2005
Insurance Reference Manual
Personal Insurance Federation of California Insurance Reference Book
Community Investment Reporting and the Industry
"CRA" California Style
By Michael A. Gunning
August 5, 2005
The federal Community Reinvestment Act (CRA) was enacted in 1977. It requires banks to increase their investments and loans to low-income communities. California legislators and the Insurance Commissioner are now casting an eye toward similar legislation for the insurance industry in California.
In other states like Massachusetts, New York, Texas and Illinois, legislators have also examined whether the insurance industry should play a greater role in investing in low- and moderate-income communities. The recent passage of the federal Gramm-Leach-Bliley Financial Modernization Act (GLBA), which allows insurers to own banks and visa versa, has served to further blur the lines between banks and insurance companies in the minds of many state legislators.
More Insurer Investing Through COIN
In 1996 a program was created to provide an alternative to state legislation that would have mandated insurance company investments in low-income communities. The California Organized Investment Network (COIN) was designed to review, examine and promote sound community development investments to insurance companies doing business in California. COIN is a collaborative effort between the Legislature, the California Department of Insurance (CDI), the insurance industry, and community development advocates. The intent of the COIN program is to facilitate voluntary insurance industry investments that provide solid returns to investors and both economic and social benefits to California 's low-income urban and rural communities. As of January, 2005, 138 insurance companies have invested over $1.6 billion in California affordable housing and economic development projects.
Insurers Should not be Compared to Banks
In the 1990's several banks made long-term, multi-billion dollar commitments to invest in low-income communities in California in order to enhance the closure of their mergers or acquisitions. These commitments have become the defacto measure for "financial institutions" to demonstrate their commitment to low-income areas.
Some members of the Legislature and community organizations are stating that the COIN program has not produced the same kind of results when compared to the bank commitments of the 1990's. Yet as of January 2005, insurers have invested over $112 billion in California 's economy including $23 billion in state bonds, $25.7 billion in U.S. Government securities and $53.5 billion in California corporate stocks and bonds.
Insurance companies and banks are fundamentally different. Banks are federal institutions chartered to provide credit to the communities in which they service. Insurance companies are not federal institutions and are not chartered to provide credit. It makes no sense to take a community reinvestment act, originally crafted to apply specifically to banks, and apply it to insurance companies.
The CRA specifically addresses concerns about banks locating in a community, collecting deposits, and then making loans to projects elsewhere. Insurers do not "take deposits" from the areas in which they do business. Premiums are directly returned back into the communities in the form of claims payments.
Because a favorable CRA rating can lead to approval of mergers and use of the FDIC coverage for deposits, this is in affect a "carrot" that helps to promote investments. There is no comparable "carrot" for insurance companies. There is no "premium insurance" that is the equivalent of deposit insurance for banks. In fact, there are specific guidelines and ratings for insurer investments in Section 1170 of the California Insurance Code.
This is an important distinction that needs to be recognized by the Legislatures throughout the country. Insurance companies are state-regulated entities that have individual state guidelines and specific investment requirements per the National Association of Insurance Commissioners model law.
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