary, that its function couldn’t be done through other nondiscriminatory means, and that the discrimination wasn’t deliberate, according to experts evaluating the measure. The Diversity and Inclusion Data Accountability and Transparency Act, a revised version of the bill, was presented in the United States House in March 2021.

State-level restrictions on algorithmic practices also exist. In New York, for example, authorities prohibit insurers from utilizing algorithms that “have a discriminatory impact on the protected classes recognized in New York and federal law.”

However, regulatory analysts have stated that insurers in the state are not permitted to gather information on legally protected classifications, which complicates the requirement by making it difficult to determine the effects of algorithms. Other states, such as California, Connecticut, Illinois, Maryland, Massachusetts, Michigan, and New Jersey, have either enacted or considered some form of restriction on the inclusion of personal information in underwriting, ranging from prohibiting the use of genetic data in life insurance to considering education, job, and ZIP codes as criteria.

What factors do insurance underwriters take into account?

The specifications vary depending on the company and the insurance plan. Insurance underwriters, on the other hand, look for the risk indicators indicated by their company in its underwriting criteria. Life insurance underwriters, for example, consider age, gender, health history, marital status, and smoking/drinking habits.

Auto insurance, on the other hand, consider driving records, age, gender, years of driving experience, and claim history.

What Is Unfair Discrimination in Insurance?

Unfair discrimination happens when similar risks are treated differently and premiums are based not on relative risk but on factors like race.

What Is Redlining?

The now-illegal practice of rejecting loans or insurance to inhabitants of certain areas based on their race or ethnicity is known as redlining. In the 1960s, sociologist John McKnight coined the word to describe color-coded maps created by the Home Owners’ Loan Corp. (HOLC) that labeled racial minority districts as “dangerous” to lenders.

Redlining contributed greatly to the current racial wealth divide.

NAIC members present in the 2020 race session suggested many approaches to address existing imbalances, including increasing minority representation in the sector, educating customers, and regulating big data to promote transparency, safeguard privacy, and dissuade discrimination. The NAIC has also formed a special committee to address these concerns.


  • Underwriting criteria are used by insurance firms to set prices and choose who they would insure.
  • Companies establish rates based on risk and criteria that are permissible under the law, such as an applicant’s gender.
  • While insurance firms claim that certain characteristics are actuarially valid criteria for determining rates, consumer advocates believe that rates should be determined by aspects that consumers may control.
  • Redlining, restrictive covenants, race-based insurance prices, and what supporters term subtle proxies for unfair discrimination, such as utilizing ZIP codes and credit scores to price vehicle insurance, are all examples of historically biased insurance rules.
  • In recent years, regulators and insurance sector representatives have advocated regulations to reduce discrimination.

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