Oops, forgot to define “redlining.”
The term has interesting origins:
Are you sure this is true? This is so incredibly idiotic that it is hard to believe that an insurance company believed it.
It has been two years since I passed the bar and haven’t thought about constitutional law since. However, IIRC, there are different standards for determining the legality of discrimination based upon race vs. discrimination based upon sex.
Discrimination based upon race is almost never alllowed. On the other hand, discrimination based upon sex will be allowed with some justification by the discriminator. Strict scrutiny vs. some other level of scrutiny.
Sua or DSYoungEsq. could probably provide the proper actual terms used by the Court here.
I think you’re thinking about the constitutional standards applied to discrimination by governments.
I believe that for the most part, private organizations, such as insurance companies, are regulated by statute.
kabbes, you have done a very good job of explaining it and I understand it perfectly but there is another aspect to this rather than pure common sense which is selling it.
Perception is everything and you have a hard time selling something if the public has a negative perception and the fact is the public often has a negative perception about some very reasonable things just because they do not understand them. Then they turn to politicians and they have laws enacted which reflect the public’s perception of the situation. Politically speaking, older people have more clout and it would be much more difficult to pass laws that had a negative effect on them than to do the same with younger people.
Age discrimination happens all the time for no reason. Seniors get discounts for the same things I have to pay full price so I am, in effect, subsidizing them. Sometimes young people, or students get discounts too. This is purely marketing and with no other basis other than getting the most you can out of each person.
But again, public perception is everything. Giving discounts to seniors is perceived as a good thing (never mind I am paying the difference). I vaguely remember some cases, maybe someone has some further details on them. It could well be that I read about them in this board.
Dry cleaners charged more for a woman’s shirt than a man’s shirt. Outrage and cries of discrimination ensue. Never mind that the drycleaners say women’s shirts have more frills and generally take more work. Public perception is against this and (I believe) in the end the dry cleaners had to charge equal price for both.
Another case: A driving school gave an offer which was they would give you as many hours of teaching as you needed at a flat rate. The flat rate was higher for women because as an average, women required more hours. Again, public perception finds this intolerable discrimination against women and yada yada, so, in the end, the school is forced to change this and institute a single fee for both sexes.
Then you have the situation where women are charged lower insurance rates because they have fewer and less costly claims. Does anyone have a problem with this? Of course not! Why should women pay for the accidents of men!
I guess you get my point which is that common sense and reason is not enough. PR and public perception are very important. You cannot reason with a 21 year old driver why he has to pay a higher rate. You can talk to him until you are blue in the face and he will still not understand it. And yet, wait 30 years, and he sees it clearly without anyone explaining it. Age is a wonderful teacher. (As a friend once said: “Now that I realize how right my father was, I have a son telling me I’m all wrong”)
A very clear case of the same thing is the HMO thing: Don’t try to reason with people. They want everything and more and they want to pay less for it. Who wants to get into any kind of analysis when you can ask for that and you have politicians telling you they will deliver if you vote for them?
I could write a whole book on this subject, but I am between trips. I have very little time, and will not have much more time here for a week or two, Here are a couple of thoughts:
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Discrimination is GOOD. Once there was a concept of a “discriminating shopper” – one who had good sense of value.
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It’s fair for people to pay less when they have less risk and vice versa.
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The porposed scheme of rating people based on their accident record would have some predictive value, but it would not be as accurate as rating them ona combinaiton of their accient record and other data, such as age, sex, location, automobile use, etc.
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There are rating factors that correlate with accident cost, but which are not intutitive. They constitute a PR problem.
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Statistics (I have been told) show that on average minorities and poor people are considerably worse to insure. For political reasons, these are never discusses.
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Race discrimination has such an ugly history in the US that it is special, and different from all other types IMHO.
Out of time…
It’s not the insurance companies’ job to ensure that drivers are law-abiding; they can choose to refuse you service. And if no one was allowed to drive a car until they were 25 … hmm, interesting. I wonder if the accident rate would go down? 
Seriously though, I live in the suburbs. I’d guess that there’s a greater percentage of teenagers driving here than in more urban or rural areas. I can’t quite see it happening either … but did they say the same when they raised the drinking age from 18 to 21?
december said what I was thinking – there’s a big difference between “fair” and “equal”. It does make sense for students and seniors to have discounts on many things, because they typically have much lower incomes than do those in between. If my admission ticket is half the price of my father’s, and he makes 50 times what I do in a year … then aren’t I being overcharged? (Yes, he’s worked for it, he’s earned it … but the broad generalization idea is the same.)
Oh, and horhay: I suspect that they [that is, the insurance companie] did start with a “level playing field”, and discovered that the older (25-70 yo) drivers “earned” the lower rates, while the youngest drivers deserved the higher rates. The rates aren’t individualized, because they’ve learned from experience. They can’t predict the future, and say for certain who will be a good drievr and who won’t be … but neiher can they predict the weather. They can only give a probability for what is likely to happen, based on the past [statistics].
Well, my Dad is pretty reliable. If it’s not true, it’s the explanation that was given to him.
A number of points to clear up.
horhay, you can cast about for other risk and/or rating factors until you’re blue in the face. You wouldn’t be alone. There’s a multi-billion (if not trillion) dollar industry searching along with you. So far, these are the best they’ve got.
Alcoholism though is a particularly bad choice. If you’re drunk whilst driving, you’re not insured anyway. So the insurance company doesn’t particularly care.
As for gender - well as I already said, women in most age categories do less miles per year than men. Particularly young women. Also young women tend to drive more slowly than young men thus significantly decreasing their chances of causing a large claim. As such women’s rates should be (and often are) somewhat lower than men’s.
Interesting that you thought that womens’ insurance would be higher than mens’ (“taking it up the butt”). The clues were all there for you in my earlier posts that the reverse is true.
lucwarm - motor insurance is a very competitive industry. Particularly these days, with insurance companies selling direct on the phone and internet. If an agent wants to “redline” (or add a prejudice surcharge) to an insurance company’s rates, then I’d suggest that agent won’t get much business from minorities, who can simply go direct to the insurer.
As for refusing insurance altogether - well that has to be any insurer’s right. If they consider a risk to be too great, then as a private corporation they have the right to not insure it.
horhay - this also goes for the “right” of under 25s to be insured. They only have that right to the extent that an insurer is willing to take the risk on. If the risk is not profitable, then why should they insure it? A company is not the government and it isn’t the charity - you can’t make them insure the young person.
Furthermore, if the US is like the UK (and I strongly suspect this is the case), only third party insurance is required by law. If you want third party, fire and theft or fully comprehensive insurance then you’re requesting more than the legal minimum. Your case for mandating that the insurance company insure you is then even weaker.
sailor - yes, public perception is important. But so is profit. Insurance companies are extraordinarily important to an economy since they allow companies and individuals to use their capital more effectively (a point I know you already appreciate). As such, insurance companies have a lot of clout. A government isn’t going to insist they start selling policies at a loss even if the public starts getting really pissy about it since they then risk the insurance company pulling out of the market altogether.
But PR is vital. Why do you think I’m here posting the defence?
StephenG - I think that you’re thinking along the right lines. Many people seem to start assuming that insurance companies have a role in enacting and enforcing the law. It’s just not the case. They’re corporations out to make a profit. They, frankly, couldn’t give a shit if you’re under 25 and can’t find insurance unless they can charge you the price they consider appropriate. horhay is setting up a false problem.
Also you have the right idea when it comes to pricing - except that we start with that level playing field every time there is a pricing exercise. The data dictates the rates. And data says that young people cost more to insure. Full stop.
Badtz - in your original story you said that the agent made that claim. This is entirely possible - agents are notorious for not understanding the policies they are selling. The insurance company or underwriter certainly wouldn’t have made such a mistake.
Here’s another story for ya: this was apparently (although probably apocryphally) overheard in the Lloyd’s building in London (where 20% of all the world’s marine and aviation insurance and a similarly high proportion the world’s catastrophe reinsurance is traded)
agent 1: Storms happen every ten years, yeah?*
agent 2: Yeah…
A1: And we had a storm this year, yeah?
A2: yeah…
A1: So we won’t get one for another ten years! We can really clean up on the insurance!
A2: Yeah!
(pause whilst agent 2 engages in some High Level Thinking for an agent)
A2: Ah - but last year’s storm may have happened at the end of it’s ten year cycle and we may have the next one at the beginning of the next ten year cycle. So we could have one next year after all.
A1: Oh yeah. Damn.
I hope and pray that this is made up.
[/quote]
*actually they happen with about an annual frequency of 10%, so he was along the right lines at this point.
pan
The problem wasn’t, at least in NYC, that dry cleaners were charging more for frilly or very small (because they claimed women’s shirts didn’t fit on the pressing machines} women’s shirts. The problem was that they were charging more for women’s shirts, regardless of the size or plainness, and in one case,charged more for the identical shirt when a woman brought it in.
I take it that you now agree that insurance companies can and do discriminate on the basis of race.
It seems that position #2 is that such discrimination is not in the interest of insurance companies.
Although I don’t have figures for auto insurance, this is clearly false as a general proposition.
For example, nobody questions that life expectancies are different for different races. Clearly, it would be in the interest of insurance companies to “redline” in the context of writing life insurance policies.
In my jurisdiction, the legislature has prohibited such redlining.
Well, I don’t know about the UK, but in my jurisdiction (New Jersey, USA), this is false as a general matter.
The legislature could pass a law saying (1) insurance companies may not discriminate on the basis of age in setting rates; (2) insurance companies must accept applicants of all ages who otherwise comply with their underwriting guidelines; and (3) insurance companies may raise their rates on all policy holders in such a way that the extra cost is spread through all age groups.
If this happened, the courts would make sure that the insurance companies complied.
Please feel free to cite some authority saying that UK insurance companies cannot be regulated in such a manner.
let me just supplement my last post with a few numbered points:
(1) Insurance companies are capable of racial discrimination.
(2) Legislatures have prohibited this sort of discrimination, as they should.
(3) Insurance companies continue to practice age discrimination.
(4) This practice is troubling, especially if you happen to be a young, safe driver. However, age discrimination is not nearly as offensive as race discrimination.
(5) Legislatures (in the US) have the power to prohibit the above-mentioned age discrimination.
**lucwarm ** is correct. As an American actuary I’ve had a bit of experience with UK motor insurance. As a general rule, insurance companies are more highly regulated in the US than in the UK. This would include areas such as premium rates and monopolistic practices.
I also live in the NJ. IMHO the rate regulation here disservers consumers. It’s so burdensome that it drives low cost companies out of the state and causes rates to rise. We’re in a kind of death spiral, where high rates beget more regulation, which causes rates to become higher yet.
horhay wrote:
This argument wrongly assumes that all companies must follow the same policy. In principle it would work if some companies didn’t insure young drivers and others did. Also, there is an Assigned Risk process so that every driver can obtain insurance.
Woah there hoss! You seem to be confusing an insurance agent and an insurance company. The two are not the same. Most motor insurance is still sold via non-tied agents that select from a variety of insurance companies for their client (i.e. the insured). There is nothing per se to stop that agent adding a prejudice surcharge if he so wishes. This, however, would not be the doing of the insurance company themselves.
I’ll say it again:
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there is no such thing as a clearly definable “race” for insurers to use in rating or pricing exercises. I don’t know why you persist in ignoring this point. It really is key.
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there is simply no evidence that race as an independent factor is a good indicator of risk. Where correlations between a (subjectively defined) race factor and risk exist, it is always the case that race would not add to the predictive capabilities of other existing rating factors such as location and age. In other words, race (such as it is) is not an independent risk factor from location and age. Trust me - without wishing to go into technical details, we don’t want to start using lots of non-independent risk factors when it comes to insurance pricing.
I realise that m’colleague december in his flying visit mentioned the possibility of race as a single factor being correlated to risk - what you have to realise is that it isn’t independent of location and occupation. All of these rating factors are being used to guess at my original seven risk factors and there is no evidence that race helps over and above the previously mentioned factors.
But (2) really is an academic point, since (1) means that insurance companies couldn’t use race even if they wanted to.
Now, as I say, some Joe-Bub working for Redneck Insurance Agents may take the insurance price quoted by Fine Insurance Company and add 20% because he’s quoting to a black man. But that practice has nothing to do with the insurance company themselves. That’s just one man acting on his prejudice. And it appears that it’s illegal anyway.
As for your other point - I feel that I’ve already addressed that. I don’t think that it is ethical to insist that an company be forced to insure a risk they don’t feel is appropriate for them to take.
If you want a more technical argument, it rests on the security and solvency of insurers themselves. It’s absolutely no exaggeration to say that the stability of modern economies rests on insurance companies being financially strong. To this end, insurance companies have a legal obligation to produce things like Statements of Actuarial Opinion that their reserves are sufficient to meet their obligations.
Many insurance companies feel that they don’t have expertise in the whole motor market, therefore they specialise - in over 50s, say, or women only. You want to take that option away. This leaves the insurance company two choices - quit the motor market altogether or set prices in an area they are not expert in.
Furthermore, the increased heterogeneity in the pool resulting from your removal of the right to discriminate means that the volatility of the underlying statistical distribution of the insurance class increases dramatically.
This means that the insurance company has far less solvency security and risks to a far greater extent becoming insolvent. Needless to say, this carries huge consequences for all insured parties and the market as a whole as individuals lose confidence.
As such, you propose a dangerous route by insisting insurers carry risks they don’t feel they can.
Frankly, I don’t understand this whole line of reasoning. Should we stop discriminating by location too? What about by engine size? I still say you guys are looking for something for nothing.
If I may pick up on an unrelated point too - your blanket statement that “different races experience different life expectancies” is also massively oversimplified and betrays a fundamental lack of understanding of the underlying issues. Once again, it isn’t race itself that is the causal risk factor, but things like living conditions, nutrition and locale. Race as a rating factor is only an indicator of these risk factors to the extent that race tends to be correlated with them, i.e. in simple terms, ethnic minorities tend to be poorer. Once again, there is simply no need in life insurance to use race as a rating factor because it is not independent to the other rating factors. Also we run yet again into the problem that there is no objective measure of race.
Maybe we should say that a few more times, just to let lucwarm really drum it in.
There is no objective measure of race, so insurers can’t use it as a rating factor.
There is no objective measure of race, so insurers can’t use it as a rating factor.
There is no objective measure of race, so insurers can’t use it as a rating factor.
Thankyou.
pan
Those of you paying attention will of course realise that I meant original eleven risk factors.
(Intentional mistake. Ahem)
I never said that auto insurers should be prohibited from discriminating on the basis of age.
My only point is that legislatures have the power to prohibit this sort of discrimination, if they so choose.
As far as racial discrimination goes, I agree that it is often much more difficult to ascertain people’s race than their age, but this doesn’t stop insurers from discriminating in ways that are rougher. And in the past, this sort of discrimination was not only practiced by rogue agents:
Do you honestly believe that these underwriting manuals were only produced by rogue agents?
>> A government isn’t going to insist they start selling policies at a loss even if the public starts getting really pissy about it since they then risk the insurance company pulling out of the market altogether.
You are overestimating the intelligence of politicians y a very long shot. They do very stupid things very often. The public thinks passing a law is all it takes to fix something and politicians (a) pander to the public and (b) are pretty stupid themselves.
Here in DC, many years ago, a law was passed forbidding health insurance companies from asking about risk factors for AIDS. By law they were obligated to cover AIDS but could not recover any costs of doing this. You know what happened? The insurance companies, with the voice of that bitchy, obnoxious woman in MAD TV, Said: “You know what?? I don’t think so! Uh, Uh” and they stopped selling health insurance here. Never underestimate the stupidity of politicians.
>> We’re in a kind of death spiral, where high rates beget more regulation, which causes rates to become higher yet.
Isn’t that what generally happens when the government start regulating things? It’s ironic that people seem to not grasp this and generally call for more regulation rather than less. Rent control is another very good example of the same thing. The more rents are controlled the higher they are. And yet most people ask for more regulation rather than less.
lucwarm, I think what kabbes means is that as things are now you do not have certain rights, not that those rights could not be enacted by the legislature.
Doreen, I am not in the dry cleaning business and I tend to assume nobody knows more about his business than the owner-manager and he should be allowed to freely set his prices withjout having to justify any reasons. If it is true that women’s shirts do not cost more to dry clean, then, one of the dry cleaners would lower their prices to get more business. That’s what free markets and competition are about. Prices are set by the market to be: (I) the maximum a buyer is willing to pay for the product or service and (II) the minimum the provider of the product or service is willing to provide it for. It seems women are willing to pay more for clothing and dry cleaning and sellers take advantage of that. Nothing wrong with that. Many businesses recognise middle aged people are generally willing to pay more for the exact same service and charge them more while giving discounts to young and old people.
You, as a seller, are free to sell at whatever price you want and you are not obligated to give the same price to everybody. You can sell individually at whatever price you believe is the most each person will pay. That is how a free market works.
Of course, if you are selling to the public at large, then you may have PR problems unless you do things right. You do not add “surcharges for middle aged people”, rather you have “discounts for seniors and students”. Same thing but sounds much better.
This is just a guess
Let’s say some state government somewhere passed a law making age discrimination illegal.
Everyones rates go up except under 25 drivers.
Next election that government gets voted out of office because there are more people 25 - 70 than there are 18 - 25.
My second point.
How many people think they’re a better driver now than when they first started. I know when I first started driving I sucked at it (relative to now). I was lucky and more experienced drivers avoided my mistakes. I now have a lot more experience so my chances of making a mistake are much lower.
OK - I meant in the long run. But you’ve made my point for me admirably (thankyou!) Insist that an insurer charges less than they can justify to themselves and they will stop insuring. Any other way is madness. sailor has provided an example of where this exact thing happened.
In other news - I suppose that you could have multiple firms setting up to cater to the different market segments. But that would be de facto discrimination anyway, since the firm supplying to the 18-25 market would be charging more than the firm selling to the 25-50 market.
lucwarm - I can believe that many years ago practices were different and as you described. Indeed, the set up of insurance companies themselves were different. We didn’t have computers to crunch through reams of data and we didn’t have the statistical and computational tools to analyse the data with. As such, underwriters tended to price on gut rather than analysis. In this case I can well imagine a underwriter “redlining”.
This could have been prejudice or he simply could have noticed that that area had higher claim rates. Note however that strictly speaking this is not discrimination by race, but by location! So you still aren’t really demonstrating a racial element in rating! Now OK, it is de facto racial rating - but really only because race is so correlated with location in these cases.
But that aside, motor rating techniques are a lot more sophisticated now than they were even ten years ago, let alone twenty or fifty years ago.
(But don’t get me started on marine insurance. Feh.)
pan
>> don’t get me started on marine insurance
No, don’t get me started. My boat was hit by lightning and I filed a claim in August of 2000 and the insurance company has been dragging their feet. I got fed up and ended going to the top and finally today I got the check but I still have a quarrel with them. I say one or two months would have been a reasonable time to pay but they have taken 11 months and I deserve some compensation for the use of the money during that time. They say no way, so we’ll see. But I feel delaying payments of claims is stealing from me the interest the money would have earned me in the bank. $15K invested during these months would have earned me some money, instead it has earned them some money. I am thinking how to proceed… (just an anecdote which adds nothing to the substance of the thread).