Insurers Pressured to Invest in Poor Areas

California Insurance Commissioner Harry W. Low is turning up the heat on insurers to invest in low-income communities, citing poor participation in a voluntary program established by the industry five years ago to stave off legislation.

In a letter to chief executives of 1,500 companies, he gave insurers until Wednesday to report back with annual goals that would bolster investments tracked by the California Organized Investment Network.

Community activists say Low’s approach marks the first time an insurance commissioner in the country has forcefully advocated investment in low-income communities.

“This is a pretty strong step,” said Alan Fisher, executive director of the nonprofit California Reinvestment Committee. “Nobody as insurance commissioner anywhere has said to insurers, ‘Here’s your due date. Ante up.”

COIN, administered by the Department of Insurance, has facilitated $477 million in such investments in everything from single-family mortgages to affordable housing and retail construction. But those came from fewer than 10% of the companies doing business in California, which together collect more than $80 billion a year in premiums, Low’s letter noted.

Low stopped short of pledging to support legislation if the companies fail to deliver but said that “one way to avoid a mandate is by having a successful voluntary COIN program.”

Industry officials responded cautiously. Although they said insurers should not be legally compelled to make such investments, the companies “surely . . . can do better,” said Sam Sorich, Sacramento-based vice president of the National Assn. of Independent Insurers.

“Commissioner Low’s encouraging of companies is a valid call,” said Sorich, whose association, he says, is “developing a plan at least to encourage companies to look closely” at Low’s request.

Widespread Response Is Doubtful

The Assn. of California Life and Health Insurance Companies also has pledged to facilitate greater participation, forming a community reinvestment committee in early summer in response to Low’s pleas, said Executive Director Brad Wenger.

Still, industry leaders such as Sorich were skeptical that the response will be widespread.

Banks are required under the federal Community Reinvestment Act to make investments in the low-income communities where they do business. But efforts to impose a similar mandate on insurers have been unsuccessful.

The industry has maintained that direct comparisons with banks are unfair. Banks benefit from federal deposit insurance, making regulation more appropriate, industry leaders say. Banks also can earn money on deposits from poor neighborhoods without returning any capital to those communities.

“I don’t think we can be accused, as banks were, of taking money out of the community,” Sorich said. “Our companies who are writing policies in low-income areas are putting money back in the form of claim payments.”

He noted that property and casualty insurers invested more than $10 billion in California municipal bonds in 1998 alone, contributing to infrastructure development in many neighborhoods.

In California, at least four bills that would have mandated investments in poor neighborhoods stalled in recent years. But they nevertheless captured the industry’s attention, prompting insurers to propose COIN and--two years later--Impact Community Capital. That San Francisco-based fund was established to invest pooled contributions in low-income communities, diluting risk to insurers.

But participation has dropped, data show. Deputy Insurance Commissioner Edward Fong said COIN recorded $177 million in investments in 1999 and $191 million in 2000, but so far this year only $5 million has been reported. Fong said insurers may be waiting until the end of the year to report their deals. But community activists say they see a pattern.

“Every time the pressure has gotten put on the insurers, they’ve tried to do something,” said Michael Herald, executive director of the Sacramento-based nonprofit Housing California, which has promoted legislation multiple times. “When the pressure’s off, they relax and stop doing anything at all.”

Although many insurers, including those with significant California business such as American International Group and SunAmerica, haven’t participated at all or have done so only modestly, others have stepped up to the plate, COIN data show.

State Farm recently invested $25 million in the Local Initiatives Support Corp., which funds affordable housing and other community development efforts. Smaller companies, such as Newport Beach-based Pacific Life Insurance Co. and Oregon-based Standard Insurance Co., also have found opportunities through COIN. A Standard subsidiary, for example, invested in an Oakland retail and housing complex and a low-income hotel developed by an East Bay nonprofit.

But even those companies that have participated are balking at the demands in Low’s letter. Standard, for one, responded with a letter detailing its participation and promising to take a close look at other potential deals, said Mark Fisher, vice president of parent company StanCorp Mortgage Investors. But the company stopped short of setting an annual goal.

“If it’s a request for volunteerism, he’s kind of dancing around the edge of insulting us,” Fisher said. “We don’t need a goal.”

Fisher said companies that have participated should not be punished for the misdeeds of those who haven’t. Still, he applauded the commissioner’s pledge to help insurers do more.

Community development practitioners also lauded Low’s strong wording.

“We’re very excited about the commissioner stepping forward like this,” said R.D. Lottie Jr., executive director of Los Angeles-based Pacific Coast Regional Corp., which is seeking a $3-million investment from insurers through COIN for its entrepreneurial training institute.

But others were skeptical. Although Low’s letter shows “leadership in this area,” it also speaks to the failure of a voluntary approach, said Michael Banner, head of Los Angeles-based Local Development Corp.

“By any objective measure you can see that their results are not anywhere similar to what happens with banks, which are regulated in this area,” he said.

Investments Often a ‘Token’ Commitment

Assemblyman Fred Keeley (D-Boulder Creek), who carried the most recent legislation to mandate such investments, agreed. He said a mandate is still necessary: “There is no evidence to lead me to believe that they will, on a sustaining basis, make anything other than a token level of commitment,” he said.

In his letter, Low touted the investments as both safe and symbolic of good corporate citizenship. He promised to do more to direct insurers to investment opportunities pre-screened by his department--the purpose of COIN--and to laud those who perform well.

Low’s stance differs markedly from that of former Insurance Commissioner Chuck Quackenbush, who did not promote the program. The new commissioner sat on the board of Union Bank of California and saw that mandated Community Reinvestment Act investments--a multibillion-dollar industry in California today--were successful, said deputy insurance commissioner Fong.

As banks and insurance companies increasingly merge and come to resemble one another as a result of federal banking reform, insurers should step up to the plate, he said.

Insurance “is a huge financial services industry,” Fong said. “Quite simply, they should participate in providing some investment capital to low-income communities that badly need it.”