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Underwriting the Inner-City Market
Urban risks require vision and
insurance models

Many mundane exposures, primarily because of their geographic location, fail to find either a market or an affordable price.

Property/casualty underwriting is a perplexing art form. Globally, underwriters can negotiate the most complex risks—yet many of the simplest at-home exposures represent their biggest roadblocks. For instance, underwriters found a way to insure the two World Trade Center towers for more than 27 years. When the ribbons were cut in 1973, at 1,368 feet each they were the tallest buildings in the world with each tower reaching about 100 feet higher than the mast on the Empire State Building. Underwriters covered the Piper Alpha oil production platform, which exploded and burned in 1988 and was fixed in one of nature’s most hostile environments, 120 miles northeast of Aberdeen, Scotland, in the turbulence of the North Sea. Space flights, manned and unmanned, present a range of complex exposures, and yet underwriters find a way to handle them.

Somehow, all of these risks are accommodated and underwritten by the world’s insurance market. On the other end of the spectrum are routine auto, home and small business risks that go bare. Why? The underwriting perplexity is that these many mundane exposures, primarily because of their geographic location, fail to find either a market or an affordable price.

A recent (2005) Brookings Institution report, “The Price Is Wrong—Getting The Market Right For Working Families In Philadelphia,” addresses this issue on a larger scale and from a different angle. The Brookings thesis is intriguing and challenging: The urban market in Philadelphia and many other cities penalizes “aspiring middle class” families, and market forces require them to pay more, often substantially more, for goods and services than is the case in non-urban markets (in insurance language, an economic adverse selection process).

It should come as no surprise that automobile insurance is on the Brookings list of these hyper-costly purchases, as are inner-city home loans because lenders won’t provide mortgages or lines of credit without proof of insurance. Other goods and services listed include car purchases, car loans, groceries, check cashing, short-term loans, establishing utility services, gas prices, home appliances and furniture, and real estate taxes.

Brookings uses a median family income of less than $30,000 as its threshold definition of a low-income family. Across America the average annual expenditure on homeowners insurance in 2005 is about $677, and urban dwellings can easily cost twice that to insure. Add to that the average annual 2005 expenditure on automobile insurance of $870, and consider that an urban-garaged vehicle could easily cost up to three times that amount to insure. Do the math. A family makes $30,000 per year and at best spends $1,547—but most likely much more—on auto and homeowners insurance. Brookings’ point: not an enticing purchase proposition.

The Brookings report posits overall market solutions that are creative and include traditional steps and action plans of a risk management process: Reduce the risk of doing business with low-income families; boost the amount of market information accessible to low-wage families; contest market abuses; and lower the prices of publicly supplied goods and services. The report also develops a “need to educate the consumer theme” throughout, for instance, the need to invest in financial literacy, to develop a roadmap for families to improve their credit scores, and to rethink and reinvest in financial education for these families.

After reading the Brookings study, a nagging question remained. How do these solutions get accomplished? Who moves the generally intransigent underwriting mentality toward the provision of a viable market for urban risks? How does it get done effectively without a government or legislatively imposed solution that does little more than load an unwanted market and put yet another financial strain on insurers’ profits?

Every so often you meet someone with a message that makes so much sense that it hits you like a hammer. The message: “Traditional underwriters are trying to apply suburban and rural underwriting standards to an inner-city underwriting environment. It doesn’t work!” Please meet Donald W. Lewis, president and CEO of The Insurance Cooperative in Philadelphia. He is a former insurance agent, and his self-described life’s mission is to mentor, teach and provide the vision for his 100 inner-city Insurance Cooperative agents, all of whom benefit greatly from his leadership. He’s also a nationally recognized expert in the development of evolutionary urban insurance solutions. In short, Donald Lewis can be viewed as a shepherd, nurturing and leading his cadre of Philadelphia agents to a level of professionalism that enables them to make a substantive contribution toward easing the insurance market issues that Brookings highlights.

Lewis’ Insurance Cooperative, one of the nation’s largest and most successful, can be viewed economically as a kind of mutual fund of insurance agencies, where the value of the whole is an aggregation of the value generated by the individual participants. Therefore, while he gives his network of inner-city agents the market access and backroom process support, his essential role is to provide a fraternity/sorority for them to survive and eventually thrive. To do this, he acts as an intermediary (the shepherding part) when needed, interjecting himself into the agent-company exchange to make sure it proceeds smoothly and professionally, all the while providing his agents the training and tools they need to educate themselves, better serve their clients, and carve out a decent living for themselves. “We act as gatekeepers to prevent our agents from shooting themselves in the foot,” says Don.

This is “grassroots” activity in its most effective form. As the agents in Don’s cooperative mature in their capabilities and prove themselves to their underwriting markets; and as they participate in agent/company forums and promote an understanding of their market and their individual value and contributions, a market solution emerges.

Back to the Brookings report for a moment and the need for education: To this end Don believes that a “holistic” attitude is essential to success and to creating sustainable markets. In other words, he preaches that anyone who has an interest in the urban market environment, economic or otherwise, has a responsibility to learn about the issues and contribute to the solutions, whether they are agents, carriers, lending institutions or nonprofit community development organizations. In Don’s vision, only by changing the way traditional underwriters think about urban risk will attitudes be changed. That thinking includes eradicating the paradigm about lower-income families: that because of their socioeconomic status they automatically represent increased underwriting risk.

I asked Don how traditional underwriters can succeed in an urban environment and provide their owners/investors with expected financial returns. His vision is clear:

Brookings reports that more than one in five Philadelphians exists below the poverty line and one out of four lives on less than minimum wage; and “put simply, Philadelphia must also grow a middle class by making the market work for low-income families.” An increase across the country in the application of visions and urban insurance models like that of Don Lewis’ Insurance Cooperative can be a significant private sector step toward making that happen. *

Polestar is proud to support The Insurance Cooperative in Philadelphia and its affiliate organization, the Urban Insurance Partners Institute in Chicago, which will be holding its Fifth National Workshop in September. For more information, contact the UIPI at (773) 880-8780 or visit www.uipi.org for updated information or to register. The Insurance Cooperative can be contacted at (215) 521-7121 or inscoop@aol.com.