Undesirable groups are being penalised for being non-average. Whether you're a smoker, live on a floodplain or have a family history of disease, insurers are making it more difficult to get cover. Simon Grace reports on redlining in the insurance industry

Insurance companies are in business to make money, to collect more in premiums than they pay out in claims. Unsurprisingly, therefore, people living in burglary-rife neighbourhoods can expect to pay more for their home insurance than those living in crime-free rural areas. Equally, young and inexperienced drivers, people with family histories of inherited disease, and those who live on floodplains will be penalised for their departure from the insurers' norm. Smokers pay more for life-related assurance than their non-smoking counterparts, and men generally pay more than women. Simply put: where the probability of loss is reckoned to be greater than the average, underwriters will load the premium to reflect their best judgment of the increased risk.

Insurers use a wide variety of rules of thumb, statistical analyses and actuarial data to arrive at "fair" premiums for individual circumstances. Broadly, this approach is not exceptional and investors and policyholders should expect no less. Evidence is beginning to accumulate, however, that some underwriters are prepared to go one step further and "redline" certain areas and individuals. Redlining means bumping up premiums for those who live in high-risk districts, usually defined by postcode, and for those with particular social or medical characteristics, or even refusing to accept applications for insurance from such people without considering any individual circumstances at all. The matter has been brought to a head by public concern over the continued widespread flooding in Britain and the swingeing losses borne by insurers.

No need to worry
The Association of British Insurers (ABI) has been quick to reassure policyholders that nobody is going to be turned down for home and contents insurance, even if they live in a flood-prone area or have made recent claims for flood damage. "Insurers have a responsibility to stick with policyholders," says an ABI spokeswoman, "and could shoot themselves in the foot if they turn away business."

She adds that redlining is not a phrase that the industry accepts, but she recognises that there will always be some exclusions. "It may be difficult to offer cover unless the level of risk is brought down." No definitive guidance has been issued to ABI members on how they should tackle the problem, although a number of companies appear to have adopted an approach mentioned at ABI meetings: insurers' household underwriters report that they will continue with existing customers for up to two years, though premiums will rise to reflect the level of risk. The general recommendation is that homeowners should stay with their existing insurers.

If an applicant has had no insurance in place previously, then it may be difficult for him to get cover. Even though the ABI recognises that, in some cases, insuring a home against flooding will be more like subsidising a certainty, the association insists that everyone will be able to obtain suitable cover. "In one case," says the ABI, "even where the insured had made two or three claims totalling between £40,000 and £50,000, the insurer decided to continue to write the business, because the local authority was proceeding with effective flood defences."

The industry view is that the two-year moratorium will be honoured, but that business will be turned down if preventive measures are not taken. The UK is one of the few countries in the world that automatically provides flood cover on homeowners' insurance policies, but the industry recognises that this may not be sustainable in future, particularly at an affordable price. Generally, flood risk is an easily verifiable factor, particularly given the information now being made available by the Environment Agency.

Fiddling the truth
Where insurers face mounting problems, though, is when insurance applicants have relevant information about themselves and their life styles that is not available to their insurers. It is true, as the ABI emphasises, that insurance contracts are proposed and accepted in circumstances of "utmost good faith" on both sides, and that applicants are expected to provide insurers with information relevant to a proper assessment of the risk involved.

However, this commitment is honoured more often in the breach than the observance and nobody can be surprised if underwriters decide to act unilaterally, either by way of redlining based on experience or pertinent data or through an insistence on more detailed and pervasive personal, social and medical information.

As market circumstances tighten, and shareholders focus more on returns than on responsibility, underwriters are being placed under increasing pressure to draw in only profitable business and to reject potentially costly applications. The social implications of such a hardening attitude are considerable, and the creation of a group of individuals who cannot get adequate or affordable insurance cover is undesirable. The alternative appears to be the adoption of a higher degree of altruism among insurers than they have exhibited to date.

One conclusion is clear, however contentious it may be. Insurance underwriters have a legitimate interest in obtaining as much information as possible about the circumstances and characteristics of those seeking insurance cover. Limiting insurers' access to such information will hamper their ability to make proper judgments about policy conditions and premiums. The underwriters will be forced to use such hit-and-miss yardsticks as population averages.

Prices based on these characteristics will deter low-risk individuals, for whom the premiums will be too high, while attracting those most at risk, for whom they will be much too low. Insurers could end up covering only those who are at greater risk - hardly a recipe for success and business longevity.

Not the way to do it
Virtually unchallenged, American insurance companies have been practising redlining for several decades. Protected from federal investigation and oversight by their state-regulated status, US insurance companies benefit from a significant degree of disharmony from state to state. Community workers and public interest lawyers across America point to substantial anecdotal and statistical evidence that insurance companies will not write business in low income and minority communities or, if they do, will demand excessively high premiums for generally inferior coverage.

According to one source, insurance redlining was a major contributory factor to the widespread urban riots of the late 1960s and the situation has not improved significantly. "Insurance is a necessity," says the Inner City Public Interest Law Center. "It is difficult if not impossible to get a home loan if you can't get insurance on the property. As in Europe, in most parts of the United States, you cannot drive a car (to get to work, for example) without having insurance."

Community housing groups are using the federal Fair Housing Act to tackle discrimination in homeowner insurance and a number of law cases and administrative complaints are under way. The US Department of Justice has intervened in a number of class actions against insurance companies, producing settlements that improve insurance availability.

One such case in Virginia involves Nationwide Insurance, which was accused by a fair housing group of using zip code criteria that favoured affluent and non-minority neighbourhoods. In the lower court, the plaintiff won its case and was awarded $100m in punitive damages. That decision was overturned on appeal but the Virginia Supreme Court has now agreed to rehear the case. If the housing group wins the day, many US insurance companies will be forced to change or at least modify their acceptance practices, and there is considerable unease in the industry.

Getting relevant information from insurance companies and state insurance commissioners is extremely difficult, reports the Inner City Public Interest Law Center, citing more than a dozen examples of official non-cooperation or outright refusal to release data. While some states have laws requiring the collection and publication of insurance policy data by zip code, these are not enforced rigorously.

Stop Smoking or we'll get you
Insurance companies seeking to protect themselves against smokers who claim to be non-smokers and thereby benefit from substantially lower premiums on life products have found a new ally in the battle. A former Birmingham University medical scientist, Dr Graham Cope, has come up with an inexpensive and readily administered nicotine detection test, which his company, Mermaid Diagnostics, sells for £5 and is designed to be used by non-technical and medically unqualified staff in any location, such as by insurance company personnel in people's homes.

There is a comparable test currently in use but Dr Cope's Smokescreen urine test beats it hands down in terms of expense and speed of availability of results. Developed at the Wolfson Applied Technology Laboratory in Birmingham, the test is easy to use and takes just six minutes. A person's urine is added to dry chemicals enclosed in a patented plastic tube and turns pink in the case of an occasional smoker. A frequent or heavy smoker's urine will go bright red.

Despite the test's cheapness and effectiveness, insurers say that such a procedure would only be followed on occasions when a medical examination was requested. There would be no general application to everyone who applied for insurance as a non-smoker, even though the incentive to lie is substantial in most cases.

Pro-smoker action group Forest says that any requirement to take the test would be a breach of an individual's human rights.

Insurers dragging heels on genetic tests
The ABI has failed to meet deadlines for the submission of genetic tests for validation by the government-established Genetics and Insurance Committee (GAIC). Part of the committee's brief is to look at the ten genetic tests currently used by insurers. The industry, through the ABI, has undertaken to stop using all tests where applications had not been submitted by the end of last year or where approval had been refused by GAIC. To date, however, a GAIC spokesman confirms, only one test has been validated - specifically for Huntington's Disease in respect of life insurance applications - and the committee is to rule on two others - those for Huntington's Disease in respect of critical illness insurance and in respect of income protection insurance - at forthcoming meetings.

The committee says that its decisions will not mean that individuals will be asked to have a test for Huntington's Disease before obtaining insurance. But where individuals have already been tested as part of their medical care, then there is nothing to prevent insurance companies asking for that information. The GAIC spokesman said that other tests had not been submitted for approval.

An ABI spokeswoman said that the "association was in the process of submitting applications to the committee", but added that the number of individuals affected was "minuscule". ABI director general Mary Francis says that the industry follows a strict code of practice, based on independent medical advice.

The primary principle in the code of practice is that applicants must not be asked to undergo a genetic test in order to obtain insurance. "The industry is committed," adds Francis, "to accepting the GAIC's decisions on which test results previously undertaken can in future be used by insurers."

Meanwhile, a survey conducted for the Human Genetics Commission, which has launched a consultation on the storage, protection and use of personal genetic information, reveals:

  • only 8% of respondents think that genetic test results should be used for setting insurance premiums
  • a total of 76% do not agree that insurance companies should be able to see genetic test results to assess whether premiums should go up or down
  • between 54% and 60% of people think that it is inappropriate to disclose genetic test results in applications for life, health and long-term care insurance
  • insurance companies were among the least trusted to use medical database information responsibly.

    Commenting on the so-called people's panel results, Francis says that the ABI's own past research has shown that "people tend to take different views according to their understanding of the consequences of particular approaches". What is needed is a clearer understanding of the issues involved and the ways in which insurers use genetic test results. "The industry has long recognised the legitimate social concerns and sensitivity surrounding genetic testing. This is why we have made it clear that insurers would never ask for a genetic test to be undertaken."

    GAIC members include two ABI nominees, geneticist Professor Sandy Raeburn and ERC Frankona deputy managing director Anthony O'Leary. The committee's present target is to consider further ABI test applications (including those for myotonic dystrophy, the early onset of Alzheimer's disease, and rare inherited cancers) and to have completed its review of those applications by the end of June this year.