Insurance bills consider race over economics - effort in Congress to establish laws for housing and commercial insurance policies to accomodate minorities - Column

0 Comments | Insight on the News, June 6, 1994 | by Llewellyn Rockwell, Jr.

Brace yourself Liberals in Congress have targeted another industry for government takeover. Housing and commercial insurance companies, they charge, don't provide enough coverage to enough people at low-enough rates. Liberal politicians want to fix the problem with legislation that will raise premiums for the middle class.

Two bills are on the table. Legislation by Rep. Joseph Kennedy, a Democrat from Massachusetts, would require insurance companies to disclose internal data from 150 metropolitan areas, separated into tiny census tracts. The figures will be turned over to the Department of Housing and Urban Development so it can crack down on companies with racial or ethnic disparities.

The second and slightly less onerous bill is offered by Rep. Cardiss Collins, a Democrat from Illinois. It would force companies to disclose information in 25 areas by zip code and leave enforcement to the Commerce Department.

The problem? The "civil rights community" can't agree on which bill to support. Such is the nature of debate on the "second generation" of civil rights. The question is never whether a whole industry ought to be put under the government's thumb or what dire consequences will result, but how to do it. In this case, ironically enough, the answer may turn on the sponsor's race.

Regardless of whose bill passes, data will be used to lynch insurance companies. The inner city simply is less insurable than the suburbs. Theft and vandalism coverage, for example, costs more in high-crime areas and may not even be available. But once again, economic logic is branded as "discrimination."

To prevent self-incrimination, the insurance industry should plead the Fifth Amendment. Whether Commerce or HUD gets its hands on these statistics, insurers will be reeling from lawsuits - the trial lawyers are salivating - and firms will be forced to use egalitarian pricing.

Liberal lawmakers making these proposals need a course in insurance economics. Everything is insurable at a price, but sometimes the price must be very high. Is that "unfair?" Insurance companies exist to make a profit, not to provide welfare. They make that profit by assessing the risks of fire, vandalism and theft to a home or business, and then setting premiums in anticipation of bringing in more revenue than they pay out.

In doing this, insurance companies provide an important service for property owners anxious to prepare for the unexpected. And the more narrowly actuaries can define risk, the lower the premiums. But if the government decides what constitutes risk, it wrecks the principle of insurance and puts the companies on shaky financial footing.

The Collins and Kennedy bills would force companies into an irrational scheme called community rating. No longer will they be able to charge different premiums for different risks. Several consequences will follow. First, people living in volatile areas will benefit at the expense of those in settled communities. Blind-sided homeowners won't know what hit them, and they'll blame the industry instead of the real culprits in Congress.

Second, community rating will force small- and medium-sized insurers to cut back on their benefits, fire employees or go out of business. These companies operate on tight profit margins. Force them to insure houses and businesses at below-market rates in areas swarming with drug gangs and you endanger their existence.

Third, community rating will change the incentive structure for businesses and homeowners in high-crime areas. Today, the main source of protection is self-insurance. This can take the form of private security guards, alarm systems or cash accounts for emergencies. But if insurers provide low premiums and high payments, the incentive for self-insurance falls. The costs will be shifted away from those who ought to bear them to those who ought not to.

The insurance industry should study what happened to the banking industry when it went along with a 1989 bill requiring banks to provide racial data on their mortgage and business loans. The Justice Department and Federal Reserve began an unprecedented shakedown racket against them. Over time, banks have been forced to adopt de facto lending quotas, and even that sometimes is not enough. Left-wing community activists hold banks hostage anytime merger or acquisition is in the works, and they have extracted billions in lending commitments merely by calling banks racist. The resulting racial set-asides are doled out regardless of credit rating, assets, marital status, job history or other predictors of repayment.

Middle-class taxpayers will be forced to pick up the tab for these unwise disbursements, just as middle-class homeowners will pay for quotas in the home insurance industry. Race-based policies may not be as visibly confiscatory as taxation, but they are just as costly to the economy. They undermine traditional standards of merit as well.