The ways insurance companies decide who gets to be insured and the premiums they pay have raised concerns about racial discrimination for decades, and Consumer Federation of America has conducted numerous studies about these problems in American insurance markets. Many articles about discrimination in claims handling and concerns about techniques for fighting insurance fraud have also raised concerns. Sometimes, though racial discrimination begins before any policy is sold and is built into the marketing and selling strategies of an insurance company. An enforcement action by the Maryland Insurance Administration from earlier this year showed how insurance companies engage in racism against certain consumers.
The action, involving regional insurer Erie Insurance, highlights how the company has created incentives and disincentives for agents to selectively and subjectively choose consumers in a manner that is intended to reduce Erie’s business and discourage policies in mostly Black and Hispanic neighborhoods.
Some background: Based in Pennsylvania, Erie Insurance is a $15.29 billion insurer that sells auto, homeowners, business, and life insurance through a network of independent insurance agents. It has over 6 million policies and operates in twelve states, including Maryland. Erie markets itself as offering policies that are often cheaper than those of other insurance companies. According to reporting, the company has somewhat loose underwriting standards that should make it easier for customers to qualify for coverage, but the company relies on its agents to make subjective decisions about who gets coverage in order to keep its loss ratio from getting too high. (An insurer’s loss ratio is the relationship between the claims it pays out and the premiums it collects. The higher the loss ratio, the lower the insurance company’s profits).
Recently independent agents in Maryland accused Erie of punishing them for selling insurance policies to Black and Hispanic consumers, most of whom lived in dense areas of cities like Baltimore. Erie claimed that these areas were too risky to insure. Baltimore agent Bj Borden stated that “they [Erie] had us create separate guidelines to weed out some of the people they didn’t want us to write in inner cities.” He stated that over several years, Erie managers punished him for selling policies to Black consumers in Baltimore by docking his commissions and threatening to cancel his sales contract. Other agents reported similar behavior and abuse from the company, indicating that it didn’t want Black or Hispanic people as customers.
One of Erie’s practices is called “frontline underwriting”—essentially, insurance agents have to determine, often based on subjective factors, whether a consumer is risky and should be insured. Agents evaluate a consumer and are supposed to decide if they are honest and reliable, and can be trusted to pay their premiums. This method of underwriting is especially vulnerable to unfair bias and racism, because it isn’t based on fixed data points.
Concerned by these agent reports, the Maryland Insurance Administration (MIA, Maryland’s state agency in charge of overseeing the state’s insurance market and, among other things, preventing unfair discrimination) started investigating these accusations. And in May 2023 the MIA issued four public determination letters where they found that Erie terminated its agreements with insurance agents because they were writing policies in certain areas. In the letters, MIA concluded that Erie adopted practices “designed to target agencies writing business in urban areas and to reduce the volume of business being written in those areas.” MIA also ordered Erie to pay the agents compensation that was improperly withheld.
How did Erie respond to this investigation? By digging in its heels and refusing to admit responsibility. The company filed a lawsuit against Maryland insurance regulators in federal court, claiming that the regulators made confidential business information public. This isn’t the first time Erie has been accused of racist and unfair discrimination. Federal authorities in New York and Pennsylvania accused the company of redlining—but Erie only faced minor fines as a result. But the MIA is now conducting a broader review of Erie’s underwriting methods to see if there is additional unfair bias. If it finds additional bias, Erie could face substantial penalties and have to undertake major reforms.
Insurance costs are expensive and even unaffordable for many consumers, and in certain communities it is almost impossible to get insurance. In the past, insurance companies engaged in redlining, where they would not provide insurance to communities because of the race, color, or national origin of residents in those communities. Black neighborhoods in Baltimore were especially affected by this behavior, which widened the wealth gap. Since Black and Hispanic consumers couldn’t easily get loans or insurance, they missed out on many opportunities to build wealth and accumulate equity. Anti-discrimination laws have formally banned these practices but Erie’s behavior shows how it used punitive actions against agents to achieve the same, unacceptable ends.
The MIA must, of course, continue to pursue and defend its actions to hold Erie accountable; it should consider revoking Erie’s license to do business in the state of Maryland. The Maryland findings should also be a wake-up call to other state regulators in whose jurisdiction Erie operates. And it should be a reminder that there is a lot of work to be done and investigations to be pursued if regulators and policymakers take the problem of racial discrimination in insurance markets seriously.